SUPREME COURT OF QUEENSLAND

CITATION: Interchase Corporation Limited v ACN 010 087 573 P/L & Ors [2000] QSC 013 PARTIES: INTERCHASE CORPORATION LIMITED (Plaintiff) v ACN 010 087 573 PTY LTD (First Defendant) and MICHAEL GEORGE TIDBOLD (Second Defendant) and GROSVENOR HILL (QUEENSLAND) PTY LTD LIMITED [FORMERLY KNOWN AS HILLIER PARKER (QUEENSLAND) PTY LTD] (Third Defendant) and BRIAN MOFFAT WAGHORN (Fourth Defendant) FILE NO: 520 of 1994 DIVISION: Trial Division DELIVERED ON: 8 February 2000 DELIVERED AT: Brisbane HEARING 27-30 April; 4-7, 10-14, 17-20, 24-28, 31 May; 1-4 June; DATES: 9-13, 16-20 August; 14-16 September 1999. JUDGE: White J ORDERS: Indicative orders are

1. Judgment for the plaintiff against the first defendant in the sum of $12.994 million plus an interest component to be calculated and interest from 30 June 1993 to judgment at 6 per cent per annum.

2. Judgment for the plaintiff against the third defendant in the sum of $12.031 million plus an interest component to be calculated and interest from 30 June 1993 to judgment at 6 per cent per annum.

3. The plaintiff’s action against the fourth defendant be dismissed.

4. The third and fourth defendants’ cross-claim against the first and second defendants be dismissed. 2

CATCHWORDS: Average of two valuations to fix price – duty of care to non-retaining party – standard of care of valuers – breach – causation of loss – damages – assessment of chance – personal liability of employee valuer – contributory negligence – Limitation of Actions Act 1974 – joint or several tortfeasors – interest.

Corporations (Investigations and Management) Act 1989 Limitation of Actions Act 1974 Trade Practices Act 1974

ANZ Executors and Trustee Company Limited v Quintex Australia Limited [1991] 2 Qd R 360 Ausminco Mining Equipment Suppliers Pty Ltd v Liwood Pty Ltd Butterworths Judgments BC 9707431 of 19 December 1997 Arenson v Arenson [1977] AC 405 Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd (1995) 2 All ER 769 Bryan v Maloney (1994-1995) 182 CLR 609 Caltex Oil (Australia) Pty Ltd v The Dredge “Willemstad” (1976) 136 CLR 529 Calzaturificio Zenith Pty Ltd (in liquidation) v NSW Leather and Trading Pty Ltd [1970] VR 605 Corisand Investment Ltd v Druce & Co [1978] EGLR 86 Duke Group (in liq) v Pilmer (1999) 31 ACSR 213 Edgeworth Construction Ltd v NDL Lea & Associates Ltd [1993] 3 SCR 206 Gardiner v Henderson & Lahey [1988] 1 Qd R 125 Haseldine v CA Daw & Son Ltd (1941) 2 KB 343 Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 Hill v Van Erp (1995-1997) 188 CLR 159 Holt v Cox (1997) 15 ACLC 645 Jenkins v Betham (1855) 15 CB 168 Legal & General Life of Australia Ltd v A Hudson Pty Ltd [1985] 1 NSWLR 314 Lewisham Investment Partnership Ltd v Morgan [1997] 2 EGLR 150 Leigh and Sillivan Ltd v Aliakmon Shipping Co Ltd [1986 1 AC 785 Lion Nathan Ltd v C-C Bottlers Ltd [1996] 1 WLR 1438 Mansini v Martin (CA No 10560 of 1997 unreported decision of 7 August 1998) Meth v Moore (1982) 44 ALR 409 Mount Banking Corporation v Brian Cooper & Co (1992) 2 EGLR 142 Perre v Apand Pty Ltd (1999) 73 ALJR 1190 3

Phelps v Hillingdon London Borough Council [1999] 1 WLR 500 Piening v Wanless (1968) CLR 498 (on appeal from Wanless v Piening (1967) 68 SR (NSW) 249) Rogers v Whittaker (1992) 175 CLR 479 Sandell v Porter (1966) 115 CLR 66 Serisier Investments Pty Ltd v English [1989] 1 Qd R 678 Singer & Frielander Ltd v John D Wood & Co [1977] 2 EGLR 84 South Australia Asset Management Corporation v York Montague Ltd [1997] AC 191 Subaida v Hargreaves [1993] 2 EGLR 170 Sutcliffe v Thackrah (1974) AC 727 Voli v Inglewood Shire Council (1963) 110 CLR 75 White v Jones [1995] 2 AC 207 Williams v Natural Life Ltd [1998] 1 WLR 830

COUNSEL: Mr DJS Jackson QC, with him Mr J McKenna and Mr K Barlow, for the plaintiff Mr J McKenna appeared as required for the first defendant in the course of the trial during which time he did not appear for the plaintiff Mr CEK Hampson QC, with him Mr D Fraser QC and Mr T Quinn, for the third and fourth defendants

SOLICITORS: Allen Allen & Hemsley for the plaintiff Ebsworth & Ebsworth for the third and fourth defendants Allen Allen & Hemsley for the first and second defendants in the cross-claim by the third and fourth defendants

TABLE OF CONTENTS

Overview of the action...... 4 The parties, associated corporations and entities and some concepts ...... 6 The issues and some preliminary matters...... 8 The Development Agreement ...... 13 Relevant terms of the Development Agreement ...... 14 The claim against Hillier Parker and Mr Waghorn ...... 18 Background events ...... 19 Hillier Parker’s early involvement ...... 20 Mr Richardson’s first valuation report: 16 October 1986 ...... 24 Mr Richardson’s second valuation report: 10 June 1987 ...... 26 The Myer Centre Adelaide...... 27 Mr Richardson’s work on The Myer Centre Adelaide...... 28 Mr Waghorn...... 29 Mr Waghorn’s work on The Myer Centre Adelaide ...... 30 Mr Waghorn’s Myer Centre Brisbane valuation letter 20 November 1987 ...... 32 4

Mr Waghorn’s completion of The Myer Centre Adelaide valuation ...... 38 The Myer Centre Brisbane valuation...... 46 The letters of retainer...... 56 Mr Waghorn’s work on the completion valuation ...... 61 The Hillier Parker letter of valuation of 17 May 1988...... 69 The Colliers letter of valuation of 18 May 1988...... 70 The response to the letters of valuation ...... 70 Preparation of valuation reports...... 71 The valuation reports...... 73 Were the letters/reports Completion Date Valuations? ...... 74 Disclaimer ...... 78 Duty of care...... 78 Personal liability of Mr Waghorn...... 80 Standard of care...... 80 Breach – Mr Waghorn’s method of valuation ...... 87 Other valuations ...... 108 The “correct” valuation of The Myer Centre...... 115 Contributory negligence ...... 118 Damages – no loss...... 119 Damages - recoverability ...... 119 Scheme of arrangement ...... 148 Limitation of Actions Act 1974...... 152 Recovery against the separate defendants ...... 153 Interest ...... 153 Orders ...... 154

WHITE J:

Overview of the action

[1] By 7 May 1987 the plaintiff (“Interchase”), incorporated in September 1986 as Banway Pty Limited (subsequently Banway Limited), was the registered proprietor of land of about 1.275 hectares bounded by the Queen Street Mall to the west and Albert and Elizabeth Streets to the north and east respectively in the central business district of Brisbane (“CBD”). The land was being developed as a large retail shopping complex containing a multi-level Myer Store as anchor tenant, specialty stores on three levels, an underground multi-level car park, a bus tunnel and interchange, cinemas, taverns and an entertainment/fantasy area, the whole complex to be known as The Myer Centre - Top of the Mall (“The Myer Centre”).

[2] On 7 May 1987 Interchase (as Banway Limited), then a wholly owned subsidiary of Chase Corporation (Australia) Pty Limited (“CCA”), orally entered into an agreement with Property Estates (Qld) Pty Limited (“PEQ”), Property Estates Limited (subsequently Chase Corporation (Australia) Property Group Pty Ltd, referred to in the trial and in these reasons as “PEL” but in the pleadings is described as “Chase Group”) and CCA that PEQ would complete the development of the project. Both PEQ and PEL were wholly owned CCA subsidiary companies. The terms of the agreement were evidenced in a written “Offer of Development Contract” to Interchase (Banway Limited) (“the Development Agreement”). The due performance of PEQ as developer of the project was guaranteed by PEL and 5

CCA. The price for the completion of the project, called the Development Sum, was $360m (including the sum of $156,161,000 already expended) to be adjusted in accordance with the provisions of certain clauses in the written offer. The agreement as to price was what is sometimes described as a “profit and risk” development. The sum of $360m was to be adjusted by the average of two market valuations as at the date of practical completion (“Completion Valuation Amount) to be obtained by each of Interchase and PEQ from two independent valuers. If the Completion Valuation Amount was less than $425m the Development Sum was to be reduced by an amount equal to the difference between $425m and the Completion Valuation Amount. If the Completion Valuation Amount was greater than $425m the Development Sum was to be increased by an amount equal to 25 per cent of the difference between $425m and the Completion Valuation Amount, (cl 10A).

[3] PEL is alleged to have acted as the agent of PEQ at all material times.

[4] Interchase was floated as a publicly listed company in July 1987. It had an issued capital of 100 million contributing 50 cent shares with 50 cent calls payable on 31 December 1987 and 30 June 1988 and 53.4 million convertible notes at $2.25 convertible in December 1992. CCA caused its wholly owned subsidiary, Chase Corporation (Australia) Equities Pty Limited (“CCAE”), to subscribe for 49.5 million shares and 10 per cent of the notes.

[5] The Myer Centre was due for completion on 13 May 1988 (date for practical completion) but opened for business on 28 March 1988. The date of practical completion was 18 April 1988.

[6] Two valuations were obtained in May 1988, one from the first defendant, carried out by the second defendant for Interchase of $500m and one from the third defendant, carried out by the fourth defendant for PEQ of $490m which, averaged, gave a Completion Valuation Amount of $495m. (Initially Hillier Parker was to perform the valuation exercise for Interchase, but for no apparent reason and irrelevantly for the action there was a change.) Interchase claims that the first and second defendants in breach of contract and duty and the third and fourth defendants negligently valued The Myer Centre in 1988 at too high a figure and that if the valuations were prepared with all due care each would have arrived at a valuation figure of $380m. As a consequence, Interchase alleges that pursuant to the Development Agreement it was obliged to make payments of $17.5m to PEQ and did so. As a further consequence it alleges that had there been a valuation figure of $380m it would have been entitled to recover $45m from PEQ as an adjustment to the Development Sum pursuant to cl 10A.1 or from PEL and CCA as guarantors of PEQ’s obligations pursuant to cl 23 and would have done so. Accordingly Interchase alleges that it lost the opportunity to recover the sum of $7m which it had paid as an advance on the sum to be paid pursuant to cl 10A.2; that it would not have paid the balance of the Development Sum of $10.5m; and that it would have sought from PEQ, PEL and/or CCA the reduction sum of $45m.

[7] PEQ, its parent companies and companies associated with it experienced extreme financial difficulty from mid 1989 and thereafter and were placed in administration or liquidation. 6

[8] This action was managed by another Trial Division judge until December 1998 when it passed to me as the designated trial judge. The parties participated in mediation in February 1999. Interchase reached a settlement with the first defendant on 17 March 1999 and judgment was entered in which liability was admitted with damages to be assessed limited to $20m. Interchase discontinued its action against the second defendant. Its solicitors now act for the first and second defendants in contesting proceedings brought against them by the third and fourth defendants for contribution.

[9] The proceedings continued against the third and fourth defendants who deny liability on several bases and further contend that there was never any capacity in PEQ, PEL, CCA or any Chase company from April 1988 to repay to Interchase $17.5m nor to pay a further sum of $45m nor any part of it and, accordingly, if they were liable there was no prospect that at the relevant time Interchase could recover the sums sought nor any part thereof.

The parties, associated corporations and entities and some concepts

[10] Chase Corporation Limited (“CCL”) was established in New Zealand in 1972 by Mr Colin Reynolds as a property development company. In 1985 it expanded into Australia at which time CCA (an existing unrelated private company) was purchased to undertake these operations in Australia. CCL subsequently commenced operations in the United Kingdom. According to the Interchase Prospectus, in 1987 CCL was the sixth largest listed public company by stock market capitalisation in New Zealand. A reference to “Chase” or “Chase group” in these reasons is a reference to CCL and to wholly owned subsidiaries.

[11] Chase Corporation (Australia) Pty Limited (“CCA”) was a wholly owned subsidiary of CCL. Between 1985 and 1989 CCA and its subsidiaries operated in Australia primarily in property development but also engaged in a significant level of equity investment. CCAE was a wholly owned subsidiary of CCL and held the equity investments of CCL and CCA in Australia.

[12] After the share market crash in October 1987 CCL developed a simplified structure for its operations. Even so, the structure and operation of the CCL and CCA groups of companies were very complex. They conducted their activities on a group basis and consolidated accounts were prepared and published. There were 281 different companies in the CCL group and 95 companies and 10 unit trusts in the CCA group. As a general proposition, major property and equity assets were owned by different companies. Major lending facilities were made available to a few specific companies supported by guarantees and third party securities from other companies within the group. There were inter-company transactions within the group for companies which did not undertake direct external funding. Most of the companies in the CCA group were subject to cross-indemnity obligations to meet any shortfall to creditors upon liquidation of immediate parent/subsidiary companies. A centralised treasury upon which Chase companies could draw was established via the New Zealand company International Exposure Management Limited (“IEML”) although Datacrest Limited and Falcington Corporation were also “treasury” corporations. The financial controller for CCL and CCA was Mr RJ (John) Clarke 7

who gave extensive evidence in the trial related to the capacity of the Chase group to have paid Interchase on a valuation of $380m.

[13] On 3 July 1989 CCL’s property holding subsidiary, Chase New Zealand Property Group Limited, was placed into statutory management pursuant to the New Zealand Corporations (Investigations and Management) Act 1989. On 2 July 1989 CCA and CCL appointed Mr A Macintosh as financial adviser to them and their subsidiaries. A scheme of arrangement was entered into in August 1990. All of the relevant Chase companies have since been deregistered.

[14] Interchase Corporation Ltd, as mentioned, was originally a wholly owned CCA company and was floated to raise funds for the development of The Myer Centre. When floated it had two Chase directors, Mr Reynolds (chairman) and Mr G Smith and three independent directors Mr Max Ryan (managing director), Mr Charles Curran and Mr Robert Simes. At the invitation of Mr Ryan, Mr Henry Berkovic jointed the board subsequently. Mr Ryan, Mr Curran and Mr Berkovic gave evidence in the trial. Mr Guy Burgess and Mr Henry Berkovic were the initial company secretaries. Messrs Barber and Kelly were appointed liquidators to Interchase on 4 April 1991 and have brought these proceedings on behalf of the creditors.

[15] The simplified table appended to the end of these reasons may assist in understanding the relationships of the relevant companies. A more comprehensive diagrammatic representation of the CCA group may be found as attachment A to the explanatory statement to the scheme of arrangement (exhibit 324; see also exhibit 208/3).

[16] The first defendant, ACN 010 087 573 Pty Ltd, was formerly known as Colliers Jardine (Qld) Pty Ltd. This is the name by which it was known at all times material to the action and it has been convenient to refer to it as “Colliers” in the proceedings. It carried on business as a valuer of commercial property in Queensland.

[17] The second defendant (“Mr Tidbold”) against whom Interchase has discontinued its action practised and practices as a valuer in Queensland and was employed by Colliers at times material to the action. He was called as a witness by the third and fourth defendants.

[18] The third defendant, Grosvenor Hill (Queensland) Pty Limited, was formerly known as Hillier Parker (Queensland) Pty Ltd. This is the name by which it was known at all times material to this action and similarly it has been convenient to refer to it as “Hillier Parker” in the proceedings. It carried on business in Queensland as a valuer of commercial property.

[19] The fourth defendant (“Mr Waghorn”) practised and practices as a valuer in Queensland and was employed by Hillier Parker at times material to the action. He gave extensive evidence.

[20] Hewsea Pty Ltd (“Centre Management”) was and is the company which operated the management of The Myer Centre Brisbane and was appointed to that position on 7 May 1987 for 20 years. It was a company jointly owned by Hincorp Pty Ltd (a 8

wholly owned subsidiary of Interchase) and Remm Group Limited. Mr David Clare, who gave evidence, has been the manager of Centre Management since Hewsea’s appointment.

[21] Remm Pty Ltd (“Remm”, used in these reasons to refer to other Remm companies) originally commenced amalgamating The Myer Centre site as a large commercial and shopping precinct having acquired options on a number of properties. In 1986 its interests were taken over by PEL although it remained involved as the builder and principal leasing agent of The Myer Centre until the end of the first year’s trading. It was the developer of The Myer Centre Adelaide, which was in its early stage of development during the building of The Myer Centre Brisbane and not due for completion until September 1990 and in respect of which Hillier Parker prepared a valuation.

[22] Wintergarden Stages I and II was a new shopping complex on the Queen Street Mall opposite the David Jones department store. It contained a large basement food court, two levels of shopping including luxury goods stores and “upmarket” fashion shops, a Hilton Hotel, an Elizabeth Street frontage and had an associated car park. The Wintergarden, a Kern Corporation development, was considered the most comparable development to The Myer Centre at the time.

[23] The Myer Centre covered almost an entire city block bounded by Queen, Albert and Elizabeth Streets. It had the Myer Store as anchor tenant and included provision for 185 specialty shops as well as kiosks throughout the Centre and storage areas. It was designed with two atriums, one within the Myer Store and the other extending from the Elizabeth Street level to the entertainment levels. The specialty shops were situated around the open space of this atrium. The retail shopping and entertainment area of The Myer Centre comprised the Queen Street level and four levels above it. The Myer Store commenced on Queen Street. There were two retail levels below with entrances onto Elizabeth Street and Albert Street to take account of the sloping nature of the land. The entertainment area occupied the two upper levels to the top of the atrium and was known as Tops. It was to feature rides and retail outlets to give the appearance of a funfair. A bus station entry and interchange terminal and eight cinemas were located below the Food Court which was below the Queen Street level of the Centre. Five levels of parking for 1,450 cars were under the shopping levels.

[24] Hillier Parker and Colliers each provided a valuation letter to PEL and Interchase respectively dated 17 May and 18 May 1988 (exhibits 36 and 37) and full valuation reports delivered 8 July and 15 July 1988 respectively (exhibits 2 and 70).

The issues and some preliminary matters

[25] Fundamental to Interchase’s claim against the third and fourth defendants is a finding that the Hillier Parker valuation (and the Collier valuation) were Completion Date Valuations as envisaged by the Development Agreement so as to trigger an obligation on the part of Interchase to make a payment to PEQ. The third and fourth defendants argue that the letters of retainer to Hillier Parker and Colliers departed from the terms of the Development Agreement relating to the Completion Date Valuations so that they could not be said to have been retained to provide Completion Date Valuations. Neither they argue could the subsequent valuations 9

be described as Completion Date Valuations so as to oblige Interchase to make any payments to PEQ pursuant to the terms of the Development Agreement. Interchase has sought to make the letters of valuation or the subsequent valuation reports Completion Date Valuations on several alternate bases

· upon the true construction of the terms of the Development Agreement and in the events which happened the two valuation letters (or reports) constituted Completion Date Valuations within the meaning of the Development Agreement or · by agreement between Interchase and PEQ they were to constitute such valuations (para 22 of the amended statement of claim) or by amendments made in the course of the trial · by a course of dealing undertaken on a common assumed basis the two valuations were Completion Date Valuations within the meaning of the Development Agreement and neither Interchase nor PEQ sought other valuations under the Development Agreement and acted upon the valuations (exhibit 61)

[26] If the valuations are characterized as Completion Date Valuations the third and fourth defendants maintain that the terms of the retainer, the disclaimers of liability to third parties, the lack of knowledge by Hillier Parker (Mr Waghorn) of the relevant terms of the Development Agreement relating to the Development Sum together with Interchase’s capacity to have protected its interests vis-à-vis the third and fourth defendants by additional or different terms in the Development Agreement (for example, by a joint retainer of the valuers), or by specific terms in the retainer between Hillier Parker and PEQ have the consequence that no duty of care to avoid causing economic disadvantage to Interchase was owed.

[27] Interchase had alleged a joint retainer of Hillier Parker by PEQ and Interchase (para 14) but abandoned its claim against Hillier Parker based on contract in the course of the trial.

[28] A significant aspect of the trial was whether in the event that a duty of care was owed, Hillier Parker and Mr Waghorn were negligent in assessing the value of The Myer Centre at $490m. The attack focused on Mr Waghorn’s approach to the task, his calculation errors and his overall judgment as a valuer.

[29] Each of Interchase and the third and fourth defendants engaged expert valuers to carry out a retrospective valuation of The Myer Centre in mid-1988 and to give evidence about the practice of valuers in 1988 – Mr Brian Cox for Interchase and Mr Rodney Brett for the third and fourth defendants. They prepared separate reports as well as a joint valuers’ report showing areas of agreement and disagreement. Mr Cox also prepared a forensic report critically analysing both Mr Waghorn’s and Mr Tidbold’s valuations. Mr Cox retrospectively valued The Myer Centre at $380m. This figure was the basis of all calculations in the second aspect of the trial, namely, the capacity of the Chase companies to repay the prepaid sum of $7m, the further “bonus” sum of $10.5m and $45m to Interchase under the Development Agreement. Mr Brett produced a retrospective valuation of $441.5m which after recalculations at the completion of his evidence was $438,782,609 with a plus or minus margin of 10 to 15 per cent. Mr Cox contended that such a “range” was entirely inappropriate to a valuation of this size. 10

[30] Two valuers, Mr Kernke and Mr Norris had been retained in the first and second defendants’ case. Mr Kernke was called to support the Hillier Parker valuation figure. On Interchase’s application, I declined to allow Mr Norris to be called bearing in mind the length of the trial, the extensive and detailed evidence which had already been given by Mr Cox and would be by Mr Brett and that Mr Norris had not participated in the joint valuers’ report. Neither, it must be said, had Mr Kernke, but no application was made to exclude his evidence. Had such an application been made more than likely it would have been granted and, on reflection I ought to have moved in that direction myself. My reasons for declining to allow Mr Kernke to be called are set out in the transcript of the trial.

[31] The third and fourth defendants contend that since Interchase actually paid less ($377.5m) for The Myer Centre than it maintains was its completion value of $380m it suffered no economic disadvantage such as should sound in damages. The third and fourth defendants contend that the Development Agreement and all subsidiary dealings between Interchase and the Chase companies were not at arm’s length.

[32] The fourth defendant, Mr Waghorn, was an employee of Hillier Parker and an issue arises as whether he may be made liable personally.

[33] The assessment of damages, if liability is made out, is complicated by a number of matters. Interchase made payments “on account” of an expected Completion Date Valuation in the vicinity of $490m at the request of PEL in the sum of $7m but before any valuations were actually received. Those payments, and the post-valuation payments of $10.5m ($10.45m proved) were not actually made to PEQ but to related Chase corporations. The third and fourth defendants challenge the alleged agency of PEL for PEQ.

[34] The third and fourth defendants contend that CCA and CCL and their subsidiary companies were effectively insolvent from April 1988 and would have been unable to make any repayments or payments to Interchase and, accordingly, the chance to receive those moneys, lost by the negligence of the defendants, was worthless.

[35] The fact that there were two independent but allegedly negligent valuations raises calls for a consideration of the proportions of the total loss to be assigned to the two groups of defendants.

[36] The third and fourth defendants contend that Interchase’s damages, if any, should be reduced because its conduct contributed to its loss by not providing Hillier Parker with the information which Interchase contends Hillier Parker ought to have sought out in preparing its valuation report.

[37] The third and fourth defendants seek to defeat Interchase’s claim by raising a limitation defence pursuant to s 10(1) of the Limitation of Actions Act 1974. The writ was issued on 13 April 1994 allegedly more than six years after Interchase made the payment in advance to PEQ before 13 April 1988.

[38] Finally there is the question of interest, at what rate and over what period. Interchase abandoned its claim for damages for loss of use of the money foregone and seeks interest in lieu. 11

[39] The third and fourth defendants submit that adverse inferences against Interchase ought to be drawn because of the failure to call certain witnesses. The most significant of these is Mr Guy Burgess. He was at all relevant times the Queensland manager and a director of PEL. He was the designated attorney of Interchase for the purpose of accepting the terms of offer of the Development Agreement when Interchase was wholly owned by CCA. He was, initially, Interchase’s secretary. He retained Hillier Parker to carry out the subject valuation. Mr Stephen Garmston, the property investment manager for Interchase based in Sydney, who gave evidence at the trial, retained Colliers. Mr Garmston was the person at Interchase most directly involved in managing the development of The Myer Centre but directed Colliers’ enquiries largely to Mr Burgess who was involved in the project in Brisbane on a daily basis.

[40] Mr Burgess, it seems, was in Brisbane, or available, at the time of the trial. He played an important role in providing information to Hillier Parker, particularly to Mr Waghorn, and it might have been expected that he would give evidence. Indeed the particulars to the pleadings also support that inference since he allegedly accepting the offer from PEQ, PEL and CCA and allegedly agreed with Mr Max Ryan of Interchase to treat the valuations if non-conforming with the Development Agreement as Completion Date Valuations. However, there was little evidence of significance which was controversial given by Mr Waghorn of their dealings. Mr Burgess had been orally examined by the liquidator for Interchase in the Federal Court. Apart from the formation of the Development Agreement and his early role as Interchase’s company secretary, Mr Burgess was by no means discernibly in the so-called Interchase “camp” bearing in mind that this is a liquidator’s action. Counsel for the third and fourth defendants sought to introduce secondary evidence about Mr Burgess at the end of their case which I declined to permit since Mr Burgess was as available to those defendants as to Interchase as a witness. The third and fourth defendants were not shy to venture into the Interchase “camp”. For example, they called Mr Curran a former director and deputy chairman of Interchase.

[41] Mr Burgess was a person I would have expected either Interchase or the third and fourth defendants to call as a witness and can only infer that he was expected to be unlikely to prove useful to either party and, indeed, may have been positively hostile. However I am unable to draw any inferences about the nature of the evidence which he may have given one way or the other. General submissions only were made by the third and fourth defendants.

[42] There were other witnesses, such as Mr Victor Hoog Antink and Mr J (Seph) Glew, directors in various Chase companies, of considerable seniority who may have been of assistance with respect to certain aspects of Chase’s capacity to pay, but, as I have mentioned, Mr John Clarke did give lengthy evidence and there must be some judgment made about the number of witnesses. Mr Hoog Antink was the attorney for PEQ, PEL and CCA, the parties making the offer to Interchase to enter into the Development Agreement and once it became clear that the third and fourth defendants challenged the proof of its formation he might have been expected to have been called. But I have concluded on that point that no adverse inference should be drawn. Paragraph 22, both at the commencement of the trial and as amended in the course of the trial, alleges in particulars that Mr Hoog Antink agreed with Mr Ryan that the valuations would be treated as Completion Date 12

Valuations and that he and Mr Glew on behalf of PEQ assumed that the valuations were of that character. There was no evidence in the trial as to the availability of either man. What inferences, if any, which may be drawn from the failure to call them is discussed when considering the subject matter of the evidence relevant to them.

[43] In its turn Interchase has submitted that adverse inferences should be drawn from the failure of the third and fourth defendants to call Mr Rod Samut, state manager of Hiller Parker at all relevant times, and Mr Les Walsh, an investment analyst with Hillier Parker in the Sydney office, who prepared and assisted Mr Waghorn with the computer model for the valuation and who was closely involved with Mr Waghorn in the valuation of both the Brisbane and Adelaide Myer Centres. Mr Chris Mount a valuer in the Brisbane office of Hiller Parker assisted Mr Waghorn in the collection of material for the valuation but was not called and neither was Ms Cathy Smith, Mr Waghorn’s secretary. These witnesses might have been able to throw some light on Mr Waghorn’s contention that he had prepared many more documents and collected more material than was disclosed in his files but these events occurred so long ago that it would be wrong to draw even a general inference that they would not assist the third and fourth defendants. As will become apparent, a very large quantity of contemporaneous documents were generated by the valuation (including documents associated with past valuations by Hillier Parker of this property) which have been a valuable evidentiary source, and much more so than would be fragile memories reconstructing events, circumstances and conversations.

[44] Where there is a single issue or a very limited number of issues it will be easier and more appropriate to draw an adverse inference against a party failing to call a person perceived to be in that party’s camp who might be expected to know something relevant and probative of that issue than here where there is no single controversy but a course of dealing over a relatively lengthy period and a long time in the past.

[45] Finally, a comment about the structure of the trial. For whatever reason, by the time the management of the action came to me shortly before the commencement of the trial it was all paper-based. The parties have been put to the great trouble and expense photocopying thousands of pages of material. However unlike so many trials involving quantities of documents a large proportion of those tendered were relevant to the issues to be decided.

[46] The part of the trial devoted to the assessment of Interchase’s chance to recover and be paid money from the Chase group became almost overwhelming in its detailed analysis of a huge corporate enterprise but since the point was important it is difficult to see how the evidence could have been confined given the assiduity of counsel for that part of their respective cases. However that evidence was predicated upon a correct valuation of The Myer Centre being $380m and it may have been advisable, in retrospect, to obtain a preliminary judgment on the issue of liability and the amount of the correct valuation and to have dealt the question of recoverability subsequently. That would possibly have reduced the wide-ranging nature of the enquiry. 13

[47] I was, it should be recorded, greatly assisted by counsel in their conduct of the trial and they, in turn, as was quite apparent, were greatly assisted by their instructing solicitors who ensured that witnesses and materials were in steady supply.

The Development Agreement

[48] The third and fourth defendants challenge the formation of the Development Agreement and/or that the document tendered as constituting the terms of that agreement, exhibit 77, was as contended. Mrs Narelle Tobin, a solicitor, said that on 7 May 1987 she attended at the offices of solicitors Seymour Nulty & Co to witness an oral exchange in relation to a proposed contract. She executed a statutory declaration as to what had occurred on that day (exhibit 75).

[49] Mrs Tobin had an independent recollection of the meeting and that she was handed powers of attorney by two men present who identified themselves as Victor Patrick Hoog Antink and Guy David Burgess, the two referred to in the documents. Her statutory declaration had not been prepared by her, but she was content to execute it. She declared that Victor Patrick Hoog Antink presented her with powers of attorney from PEQ, PEL and CCA. He said to her that he was the Victor Patrick Hoog Antink referred to in each of the powers of attorney. Guy David Burgess presented her with a power of attorney from Banway Limited and said that he was the person referred to in that power of attorney. Each of those powers of attorney authorised each person named to do the things which he did in the presence of Mrs Tobin. She declared “The said Victor Patrick Hoog Antink said to the said Guy David Burgess in my presence ‘as attorney for Property Estates (Qld) Pty Limited, Property Estates Limited and Chase Corporation (Australia) Pty Limited I hand to you as attorney for Banway Limited (which was formally Banway Pty Limited) an offer by those companies to enter into a Development Agreement with Banway Limited on the terms set out therein. You will observe from page 3 of that document that Banway Limited may accept this offer by you, as one of its attorneys, orally informing me that Banway Limited accepts it’.

The said Guy David Burgess then said to the said Victor Patrick Hoog Antink in my presence ‘as attorney for Banway Limited I hereby accept the offer’.”

[50] Mrs Tobin was unable to say whether the document which was advanced by Interchase as containing the terms of the Development Agreement (exhibit 77) was the document referred to in the powers of attorney. She had no recollection of any other document on the occasion of the meeting, apart from the statutory declaration and the powers of attorney. The third and fourth defendants maintain, in the absence of evidence from either of Mr Burgess or Mr Hoog Antink, that the terms of the Development Agreement have not been proved, nor the formation of the agreement itself.

[51] The evidence points to the document constituting exhibit 77 containing the terms of the Development Agreement. Those terms are described in the Interchase Prospectus (exhibit 40) and correspond to the terms in exhibit 77. They are 14

consistent with various contemporaneous documents of advice and other memoranda passing between the relevant parties, for example, the memorandum from Mr Garmston to Mr Berkovic of 16 February 1988 setting out relevant clauses of the Development Agreement (exhibit 63) preparatory to the retention of the valuers. Officers of Interchase who dealt with the Development Agreement when shown a document in the same terms as exhibit 77 recognised it as the Development Agreement, (Messrs Ryan, Curran, Berkovic and Garmston). No other document has been produced in these proceedings which could answer to that description, and it would be lacking in common sense to suppose that there might be some other document which would do so. I am satisfied that exhibit 77 is a copy of the terms of the Development Agreement made between Interchase and PEQ, PEL and CCA and that that Agreement was made when Mr Burgess accepted Mr Hoog Antink’s offer on 7 May 1987. I accept that Mrs Tobin’s evidence proves to the requisite standard that the offer was made and accepted and that no adverse inference should be drawn from the failure to present Mr Burgess and Mr Hoog Antink to give evidence on this matter.

Relevant terms of the Development Agreement

[52] At the time when the Development Agreement was made Interchase was the registered proprietor of the land and the works already constructed on it on which The Myer Centre was to be built and had entered into various building and associated agreements and commitments consequent upon its acquisition of the site. According to recitals to the terms of the Development Agreement Interchase wished to rationalise these agreements and commitments by entering into the Development Agreement with PEQ as developer whereby PEQ would assume responsibility for the existing agreements and commitments and complete the project. PEQ agreed to do so for a total cost to Interchase inclusive of costs already paid of $360m subject to variation in accordance with the terms of cll 10A.1, 10A.2 and 10A.3 of the Development Agreement.

[53] By recital E to the terms of the Development Agreement (hereafter referred to as “the Development Agreement”) contemporaneously with or shortly after the execution of the Development Agreement the Bank of New Zealand was to deliver to Interchase a guarantee securing the due and punctual performance by PEQ of its obligations in an amount of $10m to the date of practical completion and in the reduced sum of $5m after that date to the date of project practical completion and in the further reduced sum of $2m after that date to the issue of the certificate of final completion. It appears that the guarantee was never provided to Interchase, though whether that was evidence of a specific inability to do so, as contended for by the third and fourth defendants, or was an oversight was a matter of dispute at the trial. It does seem clear however that Interchase understood the guarantee to be in place at the end of March 1988 as it is mentioned in a letter written by its solicitors, Pattison & Barry, as being available as security against the need to recover prepaid moneys from PEQ (exhibit 78). Mr Clarke, although he himself would not have handled such a small sum, could see no reason for the neglect of that contractual obligation at that time.

[54] In consideration of Interchase accepting the offer from PEQ, PEL and CCA agreed to guarantee the due performance of its obligations by PEQ. 15

[55] The following are relevant expressions defined in cl 1.1

· “Completion Date Valuations” are the valuations obtained pursuant to cl 14

· “Completion Valuation Amount” is the average of the amounts which according to the Completion Date Valuations are the value of the Centre as at the Date of Practical Completion.

· “Development Sum” is $360m adjusted in accordance with cll 10A.1, 10A.2 and 10A.3.

· “Market Value” means the price at which an estate in fee simple in The Myer Centre might reasonably be expected to be sold at the date of valuation assuming:

(i) a willing buyer and willing seller;

(ii) a reasonable period within which to negotiate the sale taking into account the nature of the property and the state of the market;

(iii) values will remain static throughout the period;

(iv) the property will be freely exposed to the market with reasonable publicity; and

(v) no account is taken of an additional bid by a special purchaser.

· “Qualified Valuer” means a company, firm or person who

(i) is suitably registered and qualified to carry out a valuation of The Myer Centre;

(ii) has at least five years’ experience (including not less that two years within the previous three years in Australia) and including experience in valuing properties in the locality where The Myer Centre is situated, or in valuing properties of a similar nature;

(iii) has no pecuniary or other interest that could reasonably be regarded as capable of affecting its or his ability to given an unbiased opinion; and

(iv) will prepare a valuation of The Myer Centre on the basis of market value subject to all existing leases and occupancies, encumbrances and potential benefits

The parties acknowledged that Hillier Parker was a qualified valuer.

· “Valuation Receipt Date” is the date by which both Interchase and PEQ receive copies of both Completion Date Valuations.

[56] Amongst PEQ’s obligations were to use its best endeavours to ensure before the date of practical completion that The Myer Centre would be let fully to best 16

advantage and on proper commercial terms to financially sound tenants, PEQ being permitted to appoint an agent for that purpose (cl 2.6); and to procure the bank guarantee referred to in recital E of the Development Agreement (cl 2.2.15) and to guarantee the net rent for the first year of $32.9m (cl 13.1).

[57] Clause 10A dealt with the calculation of the Development Sum: “10A.1 If the Completion Valuation Amount is less than $425,000,000 the Development Sum shall be reduced by an amount equal to the difference between $425,000,000 and the Completion Valuation Amount.

10A.2 If the Completion Valuation Amount is greater than $425,000,000 the Development Sum shall be increased by an amount equal to twenty-five per cent (25%) of the difference between $425,000,000 and the Completion Valuation Amount.

10A.3 The Development Sum shall be adjusted only in accordance with clauses 8.2 [not relevant] 10A.1 and 10A.2.” The time for the payment of the Development Sum is set out in cl 10B: “10B.1 The Development Sum has been and shall be paid in the following manner: 10B.1.1 As at 31 March 1987 one hundred and fifty-six million one hundred and sixty-one thousand dollars ($156,161,000) has already been paid by Proprietor [Interchase] in connection with the acquisition and ownership of the Total Site and the development and construction of the Centre. Without limiting the generality of the foregoing, this amount includes all amounts paid by Proprietor prior to 31 March 1987 in relation to …

10B.1.4 Within seven (7) days of Valuation Receipt Date Proprietor shall pay to Developer [PEQ] the remaining $15,000,000 of the Development Sum (or such other sum as is in accordance with clause 10A.3 the balance if any of the Development Sum remaining unpaid) together with interest thereon in accordance with Clause 10B.3. …

10B.3 As from the expiry of seven days after the Date of Practical Completion so much of the Development Sum as has not been paid by Proprietor to Developer or in respect of which an amount is not credited as paid shall carry interest payable by Proprietor to Developer at the Bill Rate. If upon determination of the Completion Date Valuation it is ascertained that the total of the amounts paid by Proprietor to Developer on account of the Development Sum and of 17

the amounts for which the Proprietor is given credit on that account exceeds the Development Sum (“the Excess”), Developer shall within seven (7) days of Valuation Receipt Date repay to Proprietor an amount equal to the Excess together with interest thereon at the Bill Rate as from the expiry of seven days after the Date of Practical Completion.

…

10B.5 Proprietor shall have the right at any time and from time to time to pay to Developer any amount on account of the Development Sum notwithstanding that demand therefore has not been made.”

[58] The terms relating to the Completion Date Valuations which were to establish the Development Sum are set out in cl 14 “14.1 Each of Developer and Proprietor a reasonable time before the anticipated Date of Practical Completion shall commission a Qualified Valuer (hereinafter called “the Valuers”) to determine the market value of the Centre as at the Date of Practical Completion. Each Valuer in carrying out such valuation may if he considers it appropriate have regard to the Rental Guarantee contained in clause 13 hereof and to any transfer of ownership to financiers which Proprietor may have made in respect of any plant and equipment therein and to Myer’s rights under clause 36.1 of the Myer Lease Agreement.

14.2 Each party shall bear the whole of the cost of the valuation so commissioned by it.

14.3 Each of Proprietor and Developer shall furnish both Valuers with all information which either Valuer considers relevant to its valuation.

14.4 Each of Proprietor and Developer shall direct the Valuer commissioned by it to send a copy of its Valuation direct to the other party.”

[59] Interest for late payment was provided for in cl 19. In the event that either Interchase or PEQ failed to pay any moneys to the other on the date on which they became due and payable the party in default should pay interest at the bill rate applicable to that period.

[60] By cl 23 PEL and CCA covenanted that they would each be jointly and severally liable to Interchase “for the due and punctual performance and discharge in full of all [PEQ’s] Obligations” and guaranteed “to make on demand the due and punctual payment of any money at any time owing to [Interchase] by [PEQ] pursuant to any provision, if any, of the Contract Documents including this Guarantee and Indemnity.” 18

Clause 23.2 confirmed the unconditional nature of the obligation including any liquidation or official management or arrangement which might otherwise operate to release the guarantors or that Interchase was in default of any provision of any contract document.

[61] As has been mentioned the third and fourth defendants contend that the terms of cl 14 were not followed by Interchase and PEQ when retaining the valuers so that Completion Date Valuations were not obtained. The particulars of disconformity alleged by the third and fourth defendants are that

· PEL not PEQ retained Hillier Parker to produce a valuation · the rental guarantee, the Myer rights under its lease and leverage lease were not left to the valuers to consider at their discretion · the cost of the two valuations were shared equally rather than each bearing the whole cost of the valuation commissioned · PEQ did not direct Hillier Parker to send its valuation to Interchase (although Interchase directed Colliers to send its valuation to PEQ) · the “speaking” date of the valuations was not the date of practical completion · other assumptions not found in cl 14 were introduced into the letters of retainer · whether the letters or the final reports constituted the valuations.

The effect of these departures, for it is plain that there were departures, will be discussed after the factual matters have been considered.

[62] Interchase does not contend that the valuers and Hillier Parker in particular were aware of the precise terms of the relevant provisions of the Development Agreement relating to the Development Sum and Completion Date Valuation but rather, that through Mr Waghorn Hillier Parker had sufficient understanding of the purpose of the valuation to know that a carelessly high or correspondingly carelessly low valuation figure would have financial consequences for either party to the Development Agreement in that the average of the two valuations would set the price to be paid by Interchase. This is the foundation of Interchase’s claim that Hillier Parker owed it a duty to prepare the valuation with reasonable care and skill.

The claim against Hillier Parker and Mr Waghorn

[63] Interchase pleaded that there was a joint retainer of Hillier Parker by itself and PEQ. As mentioned, this claim was abandoned in the course of the trial. Once the evidence about the circumstances of the retainer emerged there was no factual basis for such a claim and if there was it would have been a significant departure from the provisions of cl 14 of the Development Agreement.

[64] Interchase bases its claim in negligence on Hillier Parker’s knowledge, through Mr Waghorn, that the valuation which it was retained to prepare for PEQ in April 1988 “was to be used in arriving at an average value of The Myer Centre which would determine the adjustment to the Development Sum” (para 14 amended statement of claim). Mr Waghorn was adamant when giving his evidence at the trial that it was not until well after the commencement of these proceedings that he learnt from his counsel in conference of the way in which the valuation was to be used. The third and fourth defendants submit that whatever the evidence to the 19

contrary which emerged at the trial it was insufficient for the purposes of liability. The case which Interchase advances is not one based on reliance in the usual sense in negligent misstatement cases. It is that the third and fourth defendants owed Interchase a duty to take care in preparing and producing the valuation because they knew that it, together with a second valuation, would be used to fix the amount finally to be paid for The Myer Centre and that Interchase’s (or PEQ’s) obligations were crystallized when that occurred.

[65] Because the extent of this knowledge is pivotal to Interchase’s claim the evidence concerning the relationship between Hillier Parker, Mr Waghorn and valuation of The Myer Centre both in Brisbane and Adelaide needs to be examined in some detail. It is also relevant for an analysis of the approach to the valuation itself.

[66] Although the third and fourth defendants have sought contribution from the first and second defendants the focus of the evidence was upon Hillier Parker’s valuation. Interchase’s attack upon it was two fold: namely that both Mr Waghorn’s methodology and judgment as a valuer were flawed. Those weaknesses resulted in incorrect calculations and in the selection of an inappropriate capitalisation rate to an unsustainable annual rental which led to an erroneous valuation. To a large extent the internal process used is able to be assessed without a great deal of difficulty although it involved a large body of complex and meticulous analysis. The challenge for the expert valuers has been not only to approach the task of performing a retrospective valuation uninfluenced by events subsequent to the valuation under scrutiny but to attempt to recapture the commercial spirit of the time and to approach some aspects of The Myer Centre, for example, multiple cinemas, which are commonplace now but were novel then, as something new and untested.

Background events

[67] Brisbane was to host the World Exposition (Expo 88) across the Brisbane River from the central business district starting in April 1988. The opening of The Myer Centre was to coincide with that of Expo-88 and was positioned about a city block north of the bridge crossing the river leading to Southbank, the Expo site. The first part of the Queen Street pedestrian mall between Edward and Albert Streets had been established by the Brisbane City Council as something of an innovation in a major city. It was contemplated that the mall would be extended south towards the river and part of the arrangements between the Brisbane City Council and the developer of The Myer Centre required the developer to contribute to that extension to George Street, one block to the north of the river.

[68] Most Australian and New Zealand (and overseas) listed shares had suffered a significant downturn in value following the share market crash in October 1987, and governments around the world freed up credit which fuelled strong demand in the property market. Accordingly real property was seen to be doing well and the mood, as all witnesses agreed, was one of optimism and buoyancy for property. This was to last until mid 1989 in Australia (somewhat earlier in New Zealand) when a severe property downturn was experienced.

[69] The witnesses agreed that if The Myer Centre was to attract the level of patronage to make it a success there would need to be a dramatic reversal of the well 20

established trend in south-east Queensland of shopping in Brisbane suburban shopping centres such as Brookside, Garden City and Indooroopilly and Pacific Fair at the Gold Coast which provided the advantages of a big department store (Myer or David Jones) with specialty shops and free car parking. It would be essential to take market share from the suburbs not least because there was then seen to be a dwindling shopping population in the City and adjacent Fortitude Valley. The difficulties facing The Myer Centre in changing shopping trends was exemplified in an article in The Australian Financial Review of 17 March 1988 (exhibit 253/57). Mr Dennis Lee, a director of Remm, told the journalist that retail spending in the City and Fortitude Valley in 1986 had totalled $475m and that The Myer Centre aimed to turn over more than half that figure, $260m, in its first year of operation. He believed that the shoppers would return from the regional centres. “In 1961, said Mr Lee, the Brisbane CBD accounted for 44% of all retail spending in Brisbane. By the end of 1987, the city’s share had fallen to only 11%. ‘With The Myer Centre, we aim to increase that share to 15%’.” The proposed development was to be the largest retail development project ever undertaken in Australia and a question being canvassed in the financial press at the time was whether it was too big for a city the size of Brisbane (exhibit 284).

Hillier Parker’s early involvement

[70] Hillier Parker was involved with the development project from early 1986. Mr John Richardson was then its senior valuer in Brisbane. He had prepared a valuation report on The Myer Centre (not then built) dated October 1986 delivered in early January 1987 for PEL at $470m (exhibit 5). He prepared a valuation dated February 1987 for Interchase at $470m (exhibit 6) and prepared and signed the Hillier Parker valuation report for publication in the Interchase Prospectus (exhibit 40) dated 10 June 1987 summarising that same valuation. Mr Richardson left Hillier Parker in November 1987 to start his own real estate business. Thereafter it appears he was retained on a consultancy basis to assist with the Hillier Parker valuation of The Myer Centre in Adelaide which was being developed by Remm at about the same time but not due to open until September 1990. Although his valuations are not in issue in these proceedings they were used extensively by Mr Waghorn as a starting point (indeed the third and fourth defendants contend that the subject valuation was a revaluation) and he had access to and almost certainly used the files compiled by Mr Richardson which remained with Hillier Parker after he left. Mr Waghorn has relied upon Mr Richardson’s valuations in support of his own work. For these reasons a close analysis of his valuations will be made.

[71] The working papers for the preparation of the valuation of The Myer Centre Adelaide are relevant because Mr Waghorn was working on that valuation when he became involved with The Myer Centre Brisbane after Mr Richardson left. The Adelaide valuation included an assessment of the financial standing of the Beaumont Group of companies, a major tenant in both The Myer Centre Brisbane and Adelaide. The acceptance by Mr Waghorn of the financial viability of the Beaumonts and their experience and management skills in the two entertainment floors, the food court, gourmet food area and the two taverns was challenged by Interchase. The Adelaide papers tend to show Mr Waghorn’s suggestibility to 21

client influence as to value which, Interchase contends, clouded his professional judgment.

[72] Mr Richardson had a poor recollection of the events in 1986 and 1987 the subject of this litigation. He had been extensively examined on behalf of the liquidator of Interchase in the Federal Court over three days at the end of 1993 and in early 1994 when his recollection was a little more detailed. That examination with some exclusions became exhibit 282. The impression which he gave, even in evidence in chief, was of mild animosity and that he was prepared to answer only as minimally as possible.

[73] On or about 22 April 1986 Mr Richardson met with Mr John Pearson and Mr Don Innes of Remm to discuss preliminary advice on the proposed rental structure for The Myer Centre project and a valuation for the whole project. Mr Pearson was involved at a senior level in Remm particularly with the leasing of The Myer Centre. He had had many years experience in the development and then the management of retail shopping centres. He gave evidence in the trial. Neither Mr Richardson nor Mr Pearson had any independent recollection of this meeting nor of the correspondence passing between them but this initial contact may be inferred from the correspondence. Mr Richardson proposed that Hillier Parker would charge a fee of $10,000 for advice as to the rental levels proposed for The Myer Centre and $50,000 for a full valuation which would include the fee for the preliminary advice.

[74] In May 1986 Retail Surveys Australia Pty Ltd had been commissioned by Remm to produce a study (exhibit 318) of the market statistics available and sales potential for The Myer Centre. It revealed that the major centre of retail activity in the Brisbane CBD was to the north of the proposed Myer Centre. The pedestrian count in the vicinity of The (proposed) Myer Centre was 79 per cent of the level recorded in the Queen Street Mall outside David Jones to the north. The turnover per square metre per annum for the specialty shops on the mall at the end of 1985 was $5,000 and the report concluded that specialty stores and other tenancies throughout levels 1 - 5 of the proposed new centre could average a turnover of $4,800 per square metre and the sixth level, $1,400 per square metre.

[75] The Hillier Parker files contained copies of relevant newspaper clippings on appropriate valuation files. Those in The Myer Centre valuation files more than likely came to Mr Richardson’s attention and some are dated in his hand. Articles in The Australian Financial Review in mid-1986 expressed what was reported as some market scepticism at Brisbane’s capacity to absorb such a large retail development and to turn about the trend to suburban shopping. The value of the project was said in the articles to be variously $585m or $500m, that information having been provided at that time, it may be inferred, by Remm.

[76] An incomplete document (exhibit 277) dated 14 July 1986 in the Hillier Parker files, most likely obtained from Remm, contained a detailed analysis of the costings of The Myer Centre development. The estimated net income was shown as $32.975m which, with a capitalisation rate of 7 per cent, would produce a completion value of $471m. Interchase contends that this document is significant because it sets out the then developer’s expectation as to the rents which would be generated by The Myer Centre to produce a completion valuation of $471m. These 22

figures, as was conceded by Mr Richardson in cross-examination, are almost identical to the figures he produced in his valuation of October 1986 and which dominated subsequent Hillier Parker valuations.

[77] On 22 August 1986 a team of 6 Hillier Parker men met with Mr Burgess, then the Queensland state manager of PEL, to review the Myer development project, according to the minutes recorded in writing by Mr Richardson (exhibit 250). Mr Burgess played a significant role in providing Hillier Parker with information about The Myer Centre for the various valuations. He also provided Colliers with information at the request of Stephen Garmston, the Interchase officer responsible for briefing Colliers but who worked from Interchase’s Sydney office. At the meeting the Hillier Parker people expressed their concern at “the sheer size of the dollar value ($450m) of the project”, noting that its New York office had been involved in the largest single property real estate transaction in the world when it sold the Pan-Am Building in 1980 for $400m. The concern was whether a buyer could be found for property valued at that figure in Brisbane.

[78] Mr Richardson had received faxes from Hillier Parker offices in Sydney, Adelaide and Melbourne setting out specialty rents in their respective central business district shopping precincts. The level of rents proposed for The Myer Centre was noted to be in line with the present rents in Queen Street and that there was “a high level of national name retailers” interested in the project. Hillier Parker agreed that Mr Burgess’ proposed vacancy rate of 5 per cent was appropriate. The minutes record that in order to test the rents by reference to the turnover required to support them Hiller Parker carried out some calculations: “These calculations showed that the specialty shops, excluding everything else in the Centre, would need to have increased turnover of $700.00 per square metre per annum on an increased floor area of [23] square metres per annum average (based on the Wintergarden figures) in order to support the proposed level of rents. These calculations were based on the rent plus outgoings, plus promotional levies, etc, equalling 15% of turnover. It seems to us that these were not unrealistic projections to hold for a development of this type and size” (exhibit 250).

[79] Hillier Parker noted that the rent proposal for the car park appeared very high observing that public car parks were paying rent in the order of $1,500.00 per bay in 1988 dollars against the proposed rental for The Myer Centre car park of $2,700.00 per bay. The minutes noted that at 7 per cent for 1,450 car bays “this difference represented a capital value of $25 million”. Hillier Parker commented that although there might be sound reasons why the level of rental was so high it was an area that needed full investigation. This, in fact, seems not to have occurred in the course of either Mr Richardson’s or Mr Waghorn’s investigations.

[80] The participants in the meeting discussed the capitalisation rate. Mr Burgess had proposed 7 per cent. Hillier Parker noted that in the absence of similar properties for a direct comparison it was looking at a range of properties including regional shopping centres, inner city retail and the new central business district high rise officer towers. Hillier Parker noted that whilst it was not in a position to define a precise capitalisation rate it was not “uncomfortable with 7%”. Hillier Parker noted that this method was a very simplistic way of arriving at a capital value and if they 23

were carrying out a formal valuation of the property they would “need to use a variety of other methods to support the capital value”. Mr Richardson’s working notes made prior to the meeting (exhibit 283) set out capitalisation rates for two Brisbane city office towers at 7 and 6 per cent and regional shopping centres at between 8 and 8.5 per cent. Mr Richardson said that the appropriate capitalisation rate for The Myer Centre was a topic of much discussion amongst the members of Hillier Parker in the Brisbane and Sydney offices at the time.

[81] These three topics remained of considerable interest at the trial. Interchase contended that a defect in Mr Waghorn’s valuation was a failure to advert to and therefore take into account the difficulty in attracting a buyer at such a high price. The issue of the sustainability of the rents asked and achieved in The Myer Centre was crucial to the valuation. The third and fourth defendants argued that occupancy costs to turnover ratios analysis was not routinely examined by valuers in 1988 nor that there were then accepted “rule of thumb” percentages for different retail activity. The appropriate rate per bay for the car park continued to be controversial with the expert valuers differing considerably. The issue of the capitalisation rate was a lively one – a low rate reflected a low risk/high return venture whilst conversely the higher the rate the higher the investment risk.

[82] Retail Surveys Australia Pty Ltd prepared an updated report for Remm dated September 1986 (exhibit 315). The report noted that the scale and comprehensiveness of the overall project was capable of establishing new shopping patterns in competition not only with the balance of the Brisbane central district retail areas but also as a challenge to the major regional shopping centres. Because of a shortage of off-street parking close to Queen Street it expected that the car park and bus station would be likely to be highly utilised and would draw extra shoppers each day through the proposed centre. The annual turnover rates were revised and predicted in 1988 values: the Elizabeth and Queen Street levels would trade at $7,500.00 per square metre per annum; the Albert Street level at $7,000.00 per square metre, the Queen Street first level at $6,000.00 and the second level at $4,250.00. There was no predicted turn-over rate for the entertainment floor.

[83] In early October 1986 Myer Stores Limited signed an agreement to lease the department store in The Myer Centre. It was on very favourable terms to Myer with $15m contributed by the lessor towards fit out with an annual rent of $3.5m for the first 5 years. This equated to approximately $112.90 per square metre per annum, well below other large tenancies in the Centre such as the Beaumonts. To have secured Myer, regarded as the most successful retailer in Australia, was seen as a distinct advantage drawing other retail tenants. Remm engaged in a very strong leasing campaign and achieved, in a relatively short period, commitments to lease at high rents without incentives, apart from the Myer Store.

[84] Financial and property press clippings in the Hillier Parker files announced the acquisition of The Myer Centre site by PEL from Remm. Mr Richardson agreed that they would have come to his attention.

[85] By letter dated 10 October 1986 PEL through Mr Burgess retained Hillier Parker to undertake a valuation of The Myer Centre: “... to be addressed to us and will be used for funding purposes and in a prospectus for a possible public float. We shall further require 24

modifications of the valuation during the development program in line with any variation to the development in terms of areas, rentals and the like. A final revaluation will be required on completion in 1988.”

[86] The proposed fee of $200,000.00 was confirmed and Hiller Parker was asked to proceed with the valuation. The letter indicated that further details on the project were included and “any additional information you may require is available through our office and of course we are happy to meet with you to assist where possible” (exhibit 278).

[87] A media launch of The Myer Centre was held at Lennon’s Hotel on 1 December 1986 attended by representatives of Remm, PEL, the architects, Myer Stores Limited and the Queensland Premier of the day. In the media information package the project was described as a $470m investment (exhibit 285). Mr Richardson said that as far as he could recall he did not attend and would be likely to remember if he did. He could not recall being involved in any discussion of that valuation figure with PEL or Remm prior to this figure being publicly announced.

Mr Richardson’s first valuation report: 16 October 1986

[88] Mr Richardson sent a draft of his valuation report to PEL under cover of letter dated 24 December 1986 for consideration and “any necessary changes”. This, he said, was an unusual course but because of the size of the project he wanted to be sure that his basic facts were correct. The valuation is dated 16 October 1986 (exhibit 5). The purpose of the valuation was “to estimate the open market value of the development project, known as, “The Myer Centre - Top of the Mall”, as if it were, today, completed, fully leased and fully operational in every way”. The report noted that the properties contained in the site area were to be transferred to PEL’s operating company for the project, Banway Pty Ltd. It noted at page 21 that when the report was prepared pre-commitment for leasing a “substantial portion” of the Centre was in hand. This included the Myer department store, the cinema complex, the car park and two taverns, the theme floor, the gourmet food hall and the cooked food hall. The taverns, the theme floor and the food halls were to be leased by companies associated with the Beaumont family. Mr Richardson noted that the Beaumont interests were to be responsible for 18.34 per cent of the targeted rental income of $32.9m and therefore their financial standing was of crucial importance to the covenants supporting the performance of their leases. He noted that the specialty shops, kiosks and storage areas were to contribute slightly in excess of 50 per cent of the total base rent for the Centre and were also an important aspect of its financial success.

[89] Mr Richardson drew attention to the size of the development observing that there would be very few single buyers who could contemplate its purchase but noted that there was a market for overseas investment or that it might be attractive to a property trust or syndication. This, he said, was intended as a warning to lenders that the property was “unique” and a lending institution should allow a substantial margin because, as had been made clear in the instructions from Mr Burgess, this valuation was for funding purposes. 25

[90] The valuation referred to four prior sales, the Belconnen Mall, a regional shopping centre in Canberra which sold for $87m in late 1985 with a yield of 8.7 per cent; the Redbank Plaza Shopping Centre near Brisbane which sold in mid 1985 for $56m producing a yield of 9.8 per cent; the Qantas Building in Sydney which sold in April 1986 for $200m with a yield of 6.37 per cent; and the Riverside Centre in Brisbane which sold in mid 1986 for $171m plus deferred payments producing a yield of 7 per cent. The latter two were office towers.

[91] Mr Richardson set out his approach at page 53 of the report stating that the selling price for retail investment properties was reflected by the capitalisation of the relevant income stream. He adopted the rents under the pre-lease arrangements for all the sections of the project save for the specialty shops. He made no reference to the sustainability of those rents. The report does not include an analysis of comparable rentals for the taverns, Tops, the car park or the food court. Mr Richardson stated that he had considered the present market value for specialty shops, but included none in the report. He said he had adopted an “across the board” rental level of $920 per square metre per annum as appropriate for the Centre. He noted that this was below the target rents set by the developer but that it provided a “measured degree of flexibility between the rents that are asked and the rents that are achieved” (exhibit 5 page 53). In cross-examination he said that he arrived at $920 per square metre per annum by considering rentals from around Australia. But as was demonstrated, he clearly arrived at this figure by calculation to fix up an error in earlier calculations and to maintain the targeted rental of $32.9m. The evidence of comparable rentals outside Brisbane to which he referred was contained in three faxes received on 22 August 1986 from the Sydney, Melbourne and Adelaide offices of Hillier Parker.

[92] Mr Les Walsh in the Sydney office of Hillier Parker had set up computer programs to be utilised by Brisbane Hillier Parker for this project. It seems that in 1986 the use of such programs was not widespread in Brisbane. The purpose of the program was to assist in running the tenancy data for The Myer Centre and making calculations. In the tenancy data print out sent to Mr Richardson from Mr Walsh on 29 October the estimated market rental of the speciality shops per square metre per annum is $877 (exhibit 281). The food hall base rent was overstated at $4.202m and needed to be reduced to $3.701m. In Mr Richardson’s handwriting that figure is crossed out and the correct figure of $3.701 inserted. On the document Mr Richardson has written “$470 @ 7%” which may be inferred to mean $470m at a capitalisation rate of 7 per cent. This was what he wished to achieve. To do that he required a rental of $32.9m shown in his workings.

[93] Mr Richardson has then written the total base rent which the computer calculations had produced of $32.55m, subtracted from it the error of $501,000 giving a rental figure of $32.049m. In order to produce a base rental of $32.9m there was a $851,000 shortfall. Mr Richardson divided this amongst the total area of the speciality shops of 19,635 square metres to reach a figure of $43.47. He added this to his previous rental of $877 per square metre and produced a new rent for the speciality shops of $920 per square metre. With the correct food hall rent of $3.701m this gave a capital value of $470m after adding together all of the rental streams (front page of exhibit 281). 26

[94] Mr Richardson was not anxious to concede that this was how he arrived at $920 per square metre per annum rent for the specialty shops but such an inference is irresistible particularly when the handwritten calculations start and end with $470m and 7 per cent. This is at the heart of the criticism of Mr Waghorn’s approach to his valuation, namely, that he worked around a valuation figure sought by the client. He took over work which seems to have proceeded on that basis.

[95] The proper approach to this valuation contended for by Interchase (supported by the expert valuers) was to apply a capitalisation rate to each stream of rental and settle on an average rate (segmented capitalisation rate method). The third and fourth defendants argue that a number of valuations of mixed retail centres carried by Mr Cox, or under his auspices or by Richard Ellis, the organisation for which he worked and which he said set the standards for valuation practice in 1988 did not demonstrate this approach. Some of Mr Richardson’s early working notes used this method to produce valuation figures. One of his working models produced a valuation of $383,447,355 with an average capitalisation rate of approximately 8.7 per cent. He rounded off at $400m. Another calculation in the same notes produced a valuation figure of $409,251,906 with a capitalisation rate of 8.42 per cent (exhibit 279). Mr Richardson said he carried out this segmented capitalisation rate exercise many times and finally reached a valuation of $470m with a 7 per cent capitalisation rate. No other working papers suggest this kind of analysis and his valuation reports made no reference to it. Mr Waghorn strenuously maintained that he had used the segmented capitalisation rate method in reaching his valuation which is not reflected in his report or working papers.

[96] Mr Richardson delivered his first valuation report dated 16 October 1986 under cover of letter dated 16 January 1987 to Mr G Smith, managing director of PEL enclosing Hillier Parker’s memorandum of fees for $200,000 with a copy to Mr Burgess as Queensland manager of PEL.

[97] On 1 February 1987 prior to the production of the second Richardson report of 10 June 1987 Jones Lang Wootton (“JLW”) was engaged by Dominguez Barry Samuel Montague Limited as underwriters to the Interchase float to advise on the value of The Myer Centre essentially to confirm the Hillier Parker valuation. Mr Phillip Willington assisted by two members of the JLW Brisbane office experienced in leading retail developments carried out the valuation exercise for JLW in conjunction with Mr R Higgins of Sydney who was in charge of valuations in Australia for JLW. The third and fourth defendants have sought some comfort from this valuation which proffered the range $425-$440m but little is to be found when Mr Willington’s contemporaneous memoranda and his evidence are considered. Mr Willington gave evidence in the trial both in respect of this report and the use of occupancy costs/turnover rates in retail valuations in 1988. This valuation will be considered when analysing other contemporary or near contemporary valuations of The Myer Centre.

Mr Richardson’s second valuation report: 10 June 1987

[98] Mr Richardson prepared a second valuation report dated 10 June 1987 addressed to the directors of Interchase for inclusion in a prospectus for the public float of Interchase. He understood that Banway Pty Ltd (to become Interchase) was the 27

new owner of The Myer Centre. It was to this detailed report that readers of the Interchase Prospectus were referred (exhibit 40 page 25). By that stage Hillier Parker had received more leasing information from Remm. The date of inspection and valuation in the report was changed to 27 February 1987 but otherwise is virtually identical to the first of 16 October 1986. Appendix 24 of the first valuation - “Hypothecation Considerations Additional Comment” - was deleted from this report after discussion, possibly with Mr Burgess. It had qualified the valuation figure of $470m by drawing attention to the subjective element in property valuation and proposing a variation of 10 per cent above or below that figure giving a spread of $93m. Mr Richardson sought to protect Hillier Parker by a “side” letter to the directors of Banway Pty Ltd setting out, in effect, what was contained in Appendix 24. He conceded that this qualification was not available to potential investors.

[99] Numerous draft prospectuses for Interchase as well as the final Prospectus were in the Hillier Parker files. Correspondence shows that Hillier Parker, through Mr Richardson, was in regular contact with the underwriters of the Interchase share issue, Dominguez Barry Samuel Montagu Limited (“DBSM”). Documents sent to Hillier Parker refer to PEQ as the developer and set out precisely the terms of the Development Agreement as to how the Development Sum would be calculated and that Hillier Parker would be one of the valuers (exhibit 251 in its entirety). The file contains newspaper articles many of which set out the relevant terms of the Development Agreement for fixing payment between the proprietor and the developer on completion of The Myer Centre (exhibit 251). While it is not suggested that Hillier Parker knew of it an analysis of Interchase’s shares by the Melbourne firm North’s in March 1988 referred to the terms for setting the price in the Development Agreement, indicating how widespread the knowledge was (exhibit 294).

[100] The Interchase Prospectus was issued on 22 June 1987 (exhibit 40).

The Myer Centre Adelaide

[101] By July 1987 Remm had consolidated a large retail area in the centre of Adelaide which it proposed to develop in July 1988 to incorporate a Myer department store, food hall, fantasy theme floor, office accommodation and underground car parking very similar to The Myer Centre Brisbane. It was to be located on the Rundle Mall, the main retail shopping area in the Adelaide central business district, going through to North Terrace. This development included office accommodation in buildings facing North Terrace, and to that extent differed from the Brisbane development. By September 1987, Hillier Parker had been retained by Remm to value the Adelaide development. The concept and the layout, as well as many of the tenants, were similar to The Myer Centre Brisbane. Mr Waghorn who joined Hillier Parker in the Brisbane office in April 1987 was working on this valuation before he took over the valuation of The Myer Centre Brisbane from Mr Richardson. It is relevant to this action because much of the work was being carried out at the same time and the methodology and information used in respect of Adelaide was incorporated in the Brisbane valuation and vice versa. Further information about, for example, tenants common to both assist in assessing the full measure of the enquiries that were made about the sustainability of the rental stream in Brisbane. 28

[102] There was to be a co-operative effort between the Sydney office, particularly with Mr Walsh carrying out the computer calculations, Mr Richardson initially, with Mr Waghorn, working in Brisbane and liaising with Mr Shaw in the Hillier Parker office in Adelaide. The Myer Centre Adelaide was expected to generate a base rent of $37.72m which when capitalised at 6.5 per cent would give a value of $540.169m. Mr Pearson was in charge of leasing this development. The target rental for the speciality shops in The Myer Centre Adelaide was $1,402 per square metre per annum. The equivalent rental in Brisbane was $1,139. The Beaumont family companies were to operate the food hall in a joint venture with a Remm company and the entertainment floor similar to Brisbane.

Mr Richardson’s work on The Myer Centre Adelaide

[103] Work commenced on the valuation of The Myer Centre Adelaide on 9 September 1987. The Adelaide Hillier Parker office provided Mr Richardson with its estimate of current rentals for the various components of The Myer Centre Adelaide development which were significantly lower than the Remm proposed rents. The most sought after areas on the ground floor adjacent to the Rundle Mall were estimated to achieve $1,600 per square metre, while the third floor (seventh level) would achieve $500 per square metre giving an average of not quite $900 per square metre per annum.

[104] Mr Richardson prepared a draft valuation report dated 22 September 1987. It contained no final valuation figure, rental per annum or capitalisation rate (exhibit 262/7). He referred to the same four sales for evidence of value as were included in The Myer Centre Brisbane valuation report (p 29). He included The Myer Centre Brisbane sale noting at p 28 “This sale is not an arms length sale as the vendor company owns a large share holding in the purchasing company. The final sale price to be determined upon completion in about May 1988, is to be established by the average of two valuations”.

[105] Mr Walsh prepared a spreadsheet comparing the Remm targeted rentals for the specialty shops and those provided by the Adelaide Hillier Parker office as current sustainable rents. He noted the significant differences between the Hillier Parker and Remm figures and suggested to Adelaide that “before we go much further we should resolve our views” (exhibit 267/8).

[106] Mr Richardson recorded further discussions with Remm about the proposed rents in a memorandum to Mr Walsh of 16 October 1987 (exhibit 262/10). Some changes had occurred with the acquisition of further properties and some re-designing. He used The Myer Centre Brisbane’s rents to show that a premium of 16.6 per cent would be paid to secure a tenancy fronting the mall and percentage rents for the other floors were calculated from this. By expanding the average mall front rents in Adelaide of $1,650 per square metre per annum by the premium of 16.6 per cent projected forward at 12 per cent per annum for 3 years, the rental on the ground floor of The Myer Centre Adelaide at the projected date of opening in September 1990 would be $2,703 per square metre per annum. Mr Richardson conveyed to Mr Innes of Remm Mr Walsh’s reservations about rental levels, particularly on the lower ground floor. Mr Innes was looking for a higher rate of return (greater than 29

16 per cent) and a lower capitalisation rate than 7 per cent which would necessarily follow the level of rents proposed by Hillier Parker (exhibit 262/12; t/s 1852). From about this time (20 October 1987) Mr Richardson ceased to work on the Adelaide valuation and for Hillier Parker although he returned briefly at the end of November 1987.

Mr Waghorn

[107] Thereafter Mr Waghorn took over Mr Richardson’s role on the Adelaide valuation team. Mr Waghorn trained as a valuer in England and practised there from 1962 to 1984 when he migrated to Australia. For a short period he worked with Richard Ellis and from 1985 to 1987 was employed as a valuer with Isles Love Pty Ltd covering a wide spectrum of valuations. He commenced employment with Hillier Parker’s Brisbane office in April 1987 as one of three valuers – Mr Richardson and Mr Chris Mount being the other two. When Mr Richardson left in November that year Mr Waghorn was made Queensland manager and then state partner. He left Hillier Parker in December 1988 and commenced work as state manager for valuations and professional services for McGees where he continued to be employed at the time of giving his evidence (exhibit 254).

[108] In November 1987 Mr Waghorn reviewed Mr Richardson’s earlier valuation of The Myer Centre Brisbane for PEL. From November 1987 to March 1988 he took over Mr Richardson’s work on The Myer Centre Adelaide valuation, completed it and signed off as valuer. From February to July 1988 he worked on and completed the valuation of The Myer Centre Brisbane.

[109] Mr Waghorn had had occasion to value two identified shopping centres prior to commencing work with Hillier Parker – the Coles Shopping Centre at Ashgrove and Castletown Shopping Centre in Townsville, both modest suburban centres compared with major suburban centres such as Indooroopilly Shoppingtown or Pacific Fair. He said that today he has expertise in the valuation and analysis of retail premises but did not appear to suggest that he had that expertise in 1987-88 (t/s 1316).

[110] Mr Waghorn appears to have been meticulous in making file notes of conversations relating to the work in hand. He would regularly jot down a list of questions to ask the client (representative) and write the subsequent response alongside the questions. These files remained at Hillier Parker when he left at the end of 1988 and formed the basis of his evidence.

[111] I am persuaded that Mr Waghorn had no clear recollection of much of what transpired almost 12 years ago. This is hardly surprising. His contemporaneous notes were placed before him both in the third and fourth defendants’ case and in cross-examination. My impression on many, if not most, occasions was that Mr Waghorn reconstructed what he supposed had occurred to flesh out those notes on the basis of what might have happened, not that he had any actual recall. Mr Waghorn has been concerned in this matter for many years. He was publicly examined on behalf of the liquidator of Interchase in 1993 and 1994. He has had conferences with his legal advisers over the ensuing years. Thousands of pages of documents have had to be perused and digested relating to this matter. He has persuaded himself that he never knew anything about the purpose of the valuation 30

of The Myer Centre in mid-1988 or the terms of the Development Agreement and that he carried out extensive comparable rental review enquiries, when the evidence on those matters suggests the reverse.

[112] Mr Waghorn was convinced that there were more Hillier Parker files relating to the work that he did on The Myer Centre Brisbane than have been “found”, but he was unable to be precise about what was contained in them. He made particular reference to his “day book”, field notes, manual calculations and a second red book (the first is exhibit 255). The problem for Mr Waghorn is that there are no obvious gaps in the flow of file notes, memoranda and letters for either the Brisbane or Adelaide valuations. Boxes and filing cabinets of documents had been taken by the liquidator of Interchase from the offices of Hillier Parker and it is not beyond likelihood that some have been mislaid but only Mr Waghorn makes this suggestion. The comprehensiveness of the documentation chronologically and the unreliability of Mr Waghorn’s recollection does not lead me to conclude that there are missing documents, or at any rate, any significant quantity so as to cast any doubt over conclusions which might be drawn from the available documents.

[113] In order to demonstrate that there was no relevant body of working notes not available at the trial which would support Mr Waghorn’s contention that he engaged in more research analysis and used other methodologies than appear in his report, counsel for Interchase took him painstakingly through his file notes day by day. Mr Willington’s evidence, which was not contradicted, was that a fee of $80,000 (negotiated by Hillier Parker for the 1988 valuation report task) represented in 1988 terms 80 valuer day’s work. A chronological analysis tends to demonstrate how little actual research and analysis was carried out and how much time was devoted to adjusting figures on the computer model.

Mr Waghorn’s work on The Myer Centre Adelaide

[114] A file note written by Mr Waghorn on 2 November 1987 records Mr Walsh’s request that he should conclude the valuation for The Myer Centre Adelaide about which there was some urgency and sign it off (exhibit 262/13). Mr Waghorn wrote on the same note “Certify close to where they want”. In evidence Mr Waghorn accepted that that was a reference to certify at a value close to the $540m wanted by Remm (t/s 1619).

[115] Mr Waghorn commenced work on the draft valuation for The Myer Centre Adelaide on 6 November 1987. He made himself familiar with most of the documents on the file (t/s 1610). In notations by Mr Waghorn on the working draft after referring to the Retail Survey Australia Pty Ltd Report commissioned for Adelaide he wrote: “In all comments we note that the theme floors have been set aside as they remain at this time untried in Australia” (exhibit 262/14 page 12a). After stating the Beaumont total rent of $7.762m and noting it constituted 21 per cent of the total estimated annual retail income of $36.461m the following appears “In view of this fairly high proportion of the total rent being the responsibility of one family their financial standing is of crucial 31

importance to the covenants supporting the performance of these Leases”. He noted that speciality shops were to contribute 79 per cent of the total base retail income for the Centre and represented one of the most important elements governing its financial success. He assumed a 100 per cent occupancy rate and adopted an “across the board” rental of $2,500 per square metre per annum. The Remm target rents were higher.

[116] Mr Waghorn added to Mr Richardson’s draft on the theme/fantasy floors: “These are to be located on levels 4 and 5, alongside and connected to the Myer Levels 4 and 5.

The aim of these two floors, based upon fantasy entertainment, is to draw the tourists and younger family age group, plus the biggest spending population sector (the single 18-25's) up into the top levels of the Centre. Retailing will be sport, games, fun and amusement orientated and attractions, Disney style, will also entertain and thereby stimulate spending, so we are advised. This concept is totally new to Australia and has yet to prove to be a working strength to attract people into the upper levels of the retail atrium.

A lease agreement to Hentpark Pty Ltd, a Beaumont Remm partnership, has been entered into for a 10 year term at a base rent of $2,792,400 for the two floors.” (p 27a)

[117] An amendment, conceded by Mr Waghorn to be in his handwriting, on page 28 dealing with The Myer Centre Brisbane as a comparable sale makes clear that he was well aware that the sale price of The Myer Centre Brisbane was to be determined on completion in May 1988 by the average of two valuations. Mr Waghorn was quite disconcerted to be shown this amendment. Until then he had strenuously maintained, when giving evidence, that he had not known even vaguely at any time of the purpose of the valuation prepared for The Myer Centre Brisbane in May 1988.

[118] Mr Waghorn was engaged in extensive discussions during the second week in November 1987 with Remm personnel and the Adelaide Hillier Parker office. Some of his file notes are revealing: “Remm figures for rents - in latest models? … not yet - look at cap and adjust” (exhibit 262/16). He discussed the capitalisation rate with the Hillier Parker people in Adelaide and noted that they felt the capitalisation rate should be 7.25 - 7.5 per cent. In a list of questions for Remm he queried rental levels and in particular Mr Pearson’s rents and was told that the rents were conservative. Mr Waghorn noted “Views on a figure around $540m? Rents ?? Cap rate? IRR - come down to around 15%”. He said in evidence that he was seeking Remm’s views on these important valuation matters a few days before the final report was due to be delivered because “it was important to know how they [the client] viewed certain aspects because if there was going to be a disagreement it might as well be in the open,” (t/s 1624). In the days leading up to the valuation opinion, Mr Waghorn discussed appropriate figures with Mr Pearson and Mr Innes. He made a contemporaneous file note that he “could adjust here and there. Worried about growth - would he [Mr Pearson] 32

comment” (exhibit 262/17; t/s 1625). Mr Waghorn raised with Mr Innes the matter of the rent for the food areas which were leased to Beaumont interests and whether Mr Innes was aware of the relationship between Remm and the Beaumont’s (ibid).

[119] On 11 November 1987 Mr Waghorn asked Mr Innes to look at the retail rent again and “come back with expectations” (exhibit 262/19). He noted that according to Mr Pearson, rents were based on cash flow to retailer “turnover”. Later in the afternoon of 11 November, Mr Waghorn spoke with Mr Richardson (now departed from Hillier Parker). Mr Richardson told Mr Waghorn that a capitalisation rate of 7 per cent, an IRR (Internal Rate of Return) of 15 per cent and a valuation of $530m (which was the most recent exercise carried out by Hillier Parker) was “pretty right”, but noted an area of concern on the lower ground floor. Mr Richardson agreed that there should be a 0.5 per cent difference between Adelaide and Brisbane in the capitalisation rate in favour of Brisbane. Mr Waghorn again noted a conversation with Mr Pearson, following that with Mr Richardson, that the relationship between the Beaumont’s and Remm was “incestuous” (exhibit 262/20). Mr Waghorn rang Mr Innes in the evening and noted that the Remm rentals were satisfactory and that the capitalisation rate would be between 7.5 - 7.75 per cent.

[120] The following day, the 12 November, Mr Waghorn canvassed the proposed valuation and capitalisation rate for The Myer Centre Adelaide with a number of senior valuers at Hillier Parker. Apart from Mr Hunt, who said the London office was expressing caution, the opinion was favourable to a valuation of $510m with a capitalisation rate of 7.75 per cent. At 5.15pm Mr Waghorn telephoned Mr Innes and told him of those figures (exhibit 262/23). Mr Waghorn’s file note records “land value is target” and “Don concerned about land and effect upon Brisbane of this valuation. Going to think about cap rate” (exhibit 262/23). A further note on that day reads “Not a fire sale value. Range no, but use hypothecation” (exhibit 262/24). This was presumably a reference to a comment by someone from Remm about the proposed value and that a range was not satisfactory for purposes of the valuation, but that a hypothecation reservation could be included.

[121] There is no note of further contact between Mr Waghorn and Mr Innes about The Myer Centre Adelaide valuation until 19 November when Mr Waghorn telephoned Mr Innes. His note records that they had a “long friendly discussion. Discussed rates, yield, cash flows” (exhibit 262/25). It is tempting to infer some measure of relief on the part of Mr Waghorn in this note after the terse “Not a fire sale value” a week earlier. Mr Waghorn returned to the Adelaide valuation at the end of November.

Mr Waghorn’s Myer Centre Brisbane valuation letter 20 November 1987

[122] Mr Waghorn commenced his work on The Myer Centre Brisbane valuation after receiving a telephone call from Mr Burgess on 11 November 1987 whilst working in the Sydney office on The Myer Centre Adelaide valuation. Mr Burgess said that there was some urgency. From Mr Waghorn’s file note can be gleaned that Mr Burgess sought an up to date review of the leasing, to take into account the expected income; “all sorts of qualifications”; the valuation to be an indication based on an update; “too early to tell what effect the share market crash might have” (exhibit 3/1). Mr Waghorn noted that the Wintergarden had possibly been 33

sold at $120-$190m which would give a capitalisation rate of 6 per cent. Mr Max Ryan’s address was noted suggesting a conversation about who was the client.

[123] Some concern was felt at Hillier Parker that since Interchase was Hillier Parker’s client (the Prospectus valuation) there would be a conflict in performing a valuation on instructions from PEL. Mr Waghorn telephoned Mr Max Ryan on 11 November and raised these concerns with him. On 12 November 1987 a letter was sent to Mr Ryan setting out the request from PEL to Hillier Parker to carry out a review of the valuation as a matter of urgency. “As you are aware from our telephone conversation today, our first and primary concern is that Interchase Corporation Limited are our clients and we do not wish to enter into any form of conflict of interest. We seek your instructions directed to us to prepare a reassessment of the pre-existing valuation and we would propose the following: A letter setting all of our qualifications and assumptions; A review of the leasings to date, together with adjusted income stream; A statement to the effect that the October and continuing share crises have yet to show itself in the Property market; That all of our comments will be based upon previous reports and documents addressed to yourselves. We propose a fee for this letter of $20,000 and would endeavour to have the letter into your hands no later than the last day of November.” (exhibit 3/6). Copies of this letter were faxed to Mr Burgess at PEL and to Remm.

[124] On the same day Mr Waghorn asked Mr Mount to research the putative sale of the Wintergarden. Mr Waghorn has noted that Mr Mount understood that all Mr Burgess wanted was confirmation that $470m was “still alright” (exhibit 3/3). Mr Waghorn and Mr Walsh faxed a request to Mr Innes at Remm in Brisbane, copy to “Max Ryan Interchase, Sydney” and “Guy Burgess Property Estates, Brisbane” asking for certain documentation as “We have been requested by Interchase, Sydney to carry out an expeditious review of the Valuation of the above property” (exhibit 253/5). The documents sought included leases of all areas other than the speciality shops; questions about incentives; particulars of rent and commencement dates for specialty shops and lease terms and conditions. Mr Waghorn spoke to Mr Burgess’ secretary in the late afternoon seeking some of the requested documents urgently. He noted that a meeting had been arranged for the next day, Friday, with Mr Smith and Mr Burgess both of PEL, (exhibit 3/8), but since Mr Waghorn remained in Sydney that day there was no meeting although he and Mr Burgess spoke by telephone.

[125] By 13 November Mr Waghorn had received copies of the Hoyts and Goldrock (car park) leases, a completed set of tenancy information forms (TIFs) and a rental summary and vacancy schedule compiled by Remm. Mr Burgess attached a copy of a spreadsheet outlining lease terms, percentage rent and rent reviews, noting some minor changes. Agreements to lease which had been signed were indicated by an asterix. Title details were included and certain queries answered (exhibit 3/7 page 15). Mr Waghorn may have received a copy of the Richardson valuation which he was to review whilst he was in Sydney. He also received further lease 34

material sent via Pattison & Barry, solicitors. He reviewed this material and made a list of questions for Mr Burgess and after their conversation, added notes of his answers. From general enquiries Mr Waghorn learnt that JLW had not done a valuation of the Wintergarden and that an offer of $240m had fallen through. Mr Walsh started entering the new rental data into the computer model and did a print-out on 13 November (exhibit 253/13). The rentals entered in the model were the rents noted in the Remm leasing schedule (exhibit 265) as having been achieved. Where no rent had been achieved the Remm “target” rental was inserted in preference to the Banway (Interchase) “target”. In a number of instances the Remm target was significantly higher than that proposed by Banway.

[126] By Monday 16 November Mr Waghorn had returned to Brisbane and worked on the valuation review. He received from Mr Burgess a leasing status report dated 13 November 1987 and other documents and print-outs from Mr Walsh. He sent a memorandum to him asking him to check the print-out schedule “in every respect” (exhibit 253/17) and to provide a schedule of all the major leases and the standard (speciality) leases showing terms, options, rents and reviews, turnover rents; to explain how many kiosks were allowed for and leased, how many were vacant; whether the storage areas were within the lease or separate. He asked when the Centre was expected to be 100 per cent leased.

[127] The following day, 17 November, Mr Waghorn prepared a draft valuation letter for Mr Ryan at Interchase stating that he had reviewed the valuation done by Mr Richardson on 27 February 1987 and was able to conclude that the valuation of $470m could be maintained (exhibit 253/19). He made some enquiries as to whether Mr Ryan had replied to the letter of 12 November seeking instructions to proceed with the revaluation.

[128] Mr Waghorn and Mr Walsh started looking at capitalisation rates in a print-out of the computer model assigning a different rate to each stream of income and produced a weighted average for years 1 and 10 (exhibit 3/25 page 397). The weighted average capitalisation rate was 7.323 per cent on the 17 November print- out There is no suggestion in the working documents that this exercise was conducted by reference to any particular sales evidence and indeed Mr Waghorn said that apart from the Wintergarden sale which did not proceed he looked at no other sales than were in Mr Richardson’s February 1987 valuation and these were not segmented (t/s 1641). Mr Waghorn made adjustments to the segmented capitalisation rates and these were incorporated into the 20 November print-out (exhibit 3/25 page 379). He agreed that apart from some adjustments to take account of changed income and the reduction in the Myer Store capitalisation rate to 5 per cent from 6.5 per cent there were no changes to the rates which finally appeared in his 17 May 1988 valuation. Interchase contends that these various capitalisation rates were not used to produce a value but merely to produce a weighted average of the income streams (t/s 1644).

[129] In the late afternoon Mr Waghorn received a vacancy tenancy report from Mr Burgess showing the rents negotiated for previously vacant shops. Mr Waghorn appreciated that some of these rents were considerably lower than the Remm target rents. For example, Shop 65 “Wendy’s” ice cream shop had a Remm targeted rent of $70,480 per annum but an achieved rent of $34,000 per annum Against that entry Mr Waghorn wrote “low”. On the other hand some of the achieved rentals 35

were higher than the Remm target. Mr Waghorn agreed that while the rentals achieved were incorporated into the schedule for the November review, he continued to adopt the Remm target rents for the preparation of the tenancy schedule notwithstanding that some tenancies achieved were well below target. He was unable to recall if he had compared the Remm targets with those of Banway (Interchase) or whether he looked for trends, (exhibit 253/21).

[130] On 18 November Mr Waghorn received a fax from Interchase enclosing a copy of a letter dated 13 November 1987 addressed to Mr Innes of Remm from Mr Ryan authorising Remm “to supply all documentation required by Hillier Parker for the Myer Review” (exhibit 253/26). Mr Hampson QC in evidence in chief asked Mr Waghorn: “Can you recall why it was that such a letter of authority was – well, was it sought by you, first of all?-- I think so. You will recall that you drew me to sending to Don Innes the letter of confirmation of instructions and I’m sure that Don Innes had – he did ring me and say ‘I need to be authorised before I allow you to see what it is you need to see’. I see. So that’s how that came about, was it?-- Yes. Did you ring Mr Ryan yourself or did you get Mr Burgess to get the authority? Can you remember?-- I can’t recall now. It is quite likely, however, that I did ask Guy Burgess to organise it.” (t/s 1340) Since Mr Waghorn had been getting information from Remm for quite some time this may be regarded as a mere formality and was so recognised at the time. A further draft of the valuation review letter was prepared.

[131] Mr Waghorn made a number of handwritten calculations testing the capitalisation rates on a print-out of the tenancy schedule (exhibit 253/25). The total base rental was shown as $34,130,160.00. Mr Waghorn wrote “if this base rent capped at 7.25 per cent = $470,760,827.00.” Immediately below he wrote “if capped at 7.5% $455m”. Below that he wrote those two capitalisation rates and converted them into years’ purchase. He noted the increase in base rental of $1,230,160. If the extra rent were capitalised at 7 per cent (Mr Richardson’s rate) and multiplied by 14.29, $17,573,714.00 is added to Mr Richard’s valuation to arrive at $487m. Mr Waghorn set out further calculations: “Simplify 34 32.9 1.10 extra x 14.29 15.72m added cap value x 470 $488m today?” (exhibit 253/25 page 1)

[132] Mr Waghorn reviewed Mr Richardson’s rental growth assumptions in the light of the changed circumstances. Mr Walsh analysed the changes after the valuation letter was sent to Mr Ryan. He wrote “it is appropriate that we make a few notes for the file” (exhibit 253/39). He noted the increase by 2.7 per cent of the estimated net income to $33,780.00, the addition of the electricity resale of $350,000.00 and the promotion contribution of $200,000.00 which had not previously been included and which gave an adjusted net income of $33.930m compared with $32.9m an 36

increase of 3.1 per cent. However applying the 7 per cent rate of Mr Richardson to those adjusted figures a value of $484.7m would be achieved. Changes in the original assumptions for the market growth in a number of areas incorporated into the model gave a net present value of $488.7m. Mr Walsh commented on those changes.

· specialty shops growth in rental was adjusted down because of the high levels of rent achieved, the reduction in CPI from 8 per cent to 7 per cent and the large proportion of leases providing for annual reviews;

· food rental growth was adjusted upwards because there were better prospects for food (over specialties) in uncertain economic conditions, and lease terms to be reviewed every three years;

· theme/electricity rental growth reduced to 7 per cent from 8 per cent reflecting lower CPI expectations;

· taverns had only minor changes in the later years but otherwise a strong early growth was retained;

· cinema rental growth was predicted for a growth of 8 per cent above CPI but Mr Walsh noted “lease now provides for a fixed rental for the first three years with 7.5 per cent annual increases thereafter.” (exhibit 253/39). (Mr Waghorn’s calculations did not reflect the terms of the lease which led to errors in his final valuation);

· storage had previously been included as retail but was separated and the growth rate adjusted down to 7 per cent;

· car parking rental growth assumptions remained the same with Hillier Parker accepting the passing rental as market rental (a matter of considerable controversy amongst the valuers – the assumption contained an error as to the terms of the lease).

[133] On 19 November Mr Waghorn forwarded a draft of the review valuation letter to be sent to Mr Ryan and Mr Burgess. The accompanying message read: “Please find attached ‘draft’ of intended letter re: Queen Street Myer all subject to recalculation now in hand. This is therefore not a formal document” (exhibit 253/28). The review was described as an addendum to the Richardson report of 27 February 1987 and noted that all the information had been supplied by Mr Burgess of PEL and his staff. The valuation was “considered to be at least as stated on 27 February 1987 namely $470m” (exhibit 253/28).

[134] Mr Walsh produced the full print-out of the valuation schedules, incorporating Mr Waghorn’s adjustments of the previous day, adopted a capitalisation rate of 7 per cent for each income stream in the IRR calculation (exhibit 3 at page 390), adopted a vacancy allowance of 1 per cent for the retail tenancies and produced a valuation of $479.516m at an IRR of 15.3 per cent (exhibit 3 pages 392/393). This model gave a capitalisation rate of 6.84 per cent on rental income after deducting electricity at 15 per cent and the theme floor at 13 per cent. 37

[135] On 20 November Mr Waghorn signed and delivered the valuation letter to Mr Ryan and included two tenancy schedules (exhibit 14; exhibit 253/31). A letter dated that day from Mr Ryan directed to Mr Waghorn confirmed instructions to reassess Hillier Parker’s original valuation and recommended Mr Burgess of PEL in Brisbane, together with Mr Garmston of Interchase in Sydney as sources of information (exhibit 15; exhibit 253/34).

[136] On Monday 23 November Mr Burgess telephoned Mr Waghorn and asked him to make some minor changes to the valuation letter. Mr Waghorn told him that the letter was in Sydney. Mr Waghorn had no recollection of what those requested changes were and they were not on his file note. Neither he nor Mr Walsh saw any need to change the letter but were prepared to wait until they saw Mr Burgess’ proposed changes in writing. Mr Burgess sent Mr Waghorn a fax noting “We would like to see your letter incorporate these [changes] and be a little more positive. The valuation is to be addressed to the Bank of New Zealand with instructions from Interchase”. The changes sought were to add the following “We have not been able to detect any change in the market following the decline of the stock market subsequent to 2 October 1987, nor would we expect the decline to have an adverse effect on a property of this type.

The rental levels that have been achieved for the specialty shops are generally slightly higher than forecast in our initial valuation. Growth in rental levels is consistent with our initial valuation report.

Should the balance of leasing to take place to meet the budgets set by Property Estates Limited then the end value may in fact exceed the original valuation.

The current level of leasing commitments and the level of enquiry would indicate that full occupancy is likely on the completion of the complex” (exhibit 353/33).

[137] Later in the day Mr Waghorn telephoned Mr Burgess refusing to make the proposed changes, and said that the valuation letter could not be addressed to the Bank of New Zealand since Interchase was the client. His notes of the conversation are recorded on the document. CCA was then seeking further finance for the completion of the project. By letter dated 25 November 1987 Mr Ryan asked Mr Waghorn to “forward your report by Facsimile to Chase Corporation (Australia) Limited ... Would you please address the report to: Bank of New Zealand ... Sydney” (exhibit 253/35).

[138] This request caused some consternation in the offices of Hillier Parker and was described in a note as “very touchy”. After discussion with Hillier Parker directors the matter was resolved by Hillier Parker sending a copy of the valuation letter to the Bank of New Zealand by facsimile transmission on 26 November 1987 with the following message: “We have been instructed by Mr Max Ryan of Interchase Corporation Limited to forward to you a copy of our letter of 20 November addressed to Mr Ryan. We have pleasure in attaching 38

the letter (2 pages) in full. A confirmatory copy will follow through the normal course of post” (exhibit 253/37). The third and fourth defendants argue that Hillier Parker’s response on this occasion would have forewarned Interchase that it was not anxious to step outside the client relationship.

Mr Waghorn’s completion of The Myer Centre Adelaide valuation

[139] Mr Waghorn returned to work on The Myer Centre Adelaide valuation. He received a facsimile from Mr Walsh with computer print-outs of the Adelaide calculations. Mr Walsh had concerns about rents. Mr Richardson was brought in to assist (exhibit 262/26). On 1 December Mr Waghorn noted a meeting with Mr Innes and Mr Mobsby of Remm and Mr Richardson. Capitalisation rates for the Adelaide valuation were discussed and that the Beaumont interests, having committed for the tavern during the previous week now represented 25 per cent of the total project. On 4 December Mr Waghorn received material from Mr Walsh, inter alia, explaining the IRR computer model for the Adelaide valuation. He included a draft appendix for the report on cash flow projections applying a yield of 7.8 per cent on an assumed purchase price of $510m. Mr Waghorn wrote above the 7.8 per cent “not good enough” (exhibit 262/29; t/s 1647).

[140] At about this time Mr Waghorn was given a computer in the Brisbane office to assist in the calculations for the Brisbane valuation together with the software for Mr Walsh’s calculations.

[141] On 3 December Mr Walsh advised Mr Waghorn that Brian Scarborough of the Hillier Parker office in Adelaide, who was not amongst those with whom Mr Waghorn had canvassed the capitalisation rate and value on 12 November, had indicated that he wanted an 8 per cent capitalisation rate for The Myer Centre Adelaide (exhibit 262/28; t/s 1631). Mr Scarborough was to be a co-signatory as valuer of The Myer Centre Adelaide valuation report but this appears to have ceased to be the case by the following day when Mr Waghorn crossed out his name on the draft report (exhibit 262/30 p 57).

[142] Mr Waghorn prepared a draft of The Myer Centre Adelaide valuation on 4 December, copied to Mr Walsh, Mr Scarborough and Mr Richardson. The calculations use a capitalisation of earnings approach and shows an alteration of the capitalisation rate to 7 per cent “overall” which after adjustments gave a valuation of $565m. Mr Waghorn was unable to recall why he changed the capitalisation rate from 7.75 per cent which had earlier been settled with valuers at Hillier Parker on 11 November 1987 and the 7.8 per cent which Mr Walsh had suggested (t/s 1647).

[143] Mr Innes had asked Mr Waghorn to advise on the residual land value of The Myer Centre Adelaide and give a capitalisation rate. Mr Waghorn faxed to Mr Walsh, Mr Scarborough and Mr Samut (in Japan): “Don Innes has requested attached letter today - please consider wording and answer which is based upon 7.25-7.5% cap rates and developers profit 25% - 30%.

With hypothecation actual total range is $91m to $118m and a 1987 figure PV’d back from 1990.” (exhibit 262/32). 39

Mr Walsh was clearly uncomfortable with the proposed draft: “... I am UNHAPPY to provide letter as drafted when:-

1. You have not analysed Brisbane rents achieved/Adelaide current EMRV to my satisfaction - see my earlier faxes.

2. There is some indication that retail sales/rents for specialty shops may falter as result of AUD exchange rate/economic uncertainty.

3. IRR/NPV approach has been left in limbo! I have also discussed this with Peter Roper [Sydney director] who agrees that NOTHING be issued until we have totally satisfied ourselves on all aspects, including the above points. ... There remain extreme concern at a cap rate of less than 7.5% ...

Is a developers profit of 25-30% realistic for this project in the light of development time. I would have thought that 8-10% ...” (exhibit 262/34)

[144] Shortly afterwards Mr Waghorn faxed to Mr Richardson an analysis of the rents achieved in The Myer Centre Brisbane for Queen Street ground floor showing an average base rent of $1,470 per square metre and suggested that they should meet as soon as possible to reconsider what the base rent should be forward valued for Adelaide ground floor retail. He doubted the viability of $2,500. Mr Waghorn said in evidence he wanted another valuer’s opinion and Mr Richardson was familiar with the situation (t/s 1650/48).

[145] Mr Waghorn and Mr Richardson met the following day and discussed the appropriate rental for The Myer Centre Adelaide and compared it to the rents achieved for The Myer Centre Brisbane. They carried out a number of exercises which persuaded Mr Waghorn that the figure of $2,500 per square metre per annum which Mr Walsh had strongly queried the day previously was acceptable and indeed at the end of his calculations wrote “Conservatively call it $2,500!!” (exhibit 264 page 4) This was based on a proposition which Mr Waghorn accepted that there was a 16 per cent relative difference between The Myer Centre Brisbane/Queen Street rentals and those to be achieved on the ground floor in the Rundel Mall in Adelaide. Mr Waghorn could not recall if he ever reconsidered that 16 per cent premium before he delivered the final valuation in respect of The Myer Centre Brisbane (t/s 1652). He was unable to recall whether he proceeded to his final valuation in 1988 in the belief that there was a premium level of approximately 16 per cent. His knowledge of Queen Street rentals was not demonstrated. There was evidence in Interchase’s case that at the time of Mr Waghorn’s final valuations The Myer Centre Brisbane premium compared with Wintergarden national chain tenants, for example, was 40 per cent and on a frontage to frontage basis was 38 per cent. Mr Waghorn said that he thought that the Wintergarden was an inferior product compared to The Myer Centre but he did not appear to take account of the fact that it was compared with other Queen Street frontages. 40

[146] On 14 December Mr Waghorn’s notes record conversations with two Hiller Parker Adelaide valuers about the appropriate capitalisation rate to adopt in the valuation of The Myer Centre Adelaide: Mr Andrew Lucas considered that a capitalisation rate of 7.5 per cent would be “safe”; Mr Scarborough “now accepting” the ground floor rental of $2,500 per square metre per annum as conservative and after analysing Brisbane and Adelaide considered that a capitalisation rate of 7.5 per cent would have a safety margin (exhibit 262/40).

[147] The following day Mr Waghorn continued to discuss capitalisation rates and in notes of a conversation with Mr Walsh, Mr Waghorn was firm on 7.25 per cent. He told Mr Walsh of Mr Lucas’ opinion that current sales in Adelaide showed a hardening of yields post the stock market crash. He also noted a conversation with Mr Hunt in Sydney who proposed an allowance of .25 per cent for Adelaide over Brisbane and .25 per cent to take account of the post share market slump giving a capitalisation rate of 7.5 per cent. Mr Waghorn noted “he [Mr Hunt] feels that, as a gut figure, we should look at this” (exhibit 262/41). Mr Walsh was persuaded to accept the ground floor rental of $2,500 and Mr Waghorn noted that Remm said the rental levels would achieve $2,500. Mr Jackson QC for Interchase asked Mr Waghorn “This is a question I have to ask you, Mr Waghorn. One gets the impression reading these documents that, in a sense, you were conducting a negotiation among the discordant notes in your office to see if you can get them to agree to a higher rental figure and to a lower capitalisation rate. Is that a fair statement?-- I think it’s more a case of seeking views, but one has to give the background first.

If one were going to really analyse the appropriate capitalisation rates, surely what you should do is go back to the hard market data, as opposed to negotiate these gut feelings? Do you not agree?-- The hard market data would be in the Adelaide people’s minds because it was their city” (t/s 1654). But it was a telling question.

[148] On 17 December Mr Waghorn received a note from Mr Bill Crane of Hillier Parker in Brisbane setting out retail rates per square metre for a number of centres and retail shops in the Brisbane CBD to assist in the Adelaide project (exhibit 253/41and 42; t/s 1365). That day Mr Waghorn sought some information from Mr Innes about Heshbah Pty Ltd (a Beaumont company). He agreed that this indicated a continuing concern about the Beaumont interests in The Myer Centre Adelaide (t/s 1654).

[149] The following day Mr Waghorn advised Mr Innes that the draft of the final report indicated “a finished value of around $530m as at 1990 with a present day residual land value around $106m - final refinements and independent checking now in hand …” (exhibit 262/43). On Christmas Eve Mr Waghorn noted a telephone conversation with Mr Innes who “Cannot accept 7.5%.

Does not accept 7.25%”

Mr Waghorn explained to Mr Innes that 41

“0.25 for insurance on stock market downturn 0.25 for Adelaide v Brisbane and office [Adelaide Myer had an office tower] content = 0.5% over Brisbane” Mr Innes wanted another meeting to discuss capitalisation rates particularly 0.25 per cent for safety following the stock market crash (exhibit 262/44).

[150] Mr Waghorn met with Mr Innes, Mr Mobsby and Mr Richardson at the Remm office in January 1988. Mr Richardson suggested a capitalisation rate of 5 per cent for Myer on a stand-alone basis. Mr Waghorn was unable to recall why Mr Richardson was present at this meeting. He was certainly no longer working for Hiller Parker and was trading as a valuer on his own account but Mr Waghorn said that he was a good friend of Mr Innes. Mr Waghorn conceded that the idea for the Myer Brisbane income stream capitalisation rate to be 5 per cent probably came from Mr Richardson. Both Mr Richardson and Mr Waghorn agreed on a capitalisation rate for the tavern at 8.5 per cent and Mr Waghorn has noted “check Beaumont in Adelaide already” and agreed that it was a note to check what presence the Beaumonts had in Adelaide at the time of the valuation. The car park was 7.5 per cent to 7.75 per cent.

[151] Mr Waghorn sent faxes to Mr Innes twice on 11 January 1988 which included a number of queries about the Myer fit-out. Mr Waghorn asked “I am still awaiting the Beaumont Companies registration details from you, in particular that of Heshbah, and also a standard lease draft and a copy of all agreements so far reached and not yet supplied to us.” (exhibit 262/47 page 2) Mr Waghorn later in the day asked Mr Innes by fax to confirm that the Beaumont Group were already established in operations in South Australia, “It would be useful to have details” (exhibit 262/48). Mr Waghorn agreed that he had made this further enquiry because of a concern about the Beaumonts’ standing. A few days later Mr Innes told Mr Waghorn that the Beaumonts owned the Christies Beach Hotel in a seaside suburb south of Adelaide (exhibit 262/49).

[152] Mr Waghorn prepared a further draft of the Adelaide valuation dated 14 January 1988 (exhibit 262/50). The capitalisation rate remained at 7.75 per cent, he noted a new sale of the Hilton Hotel complex in Sydney in January reportedly sold for $300m and made provision in his handwritten list of appendices for a letter from the Beaumont’s accountants which was yet to be obtained (exhibit 262/50 last page). Mr Waghorn continued to express his concern about the Beaumont interests in a letter to Mr Innes of 19 January 1988 “The quantum involvement of the Billabong Group of Hotels, known more colloquially here in Queensland at the Beaumont Group, in the Myer Centre, Top of the Mall, Adelaide is such that we would like to include in our report on Adelaide a letter of comfort from the group’s accountants similar to that attached (taken form [sic] the Brisbane report).

Would you be kind enough to please arrange for such a letter, either addressed to yourself or to the writer, to be expeditiously produced with, of some merit, more details of the nature of the group’s interest/s in South Australia.” (exhibit 262/51) 42

This was a reference to a letter dated 29 October 1986 from Roberts Nissen, the Beaumont accountants, concerning the finances of the group.

[153] That day Mr Waghorn sought as a matter of urgency press clippings of the sales mentioned in the valuation reports (exhibit 262/52). Mr Waghorn’s memorandum of reminder notes for himself dated 27 January 1988 included a note that he chase up the Beaumont accountant’s letter (exhibit 262/53).

[154] Mr Waghorn produced a further draft valuation of The Myer Centre Adelaide dated 28 January 1988. The capitalisation rate appears as 7.2 per cent producing a valuation of $546,717,604 rounded to $545m. He added under a discussion of the Retail Surveys Australia Pty Ltd Report for Adelaide which had not dealt with the theme floors because “they remain at this time untried in Australia” the words “this will be the case until The Myer Centre - Top of the Mall, Brisbane, Qld opens in late March 1988” (exhibit 262/54 page 18). He agreed that at least from then he was aware of the significance of the initial trading performance of Top’s in The Myer Centre Brisbane (t/s 1658).

[155] There were no working papers, analysis or any other notes which would suggest that any work had been done by way of calculation as to why the capitalisation rate should have been changed to 7.2 per cent. Mr Waghorn suggested that he had changed the capitalisation rate to 7.2 per cent because of something to do with a rent guarantee (t/s 1659). I accept the submission that this is an example of Mr Waghorn’s attempt at reconstruction to explain what seems to be inexplicable. Mr Waghorn said that on the front page of the draft valuation appear the words “change story about rent guarantee”, with the date 22/2 and a tick. He explained, “I recall in my reviewing these documents recently to refresh my memory there was some talk about a rent guarantee” (t/s 1659). Mr Jackson reminded Mr Waghorn that this was a reference to a rent guarantee for five years for the office section of the development and would not affect the capitalisation rate in a capitalisation of earnings method of calculation (t/s 1669). Mr Waghorn agreed that if there was a guarantee for a limited period of time the correct approach in a calculation of capitalisation of earnings valuation was to take the maintainable income as assessed, capitalise it and in a separate part of the calculation include the value of the guarantee. He accepted that he had not done so (t/s 1669-70).

[156] On 28 January 1988 at the Interchase board meeting held in Sydney Mr G Smith raised the timing of “the independent valuation of the Centre pursuant to Clause 14.1 of the Development Agreement between the Company and Property Estates (Qld) Pty Limited” (exhibit 16).

[157] Mr Waghorn met with Mr Innes on 2 February 1988 and noted, inter alia, that he needed an accountant’s statement or letter concerning the Beaumont interests which had been requested earlier. He wrote alongside “in hand”, (exhibit 262/55). Mr Waghorn set out outstanding requests in a letter to Mr Innes the following day and included as item (d) to “obtain the ‘Beaumont Interest’ accountant’s letter requested by letter dated 19 January” (exhibit 262/56). There were some difficulties about a letter of intent from the Beaumont/Billabong Group which was said to contain incorrect figures. 43

[158] On 12 February Mr Waghorn again wrote to Mr Innes following up the outstanding matters requested including both the letter from the Beaumont’s accountants and their letter of intent. The solicitors for the Beaumont Group gave Mr Innes some details of the registration of one of the Beaumont companies which was passed on by letter to Mr Waghorn but there was no further information. This matter was taken up by Mr Innes in a letter to Mr Waghorn of 18 February responding to his letter of 12 February about the outstanding items and in particular “(d) We have again requested Beaumont to supply a letter of his Accountant ... (f) Beaumont has again been requested to furnish a correct letter of intent” (exhibit 262/59)

[159] Some days later in a note dated 22 February Mr Waghorn recorded that he had spoken to Mr Innes about the outstanding matters requested and in particular the Beaumont revised letter of intent and the Beaumont accountant’s letter. He wrote “on order” against each of those items (exhibit 262/60). In a note of a conversation with Mr Innes by telephone the following day Mr Waghorn noted inter alia “How long before we have documents ... Beaumont a/c, Beaumont offer” Alongside those entries appears “in post” for the Beaumont accountant’s letter and “he to chase” in respect of the letter of intent (exhibit 262/61).

[160] Finally on 3 March 1988 Mr Innes faxed Mr Waghorn a letter dated 27 October 1987 on “Billabong Group of Hotels Queensland” letterhead which was a letter of intent to lease areas in The Myer Centre Adelaide. He included a letter from Roberts Nissen the Group accountants to Remm dated 25 February 1988: “Re: The Billabong Hotels Group

Mr. L.F. Beaumont has asked us to supply you with the following information about the group.

The group, which commenced trading more than thirty years ago, comprises a number of companies operating forty freehold and leasehold hotels throughout Australia (except for Western Australia and Tasmania).

As well as operating these traditional liquor outlets, some of the hotels contain Billabong Family Bistros, a food concept conceived by the group.

The group is owned by Mr. L.F. and Mrs. M.J. Beaumont, members of their family and family trust structures, holding shares in the three holding companies:-

Beautel Holdings Pty. Ltd. Merrylands Industries Pty. Ltd. Montbeau Pty. Ltd

The daily operations of the group are controlled by Mr. and Mrs. Beaumont, who are Directors of all the companies within the group, 44

and their son Mr. S.J. Beaumont who is a Director of the Victorian Companies and state manager in the other states.

Whilst the group is pursuing expansion within its liquor/food areas, it is interested in diversifying into other complimentary areas.

This had led to the group leasing the Gourmet Food Hall and Restaurant in the Tuggeranong Hyperdome Centre in the A.C.T. and leases to operate two taverns, two food halls and the theme-retail area in The Myer Centre in Brisbane.

I hope this information is of assistance to you.” (exhibit 262/63)

[161] The failure to discount the sustainability of the rents to be paid by the Beaumont interests, particularly Tops, was a major source of criticism of Mr Waghorn’s valuation. Mr Waghorn was cross-examined about the failure by the Beaumonts to respond to requests and the terms of the letter. Mr Jackson suggested “One thing that I suggest to you stands out dramatically is that you had received every possible warning about the position of the Beaumonts - would you listen to me, please, Mr Waghorn - that you had received every possible warning about the position of the Beaumonts leading up to this first week of March that would suggest you should have been concerned as to the acceptance of the rental arrangements or agreements that had been entered into for The Myer Centre Adelaide for the theme park and for the food outlets in terms of whether they were to be treated as quality tenants, hadn’t you?-- I had considered those points.

You did nothing to reconsider them after being fobbed off in your valuation did you?-- No.

Is it not correct to say that it would have been hard to imagine without being told that there was a problem more [sic] warning bells that could have been put in your face about the potential position of the Beaumonts. Do you not agree with that?-- Could you take me through that question again, please?” (t/s 1668).

[162] Mr Waghorn met Mr Innes and Mr Mobsby to discuss the final valuation figure on 3 March. He told them that he was proposing a figure of $545 or $547m with a capitalisation rate of 7.2 per cent. Mr Innes indicated that he was happy with a valuation of $545m. That was short-lived and later in the day Mr Innes telephoned Mr Waghorn and asked him to round the figure up to $547m rather than down to $545m (exhibit 262/64). The final valuation report was issued at $547m (exhibit 266). There was no reason not to round up to $547m but these notes do suggest as did Mr Jackson that Mr Waghorn was prepared to alter his figures at the behest of the client. “What I want to suggest to you is that what you in fact did at Mr Innes’ request on 3 March was round up the 545, which was the position as at 2 March of 1988, to 547 million?-- No, I did not. I made adjustments to the vacancy allowance downwards and an 45

allowance which I had not included previously of non-recoverable outgoings-----

I understand what you’re telling me, but let me cut you off, please. You’re telling me how you did it. What I’m asking you is did you not set out to round it up to $547 million in accordance with Mr Innes’ request?-- No, I did not. I set out to produce a calculation which I genuinely felt supported a figure and that is demonstrated in the final report.

Is not the truth that the difference between $545 million and $547 million, in terms of the accuracy of this exercise, immaterial?-- Its supportability is material to me.

Is the difference immaterial or not, in real terms?-- In the perception of a reader, I would suggest it does not make much difference.

It’s not unusual to round any figure when one is talking about these sorts of numbers, whether it’s up or down, to the nearest $5 million?- - It is quite normal in respect of this type of valuation.

Let me try and test that. This valuation was the largest valuation amount that you had ever arrived at up until that time?-- Yes.

Have you ever arrived at a larger amount since?-- No.

As at the time you did this valuation, the highest sale in terms of property value of which you aware in Australia was $340 million for Central Plaza I and Central Plaza II?-- Yes, it was.” (t/s 1666) Mr Jackson continued to press Mr Waghorn with the fact that the highest recorded sale in Australia at the time of giving his evidence was $408.5m for a single property and that neither The Myer Centre Brisbane nor The Myer Centre Adelaide had achieved in sales anything like the valuation figures even in recent years. Accordingly he asked that since the figure $545m in 1988 was a ground-breaking step it was “a step only to be taken with great caution, I suggest to you?-- Yes

And not something in the course of which you ought to have been negotiating with your client about rounding it up $2 million if you were taking a proper approach?-- It appears that I was negotiating but I come back in my statement about the figure that is on page 67 and my own particular requirement of myself when doing valuations that they have to be as supportable as best they can and I made every endeavour to check my numbers and to see that there was supportability. I didn’t just fiddle the figures to make it look good.

Well, you didn’t go back after 4 December to any detailed calculation exercise beyond those which appear in the - in your valuations, did you? 4 December, 87, that’s the most recent one in your calculations folders?-- I quite clearly must have done some 46

calculations to come up with the adjustments that I made to the vacancy allowance and adding in a figure for non-recoverable outgoings vacancy allowance and the promotion fund remained unchanged.

You didn’t go back in a detailed way to hard market data about comparable rental levels for the purpose of the completion of a valuation after December 1987, did you?-- I didn’t review the rental figure between those two drafts but I certainly reconsidered the calculation of the vacancy allowance and I also discovered that I had omitted non recoverable outgoings on that vacancy allowance or have I simply split them up?

I just asked you about whether you went back to the market comparables, Mr Waghorn. Can you stick to the question?-- No, I did not.” (t/s 1667/8)

The Myer Centre Brisbane valuation

[163] Mr Waghorn and other Hillier Parker people in Brisbane met with Mr Burgess on 18 February 1988 in Hillier Parker’s office. Mr Waghorn’s notes of the meeting as interpreted and expanded upon by him in evidence indicate that the meeting discussed a valuation for 15 May 1988. Mr Waghorn told Mr Burgess that there was unlikely to be any change from his review valuation in November 1987 because he had concluded then that it was higher than $470m and “off the record” said he had then reached a figure of $478m (exhibit 253/45). Mr Waghorn noted, inter alia, that Hillier Parker had allowed a 1 per cent vacancy factor throughout excluding the Myer Store. He told Mr Burgess that he wanted to walk through The Myer Centre with Mr Samut and that he would go on Friday the 19th if possible and again just before the Centre opened.

[164] Interchase contends that Mr Waghorn’s preparedness to advise on a valuation figure at that preliminary meeting demonstrates his lack of objectivity and professionalism. His only knowledge of The Myer Centre Brisbane was from the November 1987 review which was a minor review of a hypothetical exercise carried out by Mr Richardson in February 1987. By being so quick to offer a figure, it is suggested, Mr Waghorn made it difficult for himself and Hillier Parker to give a substantially different (or any lower figure) after carrying out the valuation exercise.

[165] Interchase submits that since there is no explanation for the purpose of this valuation in Mr Waghorn’s notes of the meeting with the whole Hillier Parker team the reasonable inference is that all present knew of its purpose. That is a fair assumption when the involvement of Hillier Parker since mid 1986 in the several valuations of The Myer Centre Brisbane and the references to the Development Agreement and to Completion Date Valuations fixing the price of The Myer Centre were in the extensive material in the Hillier Parker files relating to the Interchase Prospectus in which Hillier Parker was extensively involved are considered.

[166] The following day, 19 February, an article appeared in The Australian Financial Review (in the Hillier Parker files) noting that The Myer Centre in Brisbane “should 47

get off to a flying start because of the crowds flocking to Brisbane for Expo” but suggesting that it may be too large for Brisbane. The article noted that Interchase was paying a fixed price of $360m for the centre which had been valued by Hillier Parker at $470m: “The arrangement with Chase is that if the completion value exceed $425m, Interchase will pay only an additional 25% of this sum, which is $11.25m.” The leverage lease facility was noted and the article concluded on a cautionary note “The centre’s value depends very much on Brisbane people taking it to their hearts in the way that Sydney people have taken to the very much smaller Queen Victoria Building.

If they do, the capital appreciation should compensate for the modest return” (exhibit 252/46). There were a number of newspaper articles in early March in the files of Hillier Parker which time and again described The Myer Centre as the “$470m” Myer Centre.

[167] Mr Waghorn recalled in evidence that his meeting with Mr Burgess on Monday 7 March was his first inspection of The Myer Centre Brisbane site. Mr Waghorn’s note indicates that he had a telephone conversation with Mr Burgess on 14 March and at the end of the note appears “timing: instructions: early April report: early May” (exhibit 253/55) Mr Waghorn agreed that he had already started work on this valuation and when asked whether it was unusual or usual that the instructions would come later answered “It was quite normal with the relationship that we had with Property Estates.

The next point was that the last matter you had done for Mr Burgess had been done for Interchase?-- Yes.

You just used the expression then that ‘It was quite normal with the relationship that we had with Property Estates’. For whom was this going to be done? Was there any mention at this stage as to whether this would be for Property Estates or for Interchase - that is to say, up until 14 March?-- I don’t recall” (t/s 1368).

[168] In mid February Mr Garmston had noted in a memorandum to Mr Berkovic concerning the Completion Sum that it was in the best interests of Interchase for the completion valuation amount to be on the conservative side but not “so low as to shake the market’s confidence in our share price” (exhibits 63 and 76).

[169] It was clear that the issue of the valuation was being generally discussed amongst the parties interested. A letter dated 15 March 1988 from Mr Glew, the managing director of PEL, to Mr Ryan illustrates this “Further to our discussion on Friday, I confirm our understanding that the valuers are to be briefed to commence on their assessment of the value of The Myer Centre at the earliest opportunity. 48

As discussed, we will advise the valuers of the date of practical completion once this has been identified, and will request their completed reports by the second week in May.

The accuracy of these valuations is of prime importance and we suggest that this work should not be hurried merely to suit short term project funding requirements.

As an interim measure, we propose that the final payment of $15 million, together with an interim assessment of the anticipated bonus payment, be made on 8 April. This is approximately seven days following the date of anticipated practical completion.

Preliminary assessments of value, as recent as December 1987, indicate that the final bonus payment will exceed $11 million and we suggest that an interim payment of $7 million is not unreasonable. We will, of course, provide appropriate indemnities, and in the unlikely event of a refund becoming necessary we would include interest on the moneys being repaid.

I await your response in due course” (exhibit 17).

[170] These matters were taken up at the next Interchase board meeting on 24 March 1988. Mr Ryan reported as managing director on The Myer Centre. “The next item of importance is the valuation which will be instructed to be delivered approximately 2nd week in May. Hillier Parker will represent Interchase and Colliers will represent Property Estates.

Arrangements are in hand to advance a pre-payment of $7M. along with the final payment of $15M. on 8 April, 1988 to Property Estates pending the final valuation. This will be done on the basis of formal agreement providing for payback in the event of a shortfall against valuation. Details are set out under a separate agenda item to be resolved by the Board.” (exhibit 65 agendum item 3 page 2). Agendum item 5E concerned the valuation and interim development payment of The Myer Centre: “A proposal concerning the valuation of The Myer Centre for the purposes of determining the Development sum and an interim payment to Chase Corporation Australia Property Group Limited has now been received.

This proposal provides for the immediate commissioning of both the Interchase and Chase valuers to assess the market value of the Centre as at the Date of Practical Completion, and for the Valuation Reports to be furnished by the second week of May, 1988.

The anticipated Date of Practical Completion is March 28, 1988 and once the exact date is identified it will be confirmed to both valuers. 49

Under the terms of the Development Agreement, the balance of the Development Sum (including any bonus attributable to the valuation on completion) is payable within seven (7) days of receipt of both valuations, together with interest on the monies as from seven (7) days after the Date of Practical Completion.

Chase Corporation has requested an interim payment on April 8, 1988 comprising the final payment of the Development Sum, as set out in the prospectus, of $15 million together with a further $7 million being a proportion of the anticipated bonus to be paid.

Present indications based on the original valuation and recent updated assessments are that the final bonus payment will be in excess of $11 million, and Chase has agreed to provide appropriate indemnities in the event that a refund (together with interest) becomes necessary. Under the terms of the Development Agreement, Interchase may at any time make a payment on account of the Development Sum to the Development.

The reason for not pressing for the valuation to be completed earlier is to ensure that as much of the information as possible being relied upon by the valuer is factual, so that the most accurate valuation as at the Date of Practical Completion is produced.

This would probably favour Chase to some degree in that, traditionally, Valuers tend to take a more conservative approach to those areas of a valuation where assumptions as to potential income are required, however this benefit is not quantifiable.

There is some minor advantage to Interchase with respect to interest savings on interim payments of the Development Sum, to the extent of approximately 0.5%.” The minutes show that Mr Glew as managing director of PEL was in attendance (exhibit 18). The briefing of the valuers was recorded: “Valuation

It was agreed that the respective valuers appointed by Interchase and Property Estates Queensland Limited [PEQ] be briefed jointly by Mr Stephen Garmston (of Interchase) and Mr Guy Burgess (of Chase).

Mr Curran inquired as to whether the issuance of a joint instruction would create legal contractual problems. However, on further discussion, it was agreed that this would not be the case since the purpose of the joint brief was not to create a contractual relationship, but to ensure that both valuers are clear on the basis of valuation.” Mr Ryan said the valuers were appointed because it was “a requirement of the Development Agreement that two independent valuers be appointed” (t/s 222). Mr Curran said that he had raised this matter (t/s 1421) because he was concerned 50

that there might have been some suggestion at the board meeting of a joint valuation. He added “When there was discussion about a joint briefing, I just wanted to establish that they were to be separate valuations and as appears from the minutes, the explanation was that the joint briefing would have been on the basis of ensuring that the valuers were on common ground, without it being a joint valuation” (t/s 1421).

[171] The minutes noted “IT WAS RESOLVED that the interim payment of $7m be paid to Chase Corporation Australia Property Group Limited subject to the appropriate indemnities being received from Chase concerning any refund with interest in the event of a shortfall in the valuation amount. … Mr Ryan advised the meeting that indicative valuations received early in the New Year indicated that there would be a valuation in the area of $480M.”

[172] This material supports Interchase’s contention that the Hillier Parker and Colliers valuations were intended to be and were mutually treated by Interchase and PEQ as Completion Date Valuations which would fix the Completion Sum. This is further discussed at para 233 and 246 and following.

[173] Mr Waghorn attended the Pan Pacific Valuers’ Conference in New Zealand from 18-31 March 1988. On 21 March Mr Colin Reynolds of Chase addressed the conference. Mr Waghorn kept all the papers from the conference but put Mr Reynolds’ in The Myer Centre file at Hillier Parker in Brisbane because “I had some concerns as a valuer involved with the valuation what is referred to by Reynolds in this speech that he gave” (t/s 1371). Mr Hampson asked Mr Waghorn “What was the particular reference that you had concerns about?-- I had concerns that he had indicated - and forgive me, it’s a long time since I’ve read this document, but somewhere is a statement that the capitalisation rate for Brisbane would be in the region of 6.85%. I haven’t yet found-- ...

Yes. That was a matter of concern to you. What I should ask you is this: when you came to actually get instruction and embark on this valuation, Mr Reynolds’ prophecies, or whatever you like to call them, or opinions about capitalisation rates, did they have an effect on you?-- None at all.” (t/s 1371) Mr Waghorn had marked, apparently contemporaneously, relevant parts of Mr Reynolds’ address when speaking of The Myer Centre Brisbane “This means that over 95 per cent of the centre by area and about 95 per cent of the budgeted annual rental income has been achieved already - we anticipate that in the next month or so we will exceed our budgeted rental income for The Myer Centre.

The budgeted yield was seven per cent, and the anticipated income excess and a firm market could see that drop by about a quarter of a percentage point at completion” (exhibit 262/60 page 26). 51

Notwithstanding his denial these figures do appear to have had an impact upon Mr Waghorn. In a fax sent to Mr Samut from Christchurch the day after he had heard this address he wrote “Colin Reynolds today publicly stated cap rate he expects from centre on next valuation will be 6.75% on a nett rent of $33 million pa” (exhibit 253/59). Mr Waghorn applied a 6.75 per cent capitalisation rate in his valuation of The Myer Centre.

[174] Mr Waghorn was pursued by Mr Burgess at his conference in New Zealand for advice as to how he proposed to treat new kiosk rental information in the valuation brought about by limiting the fixed kiosks to eight and a number of moveable kiosks to be let casually.

[175] Mr Waghorn carried out some calculations varying the capitalisation rate and advised that if there were 20 kiosks producing a rental income of $400,000 per annum in the original valuation then the new configuration of kiosks would probably produce an income of about $498,000 per annum which would, in effect, not change anything but Mr Waghorn said he needed more information before he would be able to set a capitalisation rate. On 25 March Mr Waghorn, still in New Zealand, telephoned Mr Burgess and learnt that there were to be eight fixed kiosks with a total rent of $198,000 per annum, that Centre Management preferred to lease the 10 casual kiosk positions in rotation which would produce about $30,000 per annum each and that there would be eight kiosks operating on average for 48 weeks producing a rental of $250,000 per annum.

[176] Mr Burgess wrote to Mr Samut at Hillier Parker on 25 March 1988 copy to Mr Garmston on CCA letterhead signing as director “Chase Corporation Australia Property Group Limited” (PEL) seeking a fee proposal for The Myer Centre valuation: “We are soon to issue instructions in conjunction with Interchase Corporation Limited for the valuation of The Myer Centre development.

The respective Boards have selected Hillier Parker as one of a shortlist from which a fee proposal should be sought, and we would therefore be grateful to receive such a proposal from you.

The valuation is to be based on the property’s open market value as at March 28, 1988 and will be required by mid-May. Information required will be made available to you immediately, and of course we would require that deals completed or other pertinent information that comes to hand to mid-May be taken into account fully.

Clearly, in submitting your fee proposal, we would like you to take into account the fact that you have already completed a valuation of the property” (exhibit 21). A similar letter was sent to Mr Gardiner at Colliers copied to Mr Garmston, excluding the reference to the earlier valuation. Mr Garmston and Mr Burgess agreed that Interchase and Chase would share equally the cost of the two valuations (exhibit 89). 52

[177] On this letter to Hillier Parker Mr Waghorn wrote “Colliers also doing”. He was quite uncertain as to when and how he came into possession of that information but he had just returned from the valuers’ conference in New Zealand and thought it possible that he had found that out from the Colliers people who were there. Mr Waghorn thought that perhaps he might have been told at some other date by Mr Burgess that this was the case. More importantly, he said in examination-in- chief that when he read the letter he did not notice the opening sentence that two companies were involved in issuing instructions for The Myer Centre valuation. He suggested that he made no distinction between Interchase and Property Estates. Mr Waghorn was unable to explain how he lost the knowledge that he had in November 1987 when he wrote to Mr Ryan discussing with him the instructions from Mr Burgess of Property Estates and being concerned about a conflict of interest as “Interchase is the client” (t/s 1604).

[178] The Myer Centre opened on 28 March 1988. The newspaper cuttings in the Hillier Parker files show large crowds queued up for the opening and significant national newspaper coverage of the event. The opening was covered in the Brisbane Courier-Mail on 29 March 1988 with some reservations. The noise was commented on; visitors were not spending in great numbers because a third of the specialty shops were either not open for business or were still moving in; the design was said to be confusing; particular mention was made of the difficulty of access to the car park and the ensuing traffic congestion and that only two floors of the car parking space were filled. The downstairs gourmet food emporium “had not got their act together in time” and Tops was not operating. Mr David Clare’s recollection was that “we were getting astounding numbers through the opening period of the centre” (t/s 123). Tops did not open until some time in April and after it commenced trading it needed significantly more patronage than it received to operate successfully. Mr Clare described Tops as “... made up basically of small retail kiosks and entertainment type venues such as shooting galleries and hoopla type things which would be seen at a Luna Park type establishment, and I guess the catalysts for the area were the rollercoaster that was in there and there was a swinging ship that was in there too, a viking type ship which you see down at Seaworld and they were the two major entertainment attributes of the floor ... It had some food elements, to ... just fast food, take-away food ... general trinket type businesses that you would normally find say at a fun fair; soft toy type operations, I guess. Retail associated with a fun fair, I suppose, would be the best way to describe it ... giftware and clothing, yes.” (t/s 125)

[179] Mr Clare observed that he and his team inspected the operation of Tops every day and from the very beginning of operations there were problems relating to noise from the rollercoaster and cleanliness: “It became very clear to me from the very early stages that there was a complete lack of management expertise and experience to run a floor like that.” (t/s 125) Mr Clare thought that it was unlikely to reach any viable expectation (t/s 126). The other Beaumont tenancies were not seen by Mr Clare to be trading to the same level as other areas. 53

[180] Very early there were complaints to Centre Management from the lessees of shops on the Albert Street level and “the back area” or the George Street end of the Elizabeth Street level because of poor patronage and thus trading levels.

[181] On 29 March Mr Berkovic wrote to Mr Glew at CCA noting that Interchase had made an advance payment of $15m pursuant to the resolution taken at the board meeting on 24 March 1988 being the amount of the final claim under the Development Agreement excluding any bonus sum available by virtue of the Completion Date Valuation and interest was to be paid on all advance payments at the bill rate. He enclosed a draft letter for PEQ to sign acknowledging the early payment and that the guarantees extended to the advanced payment. This letter had been drafted by Interchase’s solicitors a few days earlier (exhibit 78). Neither Mr Berkovic nor Mr Ryan could recall receiving the executed letter from PEQ, PEL or CCA although Mr Ryan said that he would have chased it up. It was not produced at trial but this evidence does support Interchase’s contention that Interchase took an independent position over the payments under the Development Agreement.

[182] Mr Waghorn telephoned Mr Burgess on 6 April to discuss fees. He proposed $200,000 which was rejected by Mr Burgess. Mr Waghorn said that in another telephone call that day he proposed $100,000 but that Mr Burgess replied that it was “a wee bit high” (exhibit 253/65). At the top of his note were a number of questions to ask Mr Burgess. Mr Waghorn’s evidence on this document are an example of his tendency to reconstruct many years after the event. “? Fee already fixed with Remm (day 1) I admit $50K. Who report for, exactly? How can we backdate information post 28.3.88 to 28.3.88?- Discuss” (exhibit 253/65). Mr Waghorn said this note recorded that when he commenced the valuation for The Myer Centre Adelaide he and Remm were able to agree on the fee immediately. This seems a curious explanation since that fee was not $50,000. When suggested to him in cross-examination that in fact the fee to be paid to Hillier Parker was to be $200,000 divided equally between the Brisbane and Adelaide offices of Hillier Parker in respect of The Myer Centre Adelaide valuation he agreed that he was probably mistaken in his interpretation of this note. The likely basis for this entry put to Mr Waghorn was that Remm had been the original developer of The Myer Centre Brisbane, that Hillier Parker had been associated with that development for a very long time and it was likely that there had been discussion with Remm about the fee for carrying out the valuation. Mr Waghorn could not recall asking Mr Burgess for whom the report was to be prepared but denied that there had been any discussion with Mr Burgess about taking into account changes between 28 March and 15 May. That cannot be correct because he referred to it in a letter to Mr Burgess on the following day.

[183] Mr Waghorn spoke with Mr Burgess the following day and asked him how he felt about $100,000. The note records this but also adds “$50,000 equals Interchase”. He could not recall what this was a reference to. The figure $80,000 also appears in the side on the note and under that the figure $70,000. Mr Waghorn said this indicated that he split the difference between what he proposed and what Mr Burgess proposed in his favour settling on $80,000. He denied that this was a 54

note of a conversation with Mr Burgess in which he indicated that Interchase was to be paying half the fee as between Interchase and PEQ (t/s 1604).

[184] Mr Waghorn proposed a fee of $80,000 in a letter dated 7 April 1988 addressed to Mr Burgess as “Director - Queensland Chase Corporation Australia”. This may have been an abbreviated reference to Chase Corporation Australia Property Group Limited as appeared on Mr Burgess’ letter of 25 March. The letter refers to the discussions about fees and the content of the report “We understand that the freehold open market value is to be assessed as at 28th March 1988; we also understand that settlement is due on 15th May 1988 and, therefore, we may be asked to take into account income/expenditure changes, etc up to the latter date. We further understand that all parties to the valuation will accept your wish that these post-valuation-date changes/amendments will be acceptable” (exhibit 253/67).

[185] In evidence-in-chief Mr Waghorn said that the reference to “all parties to the valuation” meant Chase Corporation and Hillier Parker but added that he may have re-read the letter to Mr Samut and been inferring that Interchase was also involved (t/s 1384). In cross-examination the following exchange occurred “You plainly had in mind the parties in conjunction who were referred to on 25 March, being Chase Corporation (Australia) and Interchase Corporation?-- Yes, I would have.

There was no discussion which you had with Mr Burgess which would have altered in any way what was the subject of those two letters; that is, that all parties in mind by you?-- That’s right.” (t/s1606)

[186] Mr Burgess prepared a draft letter of instructions to Hillier Parker which he sent to Mr Garmston in Sydney. Mr Garmston made some amendments on it and returned the letter to Mr Burgess on 12 April. Identical letters were to go to each valuer. Mr Garmston added to the documents to be supplied “G. A copy of the leveraged lease agreement” and the following “On completion of the valuation we require that you send a copy direct to Interchase Corp Ltd, Level 5 No 1 York Street, Sydney 2000” (exhibit 80). This sentence was left out of the final letter sent to Hillier Parker. The third and fourth defendants contend, deliberately so, and Interchase, that it was inadvertent. There is no discernible reason for leaving the sentence out apart from some conspiracy, suggested by the third and fourth defendants, on the part of PEL to keep Interchase in the dark or to bring about disconformity with the Development Agreement but since Mr Burgess sent the valuation letter and report promptly to Interchase this contention makes no sense at all. The better view is that it was overlooked by the typist and Mr Burgess did not pick up the omission. Accordingly Hillier Parker did not send its valuation letter and report to Interchase as was required by the Development Agreement but Colliers valuation was sent to PEL and Mr Burgess provided Interchase with the Hillier Parker letter and valuation.

[187] Mr Waghorn’s diary noted a meeting at 10 o’clock on Wednesday 13 April 1988 with Mr Burgess. He could recall nothing of it, but then noticed that this page from 55

his diary was photocopied and included in the volume of documents in front of him and that behind it was a long file note of the meeting. This seemed to jog his memory. The note read “Steve Garmston as well at Interchase … 10.00am meeting. Question: Movie levels – considered to be a problem?” In the right margin the names “Chris Gardiner, Mike Tidbold other valuers” appear. Mr Waghorn explained to Mr Hampson “… It’s a note about the meeting, so he must have rung me that day concerning the meeting, or perhaps I rang him. I have written his phone number down so it’s likely to be that I rang him. He said to me, ‘We’ll have a meeting at 10 o’clock.’ ‘Steve Garmston as well at Interchase’ and I note on the right-hand side that Chris Gardiner and Mike Tidbold were the other valuers. Now I believe ... Yes. I have noted for myself to ask Guy Burgess about the noise levels which were considered to be a problem. Those noise levels were associated with the railway track. ... I recall now that I went over to his office. It was in his office, not mine.” Mr Hampson asked him “Is that at Interchase? Did you call it ‘at Interchase’ or something like? I’m just wondering why you remember when you look at that that it was at his office?-- I recall that I was introduced to Steve Garmston for a very brief moment on that day. Steve Garmston was late to catch a plane or was in a hurry to catch a plane before the meeting started. We shook hands and he left” (t/s 1386-7). Mr Waghorn said that Mr Burgess told him that Mr Garmston was from Interchase. He said that he was aware that other valuers were valuing The Myer Centre.

[188] Aided by the memorandum Mr Waghorn reached new heights of detailed recollection. Mr Hampson asked him whether anything was said by Mr Burgess or Mr Garmston to indicate that Mr Garmston had any role in the procuring of valuations or anything of that sort and he said that he did not (t/s 1388). Mr Hampson asked him “Can you recall whether you discussed any terms and conditions at that meeting of your valuation that you were going to produce?- ... After Garmston had left I meant ...-- I certainly did discuss with Guy Burgess at about this time the terms and conditions. I had already asked earlier in the year for Feez Ruthning to look at the terms and conditions” (t/s 1388). After some further discussion Mr Hampson brought Mr Waghorn back to the 13th April: ‘Yes, I did discuss them with him at this time and it could well have been at the meeting we started off talking about on the 13th. ... We had used terms and conditions in - sorry, when I say ‘we’ Hillier Parker had used terms and conditions in the reports that John Richardson did. I had a concern over the Remm product that I was working on and I wanted to alert Guy Burgess to the fact that the terms and conditions which he had seen previously would perhaps be altered following legal advice. I in fact in the end I varied those terms and conditions myself and I’m not a lawyer.

What did he say? You told him that?-- He was quite happy. 56

What did he say, ‘I’m quite happy’?-- As best I recall, something along those lines. He certainly didn’t object” (t/s 1390). This was taken up by Mr Jackson in cross-examination. Mr Waghorn conceded that it was an important topic and in the ordinary course he would have made a note which he would confirm by correspondence. There is no file note or other writing of 13 April suggesting any discussion of this topic with Mr Burgess. Consistently with Mr Waghorn’s practice this is surprising. Mr Waghorn finally agreed with Mr Jackson that the only terms and conditions proposed to Mr Burgess were those attached to the formal valuation and not before (t/s 1606-7).

[189] Mr Hampson asked Mr Waghorn whether he had asked Mr Burgess if he could approach Centre Management for information to which Mr Waghorn replied “I did ask him and I was told, ‘No, I’ll provide you with any information that you need.’” This was the first mention of a prohibition on seeking information from Centre Management. Mr Waghorn made no reference to it his public examination (exhibit 191). Mr Ryan said that if he had been asked by any valuer for access to Centre Management documents he would certainly have given it. “That was understood as the briefing of the valuers. My recollection is that our representative Stephen Garmston would have given them every access to the information and the details that they would require both at the centre and within our own offices.” (t/s 225-6)

[190] Mr Garmston was not contradicted in cross-examination by Mr Hampson when he said that since most of the relevant documents for the valuation were held in Brisbane, Colliers were referred to Guy Burgess or David Clare (t/s 293). Mr Clare said that there was tenancy and turnover information available which would have been given to anyone if the Interchase directors authorised it (t/s 147-9). It is unlikely that there would have been one practice for Hillier Parker and a different one for Colliers.

The letters of retainer

[191] On 14 April 1988 similar letters of retainer were sent by PEL under the hand of Mr Burgess on CCA letterhead to Mr Waghorn at Hillier Parker (exhibit 26) and by Interchase under the hand of Mr Garmston to Mr Chris Gardiner at Colliers (exhibit 27). The letter to Hillier Parker was in the following terms: “Re: THE MYER CENTRE, QUEEN STREET, BRISBANE - VALUATION ON COMPLETION.

We refer to our recent discussions and correspondence, and write now to confirm instructions for your company to carry out a full market valuation of the above development.

The valuation is to be based on the following:

(1) Open market value of the freehold property as at the date of practical completion. The date of practical completion will be advised, and is anticipated prior to mid-April. 57

(2) Taking into account all Leases and/or Agreements to Lease in place as enclosed.

(3) Taking into account all deals done between the date of the valuation and the completion of the report, which should include Leases completed in the Centre and other sales evidence which would be used to determine an appropriate capitalisation factor.

(4) Taking into account the Guarantee by Chase Corporation under its Agreement with Interchase Corporation that the net income in year one will not be less than $32.9 million.

The following items will be forwarded to you for your reference:

A. A summary of the total Centre income.

B. A rental schedule showing break up of (i) Specialty shop income; (ii) Major tenancy income; (iii) Storage license income; (iv) Kiosk income; (v) Casual leasing income; (vi) Vacancy schedule.

C. Current estimate of Centre outgoings and recovery of same (to June 1988 and June 1989).

D. Estimate of percentage rent applicable to year 1 of trading.

E. Estimate of profit from sale of electricity.

F. A copy of (i) All major Leases; (ii) Specialty shop schedules with standard memorandum; (iii) Tenancy information forms (for commitments not yet converted to Lease Agreements); (iv) Storage license agreements.

G. Leverage Lease Agreement with the Commonwealth Bank of Australia.

We believe the above is sufficient for your initial requirements but we are happy to make available all building details you will require. We also suggest that we assist you in inspecting the property, so that all areas such as storage (and other not so obvious items) can be identified. Survey plans are also being prepared to highlight all of the various components, and these will be issued to you shortly. 58

Finally, we confirm our fee arrangement with you of Eighty Thousand Dollars ($80,000.00), and that your report is required by mid-May.

Should you require any further information or assistance, please do not hesitate to contact the writer.”

[192] The letter to Colliers differed only by the inclusion of the paragraph proposed by Mr Garmston and the different fee “Finally, we confirm our fee arrangement with you of one hundred and fifteen thousand dollars ($115,000.00), and that your report is required by mid-May. On completion of your report, a copy of this should also be submitted to Chase Corporation in accordance with the Agreement between our company and Chase.” An example of Mr Waghorn’s continued attempts to distance himself from any knowledge of the purpose of the valuation occurred when he was asked in evidence-in-chief about his understanding of the reference to the rent guarantee to Interchase in the letter of retainer. He said that he had not been given a copy of the agreement between Chase and Interchase and when he looked at this letter of retainer “As best I recall now, all I took note of was the guarantee of income and I didn’t pay any attention to the wording that proceeded that” (t/s 1391). In fact the wording of the letter makes no reference to a Completion Date Valuation or its purpose so it was quite unnecessary for Mr Waghorn to say something as unconvincing as “I didn’t pay any attention to the wording that proceeded that.”

[193] This is an appropriate point at which to consider the state of Mr Waghorn’s knowledge of the purpose of this valuation. Mr Hampson questioned Mr Waghorn further on this topic at (t/s 1502) when putting the pleadings to him. He said “The statement of claim says there was an agreement called a development contract that was made between the plaintiff, Interchase, and another of the Chase companies, Property Estates, or some other Chase company anyway, one of which, in fact, Mr Burgess was working for. At the time that you made your valuation did you know of that development contract?-- No, I did not. … Did you understand that your valuation that you were doing for the company that Mr - the Chase company - that Mr Cox was writing on behalf of - sorry, Mr Burgess was writing on behalf of was going to be used by another Chase company, Interchase?-- No. We’ve already discussed evidence where I had asked him on a number of occasion whose the report for” (t/s 1502).

[194] Earlier Mr Hampson had asked Mr Waghorn of his understanding of the valuation “It was an open market valuation according to the letters and so forth of course but did it have any other purpose?” To this Mr Waghorn replied “Not that I was aware of, no. Had Mr Burgess told you that it was going to be addressed to somebody else?-- No, he had not. 59

Had he told you that there was some arrangement whereby a copy was to be made available to another party?-- He did not tell me. You know the plaintiff’s contention here that there was a pre-existing agreement whereby two companies, Interchase, which was Garmston’s company if you like, and Property Estates, Mr Burgess’ company, were each going to engage a valuer and then they were going transfer the building, to make it short, at an average of those two valuations?-- I know that now. When did you first learn of that?-- Many years later. As I recall now, during a conference with Don Fraser [QC counsel for third and fourth defendant]. He introduced the topic and showed me a development document and drew my attention to the words of it and that was the first time I had seen any documentation on that subject.” (t/s 1386-88)

When asked whether his approach would have been different had he known that the valuation was going to be available to another company who would rely upon it Mr Waghorn gave a somewhat vague reply to the effect that he would need to understand what was behind the relationship between the two companies and would be reflected in the terms and conditions (t/s 1503).

[195] When referring to the file note of 13 April where Mr Waghorn has written the names of Chris Gardiner, Mike Tidbold other valuers Mr Jackson asked him “Would you have not been interested in why other valuers were valuing the centre and sticking with this date at around the middle of April 1988?-- I think I felt that it was normal for a second team of valuers to be involved and I didn’t think any further about it.

Did you not know at that time that they were doing a completion valuation which was to be averaged with yours?-- No, I did not.

Did you not know that they were doing a valuation which would be used with yours to finalise the price?-- I did not know.

And did you not know at that time that the price for The Myer Centre was to be finalised on valuations to be obtained on completion?-- I knew that I was being asked to do my valuation on a handover date, 15 May.

I understand that, but I think I need a specific answer to my question. Did you not know that the price for The Myer Centre was to be finalised on valuations to be obtained on completion?-- No, I did not.

Did you not know those three things which I have suggested to you at some time before you spoke to Mr Fraser [his counsel] in November of 1995?-- No, I did not” (t/s 1554). It was pointed out to Mr Waghorn that following a press release which indicated inter alia that the method of finalisation of the price between Interchase and PEL was the average of the Hillier Parker and Colliers valuations, he had spoken to Mr Burgess and had said to him that “It would have been nice if we had been 60

advised of this press release in advance” (exhibit 253/1; exhibit 3/126). Mr Waghorn agreed that at least from then on he knew that the substance of his valuation was being utilised to calculate the price to be paid for The Myer Centre and did not recall whether or not he objected to that use (t/s 1555), but in fact the evidence supports the inference that he was fully aware of the purpose of the valuation when Hillier Parker was retained in April 1988.

[196] In his public examination at the end of 1993 Mr Waghorn said that he knew the purpose of the valuation. He was asked by Mr Chesterman QC (as his Honour then was) “All right. And you were made aware, I take it, of the purpose of the valuation, why it was wanted?-- Yes, I was.

Yes. You knew that Colliers were doing a valuation as well?-- Not at that time. At the beginning of my involvement, I did not at that time know Colliers were involved.

Right. In the course of preparing the valuation I take it you learnt that Colliers were doing one as well?-- Very much later, yes.

Yes. And I take it you were aware that the purpose of the valuation was to arrive at an average of the two valuations?-- Yes.

Yes. For the purpose of arriving at the amount of the bonus, as it were, to be paid to the builder, I think?-- Yes.

Yes, all right. And this is the case: That you knew that when you began the work, but it was only later you discovered the other valuer was Colliers?- That’s right” (exhibit 191 pages 423-4).

[197] Mr Waghorn’s denial at trial of any relevant knowledge of the purpose of the valuation cannot be sustained against the accumulation of contemporaneous documentary evidence (some of which is mentioned subsequently). The third and fourth defendants accept that there is some evidence which cannot be explained away, such as the amendments in Mr Waghorn’s own hand to the Myer Adelaide valuation report which makes reference to the average of two valuations setting the price, but contend that it is insufficiently precise as to the consequences. But the amendment to the Adelaide report was merely a forensic cherry. The Hillier Parker files were replete with detailed information about the Development Agreement and its terms for fixing the Development Sum including the Interchase Prospectus, the DBSM report and numerous cuttings from the financial and property press. These are all documents which it can readily be inferred Mr Waghorn would have read when commencing work on The Myer Centre Brisbane valuation for November 1987. His knowledge is Hillier Parker’s knowledge and that is all that Interchase alleges but other senior members of the firm certainly were aware of the purpose of the valuation. 61

Mr Waghorn’s work on the completion valuation

[198] Mr Burgess continued to be the principal source of information both to Colliers and Hillier Parker in the preparation of the valuations and had been authorised by Interchase through Mr Garmston to do so for Colliers (t/s 270; 291). A convenient way to follow the progress and development of the valuation is to reflect the day to day activities of Mr Waghorn which were devoted to its preparation.

Day 1 - Friday 15 April

[199] Mr Waghorn spoke to Mr Mobsby at Remm concerning Queen Street rentals noting his information that rents in Queen Street arcades commanded $1,500 per square metre in 1985/86 which had risen to current rents of $2,800 per square metre. Mr Burgess faxed him vacancies in the Centre (exhibit 253/73) (also provided to Mr Tidbold) (exhibit 273/17). Mr Waghorn, as was his custom, prepared a list of questions for Mr Burgess (exhibit 253/72). They met at Mr Burgess’ office and Mr Waghorn wrote in red the answers. Mr Burgess advised Mr Waghorn that the leases commenced on 28 March 1998; he and Mr Burgess checked the vacancies; Mr Burgess indicated that the list of storage areas was coming; he advised that a list of option details was coming but that few leases contained options; they checked the rent review provisions for one of the shops on the Albert Street level; Mr Waghorn was to check the rent reviews of the major leases; if there were differences in the areas of tenancies on the TIF forms the TIF area would be adopted; Mr Burgess gave Mr Waghorn information about the casual kiosks including the areas, numbers and the rent; Mr Burgess sought the confirmation of tenancy areas which Mr Burgess was to obtain in the course of that week.

[200] At the Hewsea Board meeting that day the Centre Management Report for the March trading was tabled and the concerns of the Albert Street level traders and action was noted (exhibit 50).

Day 2 – Monday 18 April

[201] On 18 April practical completion of The Myer Centre was certified (exhibits 29 and 30).

[202] Mr Waghorn made some amendments to the computer print-out and incorporated those handwritten amendments in a fresh print-out on 18 April. Amongst the amendments was an increase in the purchase price to $485m. He met Mr Burgess and a further print-out of the computer model was made incorporating further amendments. Mr Burgess forwarded to Mr Waghorn a number of documents which included vacancy schedules, kiosk locations both permanent and casual and a specialty leasing schedule with notation of changes made by PEL’s solicitors. A similar document was sent to Colliers.

Day 3 – Tuesday 19 April

[203] Mr Waghorn worked on the computer model and noted a discrepancy about vacancies “We have 19 vacancies on schedule Interchase show 18!! Could be in storage” (exhibit 253/76). Some research had been done for The Myer Centre Adelaide valuation at Hillier Parker Brisbane concerning levels of rent in Queen 62

Street Brisbane. This was printed out on 19 April and another valuer in Hillier Parker Brisbane added further information from the Prudential Building Arcade and Rowes Arcade Brisbane (exhibit 253/77). The rents show a range from $330 to $2,500 per square metre per annum.

[204] Mr Waghorn sought assistance from Mr Walsh in revising the whole model to include percentage rentals. Mr Waghorn was somewhat short of time indicating that he was to take part in an air race from April 22 to May 2 inclusive (exhibit 253/78). This note begins with the words “Interchase are still calculating their expectations of percentage rents but they have indicated that they will (they state) apply to ...”. Mr Waghorn was asked by Mr Hampson “Who were Interchase?” and answered “Guy Burgess” (t/s 1397). This may be another example of Mr Waghorn’s determination at trial to avoid any suggestion that he understood that Interchase was a separate entity concerned in the valuation as contended for by Interchase or, in haste, he may have been confused since Hillier Parker had done the Interchase Prospectus valuation at the request of Mr Burgess.

Day 4 – Wednesday 20 April

[205] Mr Waghorn received a “box of files, leases etc” under cover of a letter dated 18 April from Mr Burgess. He told Mr Burgess that he would need at least another two weeks “ie he will not have an answer by May 12 more likely June 1 ish” (exhibit 253/80). The explanation which appears to have been offered as recorded in the file note was that “tenancy schedules and rents had to be totally re-done following his [Guy Burgess] production of lawyers’ revised and Guy Burgess’ revised schedules” (ibid). Mr Waghorn in evidence-in-chief suggested that he told Mr Burgess of his air race commitment but this is unlikely in light of his note (t/s 1399-1400). Mr Burgess agreed to send over to Mr Waghorn a plan showing all the kiosks numbered with the permanent kiosks named. Myer Stores informed the chairman of Remm that in view of the initial sales response its first year sales should rise to approximately $110m (exhibit 253/80). This letter was provided to both valuers.

Day 5 – Thursday 21 April

[206] On Thursday 21 April Mr Waghorn incorporated a number of amendments to the print-out and printed a new copy of the tenancy schedule incorporating these changes (exhibit 3/278 and following). On this print-out Mr Waghorn wrote “Still to check Kiosks - names and locations Storage space s* and stge Cap rate? 6.75% Vacancy factor currently 7.2% of [?] but likely to be 1% of rental.” This note tends to bring into question Mr Waghorn’s assertion that the capitalisation rate of 6.75% nominated by Mr Colin Reynolds at the conference in New Zealand had no effect upon his judgment. This was the last day that Mr Waghorn worked on the valuation before he left the office for two weeks.

[207] Under cover of a letter to Hillier Parker dated 27 April 1988 Mr Burgess sent Pattison & Barry’s report on the titles for The Myer Centre. The opening sentence of the letter made a reference to the Development Agreement 63

“We set out the following report to assist in the valuation to be carried out pursuant to Clause 14 of the Development Contract.” (exhibit 253/82 page 4) On 28 April Mr Burgess sent some further information to Hillier Parker including the operating expenses projected for the years ending 30 June 1988 and 1989; sales projections for the first year from Lincraft and Myer Stores; details of depreciable items; and the tenancy information form for Shop 3A.

[208] On 1 May 1988 seven day trading for the duration of Expo 88 began.

Day 6 – Tuesday 3 May

[209] Mr Waghorn returned to Hillier Parker on Tuesday 3 May. He prepared a schedule showing certain information about kiosks and sent it to Mr Burgess “Attached is our schedule for kiosks etc type-script is as per your schedule and pen marks are as per your sketch plan of 21.4.88. Which is correct?” (exhibit 253/84) He added a note that the $20,000 fee from the November review remained unpaid and asked Mr Burgess to chase it up. Later in the afternoon Mr Waghorn’s note indicates that there were 11 permanent and 8 casual kiosks. Mr Waghorn adopted that number which included two vacancies when calculating his valuation, (tenancy schedule for 17 May 1988; exhibit 3 page 116). His valuation reports states that there were 10 permanent kiosks (exhibit 2 page 33). In evidence-in-chief Mr Hampson asked “And in the event did you adopt 11 or 12 or 10 kiosks?-- In the end I adopted 8. Was there any reason for that?-- As best as I recall now, I wasn’t convinced that 10 or 11 would ever be achieved and 8 seemed to me to be an appropriate number to adopt. Were these supposed to be permanent kiosks or casual kiosks?-- I’m referring to 8 as being permanent.” (t/s 1375) When page 33 of his valuation report was read to him stating that there were 10 kiosks Mr Waghorn said that it had been prepared in a hurry and was not correct on the question of kiosks and that that information had not been revised. He said that there were 8 permanent kiosks taken into account in his calculations but that the report had not been changed to reflect the capitalisation that he had carried out to produce the valuation on 17 May (t/s 1376).

Day 7 – Wednesday 4 May

[210] Mr Waghorn noted the amendments to the kiosk tenancies on his 21 April 1988 computer print-out (exhibit 3 page 283) and attended to some other matters. Towards lunchtime he received a telephone call from Mr Burgess who wanted the tenancy schedule to check. Mr Waghorn noted (exhibit 253/87) that he was not ready as he did not have any lease details for kiosks or shops 00-175 and other information “supposed to be in the 5 or 6 binders of which we only have 3”. Mr Burgess undertook to chase up the missing binders. Mr Waghorn told Mr Burgess “As to numbers, no I have not worked any yet” (ibid). Mr Waghorn made a schedule of those documents which Hillier Parker apparently had not received from Mr Burgess faxed it to Mr Burgess and indicated that the tenancy schedule awaited his reply to the attached questions and comments (exhibit 253/88). 64

Day 8 – Thursday 5 May

[211] Mr Burgess rang Mr Waghorn in the morning indicating that the outstanding documentation would be sent to Hillier Parker by 11.00am and that Mr Waghorn should get the tenancy schedule back to him by 3 o’clock. Mr Waghorn noted “He [Guy Burgess] will then check all with Colliers and ask, all around table.” (exhibit 253/89A) Mr Waghorn said that he never met in this way with the Colliers people.

Day 9 – Friday 6 May

[212] Mr Waghorn printed out the tenancy schedule and forwarded it to Mr Burgess stating that it was “as derived from your documentation, leases and other data supplied by you” (exhibit 253/91). Mr Waghorn asked Mr Burgess to check the information and to amend any errors or later information and to ask solicitors to check the details. Once this was done Mr Waghorn would be “in a position to complete our calculations requiring at least another two weeks following receipt of the schedule from you”.

Day 10 – Monday 9 May

[213] There are no file notes or documents indicating that Mr Waghorn carried out any work on the valuation on this day.

Day 11 – Tuesday 10 May

[214] Mr Waghorn reorganised the computer model after discussions with Mr Walsh to incorporate the new Myer turnover figure of $110m. Interchase contends that this is significant since it shows that Mr Waghorn was prepared to make adjustments when there was new favourable turnover data (but did not seek out other turnover data). Mr Waghorn turned to the IRR aspect of the computer model. On the print-out for 10 May the purchase price is $485m (before doing the calculations); the discount rate 15%; the index rate for CPI is 7%; the capitalisation rate is 6.75%, the growth rate for the various income streams is adjusted. When Mr Waghorn made the calculations these figures produced a valuation of $394.969m (exhibit 3 pages 224- 229). Mr Waghorn altered the growth factors on his model (exhibit 3 page 224) which produced a valuation of $481.078m (exhibit 3 pages 209-217).

[215] Mr Waghorn then prepared a first draft of the valuation (exhibit 253/92) based upon Mr Richardson’s valuation of 16 October 1987 (exhibit 5) making amendments by crossing-out and additions incorporating some parts from The Myer Centre Adelaide valuation. The title page states the date of inspection as 10 May 1988. This was not the case. The capitalisation rate was altered from 7 per cent in the Adelaide valuation to 6.75 per cent. It incorporates an IRR rate of 15.2 per cent. Under sales evidence Mr Waghorn included “April 1988 - Southern Pacific Hotel Corporation Chain sold for A$540 to Hong Kong-based Adriaan Zecha, formerly owner of Regent International, HK.” (page 51). It contains no opinion as to value, nor any tenancy information. Mr Waghorn arranged a meeting with Mr Burgess for the following day at 8.30am to discuss the tenancy schedule (exhibit 253/95). This note also records that there was some 65

discussion between them about a possible sale of the Wintergarden at a figure of $240-245m.

Day 12 – Wednesday 11 May

[216] Mr Waghorn met Mr Burgess at his office to discuss the tenancy schedule. Several pages of notes relate to this meeting (exhibit 253/98) “Who is valuation for. Interchase or Chase as buyers.” The first seven words are in red pen “Interchase or” has been crossed out in blue pen and “as buyers” added in blue pen after Chase. Mr Waghorn said he could recall only what he had written down. He has also noted “Colliers acting for Interchase” (exhibit 253/98). He said he thought Mr Burgess just told him that (t/s 1445-9). He noted a vacancy factor of 5 per cent noting that 3 per cent rather than 5 per cent would be adopted. He said it was he who decided to adopt a 3 rather than a 5 per cent vacancy factor (t/s 1446). He raised the leverage lease implications suggesting that at $75m it complicated a transfer. After discussion with Mr Burgess and taking advice subsequently from Hillier Parker’s solicitors in Sydney he concluded that it would have no effect on the value because it would not be an encumbrance on the title. Further on in the note appears “? Target 485m?” Mr Waghorn explained in evidence-in-chief “I would suggest that it’s a note that Guy Burgess is advising me that from his point of view, with the calculations he was doing at the time, he felt that the valuation should be around $485m. I’ve question-marked that because I don’t believe I made any comment one way or the other.” (t/s1450) It is impossible to tell whether this is an accurate reconstruction of what occurred on this topic with Mr Burgess. Mr Waghorn’s propensity to interpret his notes in an advantageous fashion has been commented upon before.

[217] Mr Waghorn met with Mr Tormey of JLW in the afternoon to discuss the Wintergarden putative sale. He was told that there was a 65/35 likelihood that the sale would proceed with the purchase price of $230m. He was told that $700 per square metre was the average rental and that Mr Tormey thought the offer equated to a 6.25 to 6.5 per cent yield (exhibit 253/101). Mr Waghorn printed out a fresh copy of the tenancy schedule to note on it the information obtained from Mr Burgess that day (exhibit 3 page 188).

Day 13 – Thursday 12 May

[218] Mr Burgess sent Mr Waghorn The Myer Centre building services report for January 1988. Mr Waghorn did a new print-out of the research work done for Remm for The Myer Centre Adelaide valuation on rental comparisons (exhibit 253/104). He was experiencing confusion and difficulty with the computer program and sought assistance from Mr Walsh in the afternoon (exhibit 253/102).

[219] Mr Tidbold at Colliers advised Mr Garmston at Interchase that his valuation would be between $485m and $495m with a capitalisation rate of 6.75 per cent (exhibit 85). 66

Day 14 – Friday 13 May

[220] Mr Waghorn prepared a list of tasks to perform for the valuation which he ticked and wrote notes against when carried out. Against electricity sales he noted “$506,000 in budget from managers”. Against outgoings he wrote “$290,000 shortfall in budget from management”. He noted in pencil that a vacancy factor of 5 per cent equalled $480m at 6.75 per cent and a 10 per cent vacancy equalled $478m at 6.75 per cent. Underneath he noted that a 5 per cent vacancy showed a true capitalisation rate of 6.67 per cent whilst 10 per cent showed one of 6.47 per cent.

[221] He set himself the task of running a full valuation model and a print-out of the full tenancy schedule (exhibit 253/106). He sent a message to Mr Walsh “We are near an answer to the pure maths and it is now a case of settling on a cap rate!!” (exhibit 253/107). At some time during Friday Mr Waghorn discussed vacancy rates in the specialty shops with Mr Len Jarrard a director of Hillier Parker London who had come to Australia for the Hillier Parker annual dinner and Mr Paul Wheeler, a director from Melbourne. Mr Jarrard said that in his European experience a vacancy rate of around 5 per cent was appropriate while Mr Wheeler suggested 2 per cent after the second year. Mr Waghorn’s note suggests that he told them that the valuation would be about the same as on the previous occasion (exhibit 253/105).

[222] Mr Waghorn spoke to Mr Burgess and advised him that the likely valuation figure was $480m with a capitalisation rate of 6.75 per cent. Mr Waghorn agreed that these figures were derived from the computer print-outs (exhibit 3 pages 171 and following; t/s 1671). The net income shown on the November print-out was $33,819,000. Mr Waghorn noted “gave him breakdown of caps” (exhibit 253/109). He agreed that this was a reference to the segmented capitalisation rates which were in the print-out dated 20 November 1987 and had not been changed since then (t/s 1672). Mr Waghorn agreed in cross-examination that these rates would not produce a capitalisation rate of 6.75 per cent nor yield a valuation of $480m; neither would a capitalisation of earnings calculation using a rate of 6.75 per cent produce a valuation of $480m. If those figures were used then a derived value of $510,542,000 would be the result (t/s 1672).

[223] Mr Burgess suggested a 1 to 2 per cent vacancy factor against Mr Waghorn’s 5 per cent in the first year and a 2 per cent in years 2 to 10. Mr Burgess told Mr Waghorn that there was a problem on the Albert Street level with the food shops, particularly poor presentation and that the shop, Greenery Imports, had the wrong stock lines. Mr Waghorn agreed that he was aware of the poor trading situation in the Albert Street shops and with Greenery Imports in Elizabeth Street and of trading problems with Tops (t/s 1684). The file note records “He to give me:- A. Trading figures. B. Vacancy he wants in years 2-10. C. Movements in Tenancies $490 is what he wants”

In evidence-in-chief Mr Waghorn was asked what this meant: 67

“I would imagine that that’s $490m and Guy Burgess would be doing his own calculations to arrive at that figure but I had no better knowledge at that time of how he got to that figure” (t/s 1467-8). Later Mr Hampson asked him “… did Mr Burgess ask you to value the centre at 490 million?-- No, he did not. He stated on at least one occasion what he felt the answer should be and we then discussed where I was differing from him in terms of rental.

You have told us about that conversation before. Was there any other occasion on which the sum of 490 million was mentioned with him?-- I don’t remember.

Were you influenced by, if you like, his suggestion that he thought on his working that the answer should be 490 million?-- I was not influenced by him. I had to be satisfied that the income was going to be there according to his information to me to support such an answer.”

[224] Towards the end of the day Mr Waghorn said that Mr Burgess telephoned and told him that David Clare said that the vacancy rate was zero. He said he asked Mr Burgess who was Mr Clare to have this knowledge and was told that he was ex- Westfield (exhibit 253/110, t/s 1468). Mr Waghorn said in evidence-in-chief that he was “told to value the property on the basis that it was a hundred percent occupied” “… It’s illogical to suggest I would therefore use any vacancy rate in the first year, and I formed the opinion - and it was my opinion - that it would be proper in the market place of 1988 to not have a vacancy rate for the first three years but to apply from then on an annual vacancy factor of 2%” (t/s 1509). This assertion of an “instruction” to value the Centre in this way is not borne out by a letter from Mr Burgess received on Monday 16 May following this conversation. Mr Burgess wrote to confirm “our telephone conversation today and write to confirm my comments regarding vacancies on an ongoing basis”. He did not foresee anything more than eight shops being vacant for the first full year after the settling-in period and that the vacancy factor might be “in the lower range of 2%- 5% of income”. Thereafter a virtually zero vacancy factor was expected given the strong draws to all floors and the excellent trading results. He included a letter from Mr Clare in which he nominated ongoing vacancies of 2 per cent or less (exhibit 253/113).

Day 15 –Monday 16 May

[225] Mr Waghorn made some handwritten changes on 13 May print-out (exhibit 3 page 152 and ff). He adjusted the purchase price (valuation) from $485m to $480m (page 154), he increased the outgoings shortfall and increased the rental growth for storage from 7 per cent to 8.7 per cent and adjusted the vacancy allowance in the discounted cashflow model and in the valuation component of the model from 10 per cent to 2 per cent. Incorporating these changes Mr Waghorn did a print-out which gave a value of $476.991m (page 142). 68

[226] Mr Burgess told Mr Waghorn that there were notes on the way concerning shortfalls, promotions and outgoings for him to work on. The following letter advised that all the profit from the sale of electricity would be used by Interchase to offset any shortfall in outgoings and any moneys remaining would be allocated as the maximum contribution towards the promotions fund. This would leave Interchase with a nil shortfall from outgoings or contributions (exhibit 253/114). Mr Burgess attached certain turnover figures to support a low vacancy rate in his letter (exhibit 253/113). Those figures related to 33 tenants out of 190. Mr Waghorn responded in evidence in chief to a hypothetical situation posed to him by Mr Hampson that he had been told that these were the only figures available. “There is a new centre and I’m told by Guy Burgess in discussion and with the documentation that this is the turnover figures that I have available ... If I were valuing the centre a year later I would expect to be given all of the turnover figures for each and every shop but I believe in this first month of the trading for 1988 that the information was not fully available at the date he gave it to me. With hindsight I can say quite honestly I should have been more aggressive but that is purely hindsight. At the time from my observation everybody was trading very well and therefore I accepted what he told me” (t/s 1522).

[227] Mr Waghorn made a note on the print-out for 16 May that the electricity profit would offset the outgoings shortfall and adjusted the figures by deleting the outgoings shortfall but, as he conceded subsequently in cross-examination, he fell into error by failing at the same time to delete the electricity income (exhibit 3 pages 139, 140). He made no change to the vacancy allowance. With these amendments the next print-out gave a valuation figure of $485.981m (exhibit 3 page 126).

[228] Later in the afternoon Mr Waghorn spoke to Mr Burgess (exhibit 253/115) telling him that his valuation would be $485m based upon a completion date of 12 May 1988 and that this was an increase of $5m on the November 1987 valuation. Mr Waghorn said he explained the figures to Mr Burgess who wished to “come over and see them” (t/s1473) and particularly go over the Heshbah Pty Ltd and Heprose Pty Ltd (Beaumont companies) figures as they were $1.2m short. Mr Burgess said that with percentage rent included the total rent would be near to $35m. Mr Waghorn made notes of this visit on the summary page of the print-out for 16 May. Mr Burgess told Mr Waghorn that the model contained a $1.2m error in showing the Food Court rental as coming from Elizabeth Street specialties. Mr Waghorn noted on the model (exhibit 3 page 124) that he should correct the entries for Heprose and Heshbah “to show seating prep in each case $3,704 [not] $2,500”. And “Eliz[abeth Street] $8.95m rent says Guy”. He made a note to adjust Heshbah and Heprose rents on the print model (exhibit 253/111 page 2). Mr Waghorn assumed that the effect of his error about the attribution of the food rent was to increase the base rental by $1.2m and showed this as $35.3m on the print-out he used during Mr Burgess’s visit (exhibit 253/111). He then calculated the new valuation figure of $493m which he wrote in red at the bottom of that document and rounded down to $490m.

[229] On the back of the print-out document Mr Waghorn wrote the word “letter”. He said that Mr Burgess told him that he needed a letter to report Hillier Parker’s 69

“answer” (t/s 1469). Notes of other matters discussed were the adjustment of the vacancy allowance for which some calculations are set out at the top of the page; a reference to the Retail Surveys Report that 30m people per annum would pass through the centre. (Mr Waghorn said he was aware that this was an old report); and three notes about Tops that the wheels which were so noisy and had been the cause of considerable complaint were to be changed next month; that the lighting was to improve and “Beaumont family now involved”. This Mr Waghorn said indicated that he had “a lot of concerns” about Tops and expressed them to Mr Burgess (t/s 1583).

Day 16 – Tuesday 17 May – Final Work on Valuation

[230] Mr Waghorn changed the area and the rental to be paid by Heshbah and Heprose as instructed by Mr Burgess and made a corresponding reduction to the areas in Elizabeth Street on the computer model. This would not increase the base rental, as Mr Waghorn thought, but would change the growth category into which the $1.2m rental figure fell moving from the lower growth category of retail to the higher growing category of food. He made a minor change to the vacancy allowance for the years 1992 and 1993 adjusting them down from 1.4 per cent to 1.3 per cent of retail (exhibit 3 page 102). These calculations gave a valuation of $488,206,000 (exhibit 3 page 105). Mr Waghorn wrote in hand on the previous page “As at completion say $490m” (exhibit 3 page 104). There were no further changes to the computer model and part of it appears in this form in the valuation report at Appendix 23. Mr Waghorn prepared a draft account to “Chase Corporation (Australia) Property Group Limited” for $80,000 for “your instructions to prepare a revaluation of the property … Preparing our revaluation in the sum of $490 million as per our report dated 12 May 1988”. The typed figure of $480m has been altered by hand to $490m (exhibit 253/117).

The Hillier Parker letter of valuation of 17 May 1988

[231] Mr Waghorn signed and delivered the letter of valuation to Mr Burgess at PEL dated 17 May 1988 described as “valuation on completion” (exhibit 253/116; exhibit 36). A copy of this letter was given by Mr Burgess to Mr Ryan and Mr Garmston was likely to have read it. “We refer to your instructions, in writing, to prepare the revaluation of this property and we are pleased to report that most of the calculation work has now been completed, in advance of the final report document being prepared.

A formal valuation of the entire project is now being written up and the documentation should be completed within approximately three weeks.

Based upon the information that you have so far supplied to us in the form of tenancy schedules, lease documents, TIF forms, vacancy schedules, storage area drawings and all other documentation ... we have formed our opinion of the value of the property, as at completion, namely 12 May 1988. … 70

Our consideration of the value of the property has been based upon our perception of the market, and on the additional assumptions, in particular that the development has received full approvals ... and that no changes whatsoever in construction, leasing, and market will take place, and that rentals achieved are as stated by you.

This letter is to stand as an appendix to the valuation report and will form part of the said valuation report in due course.

This document, in common with the full report aforesaid, is for the use only of the party to whom it is addressed and for no other purpose. No responsibility is accepted to any third party who may use or rely on the whole or any part of the content of this letter or the subsequent valuation report.

Accordingly, it is our opinion today that the property as described ... has a value as at practical completion, in the sum of Four Hundred and Ninety Million Dollars ($490,000,000) Australian.”

The Colliers letter of valuation of 18 May 1988

[232] On 18 May 1988 Mr Tidbold on behalf of Colliers forwarded a letter of valuation to Mr Garmston and, in accordance with his instructions, to Mr Burgess (exhibit 37; exhibit 273/53). Mr Tidbold said that he had been requested by Mr Burgess to send his valuation letter to both parties (t/s 1768-9). The Colliers valuation letter stated “We wish to advise that our capital Valuation of this property as at May 18, 1988, will be $500 million, subject to the existing tenancies, financial data relevant as at this date, assumptions, terms and conditions, which will be contained within our completed Valuation Report.

The complexity of this Valuation assignment has been enormous due to the large number of tenancies, the fact that the Centre has only just been opened and also due to the unique character of the property which is a “first” for Australia.

We will continue with the completion of our report as expeditiously as possible”.

The response to the letters of valuation

[233] Interchase acted on these letters as giving rise to an obligation under the Development Agreement to pay a bonus to PEL which it did. The minutes of the meeting of the directors held on 26 May 1988 attended by Mr Glew noted Mr Ryan’s report containing a reference to “the independent valuation of The Myer Centre by Colliers of $500m and Hillier Parker of $490m averaging $495m and the successful formal opening of the Centre on 21 April 1988 by the Governor of Queensland” (exhibit 38). A press release was tabled at the meeting announcing the “average independent valuation of the Centre by Hillier Parker and Colliers International being $495m together with a statement of the valuation’s impact on 71

the net tangible asset backing of the shares in the Company in comparison to the Prospectus”. It was resolved that the announcement be approved and the secretary, Mr Masterton, was instructed to advise the Sydney and Wellington Stock Exchanges immediately (ibid). In the preliminary final statement for the year ended 30 June 1988 the following appeared “The Directors have resolved to value The Myer Centre at $495 million as at 30 June 1988. Independent valuations for the Centre, in accordance with the Development Agreement, by Colliers International and Hillier Parker resulted in an average valuation also of $495 million.” (exhibit 72)

[234] Interchase made a public announcement of the valuation of The Myer Centre on 26 May 1988 under the hand of Colin Reynolds as chairman. The following was sent to the Australian Stock Exchange “The Board of Directors of Interchase Corporation Limited advise that the company’s investment property in Brisbane, The Myer Centre, has been revalued. Hillier Parker and Colliers International have independently valued the Centre resulting in an average figure of $495 million, an increase of $25 million on the Prospectus forecast valuation. The Net Tangible Asset Value, currently projected on 30 June 1988, rises to $2.89 per share or $2.66 after calculating the influence of the full conversion of notes. Previously, the Net Tangible Asset Value set out in the Company’s Prospectus was $2.66 per share and $2.52 per share respectively.” (exhibit 67) Whilst Mr Curran said he (and the other directors) expected a more lengthy valuation report, nonetheless Interchase accepted that the valuation figures were contained in the two letters and that accordingly the announcement should be made promptly to the market (t/s 1425). The Hillier Parker files contain two newspaper reports of the announcement: The Australian Financial Review for Friday May 27 and the Courier-Mail for the same day making it clear that the Hillier Parker and Colliers valuations had been averaged to give the valuation figure of $495m (exhibit 273/63, 64).

[235] Mr Berkovic, Mr Ryan and Mr Garmston understood that these were the valuations referred to in the terms of the Development Agreement and acted upon them as required. Mr Ryan, Mr Curran and Mr Berkovic then directors of Interchase said that had the valuations come in at lower than $425m Interchase would have pursued its entitlements under the Development Agreement. There is no reason not to accept this evidence. The minutes of Interchase’s Board meeting to that time demonstrate an independence from CCA and other wholly owned subsidiary Chase companies.

Preparation of valuation reports

[236] After the valuation letter was sent to PEL Mr Waghorn continued to undertake further work on the valuation. He said that he continued to discuss with Mr Burgess what further work he would do (t/s 1480). By a note to his secretary on Thursday 19 May Mr Waghorn indicated that there would need to be several drafts before the final report and asked her for a first draft by the following Wednesday 72

(exhibit 253/188). He sought the advice of Hillier Parker’s solicitors in Sydney on the leverage lease although he had Mr Burgess’s assurance that it would not affect the valuation.

[237] On 19 May Mr Clare sent Mr Burgess a copy of Centre Management’s turnover report for April 1988 (exhibit 48). Mr Clare prepared his report dated 20 May for circulation to the Hewsea board prior to the meeting. The report returned to the continuing problems in Albert and Elizabeth Street and the disputations with tenants with the action being taken. The Expo extended trading hours were monitored and indicated that a number of evenings were unsuccessful while others such as Friday and all day Saturday trading were very successful. Mr Clare noted that the noise levels associated with the Tops roller coaster was being addressed. The losses due to vacancies were set out ($253,272) daily turnover information from the Myer Store, each of the Beaumont tenancies and the car park together with rent and outgoings outstanding (at the end of April: $567,521, at 19 May, April arrears $130,497; at 19 May, May rentals outstanding were $471,372), a debtors’ report and a trial balance of the debtors’ debts. Interchase maintains that this was material which was available to Mr Waghorn to test the stability of the rental streams and not to have done so was negligent. The third and fourth defendants on the other hand submitted both that post-completion date (18 April) material could not be considered and that such early material was of no use.

[238] Mr Waghorn was in Mackay for a few days on other business and on his return on 26 May he telephoned Mr Burgess to let him know that he had returned and that the first draft of the report was being completed by his secretary. He noted “Interchase want figures secret” but said that by this he understood that “Burgess” wanted the figures to remain confidential. Mr Burgess was to read the draft once it had been edited (exhibit 253/121; t/s 1475).

[239] A second draft of the valuation report “as at 27 May 1988” was prepared (exhibit 253/122). Mr Waghorn said that it was unlikely that that draft would have gone to Mr Burgess because there were still too many details being researched. He was looking for better statistics about Coles Myer to indicate what an outstanding tenant it was. A file note suggests that Mr Waghorn tried to speak to Mr Burgess by telephone on Friday after reading the media release. He managed to contact him on the following Monday, 30 May, and recorded “News release - would have been nice if we had been advised” (exhibit 253/125). Mr Waghorn was particularly concerned at what he perceived to be a lack of courtesy on the part of Mr Burgess in not advising him that there would be a press release about the valuation after Burgess had asked for confidentiality. In response to a question from Mr Hampson about the reference to an average valuation in the newspaper reports Mr Waghorn somewhat disingenuously said that he could not specifically recall what they said “word for word”. His concern principally was that the figure had been announced (t/s 1478). He also discussed with Mr Burgess that there were no major leases in place only agreements to lease and learned that it would be three weeks before the lawyers could finalise the documentation. Interchase submits that this shows that Mr Waghorn still regarded himself as actively investigating the valuation. There is no doubt that he was still obtaining data for his report. The Hillier Parker memorandum of fees was sent on 30 May but Mr Waghorn thought that he would have discussed further work with Mr Burgess thereafter (t/s 1480). 73

[240] There had been a number of letters of complaint sent to Centre Management from some tenants particularly in the Albert Street level. The Hillier Parker files contain a copy of a report in the Courier-Mail for 7 June 1988 concerning these complaints (exhibit 253/128). It commenced “Tenants of the Myer Centre’s Albert Street level are up in arms over what they call ‘misrepresentation’ ... the tenants, who declined to be named saying they were involved in private negotiations with management about the problem, said they wanted management to provide compensation or rent rebates. Some had been considering legal action ...”. Mr Waghorn said that he had been speaking to the tenants at all levels but that he was quite unaware of these problems and none had been mentioned to him. He said that as a consequence of reading the press report he raised the matter with Mr Burgess knowing that the rentals from Albert Street were significant - $2.36m. He said that he spoke to Mr Clare about vacancy expectations but he did not speak to Mr Clare about the problems in Albert Street. Mr Burgess told him that negotiations were going on with the tenants and that everything would be resolved (exhibit 274 pp443-4).

[241] During early June Mr Waghorn reminded Hillier Parker’s solicitors that he needed advice on the leverage lease (exhibit 253/119) and received advice on 17 June to ignore it. He prepared a third draft valuation report to include this advice which he sent to Mr Burgess for comment on 17 June. This copy of the draft did not include any appendices although there was a list. The report was returned to Mr Waghorn with some amendments. Mr Waghorn maintained that his report was never completed, that there were missing documents which he would have included and would have made further refinements in the report. On the With Compliments slip from Mr Burgess attached to the draft report stamped as received 23 June Mr Waghorn wrote to his secretary “off we go to print and bind” and dated that direction 27 June 1988.

[242] The Centre Management’s report for May 1988 (exhibit 53) contained material which Interchase contends, had Mr Waghorn been diligent, he would have ascertained and been able to consider before signing off on the valuation report. The material in the report was prepared between 24 and 29 June. It recorded total turnover of $18.8m for May, a 22 per cent increase over the previous month; the rental income showing a 13 per cent shortfall due to continued disputes about lease details such as areas; specific marketing to increase the turnover shortfall being experienced on Albert Street and the Elizabeth/Queen Street mall corridor; performance reports for each tenancy; daily turnover information from the Myer Store and the car park; a vacant shop analysis; outstanding rents and outgoings; a debtor’s report and rental subsidy arrangements. At the Hewsea board meeting on 29 June Mr Clare was directed to send a letter to the Beaumonts expressing his concern about their operation of Tops. This he did on 7 July 1988 (exhibit 56).

The valuation reports

[243] Interchase received a copy of the Hillier Parker valuation report under cover of a letter dated 8 July 1988 from Mr Burgess “Please find enclosed herewith for your information and attention a copy of the Valuation on Completion as prepared by Hillier Parker.” (exhibit 39) The valuation figure of $490m was the same as in the letter of valuation. 74

[244] Mr Waghorn said that Mr Burgess had telephoned him about 7 July saying that the report was needed in a hurry and, although told it was incomplete, for example, not having tenancy schedules or calculations in it, Mr Burgess said they were unnecessary (t/s 1448). There is no file note reflecting a conversation of this nature which is unusual. The message to his secretary on 27 June would suggest that the report was as complete as Mr Waghorn wished it at that time. The amendments which he made as well as the comments from Mr Burgess are included in that draft. There is nothing in the draft to suggest that Mr Waghorn was waiting for further information. He said that he was waiting for a letter about the Beaumont’s financial standing from Mr Burgess but could not recall whether he did or he did not get that letter (t/s 1499). Mr Ryan had asked Mr Burgess for the valuation reports for the Interchase board meeting for the following week. Mr Ryan informed Mr Burgess on 7 July 1988 that although Interchase had received Colliers draft valuation “the formal complete valuations have not come in from them or Hillier Parker. Could you advise them that we require to submit them to our Board Meeting next week and advise the Stock Exchange of their receipt for inspection” (exhibit 69). Hillier Parker report included no qualification about incomplete appendices nor did Mr Waghorn, apparently, seek to deliver what he said was missing subsequently.

[245] Mr Tidbold indicated in the Colliers covering letter sent with the completed valuation report to Mr Garmston that two copies of the report were delivered to Mr Burgess “of Chase” (exhibit 88). The valuation figure of $500m was unchanged from the letter.

Were the letters/reports Completion Date Valuations?

[246] The third and fourth defendants contend that Hillier Parker and Colliers were not retained to produce Completion Date Valuations and the valuations were not of that character. If that is so there was no obligation on Interchase to make payments to PEQ in accordance with the formula in cl 10 of the Development Agreement and the third and fourth defendants contend, it was unreasonable to have done so and any causal link between a negligent valuation and the alleged loss to Interchase was thereby severed.

[247] It is well established that parties who agree to be bound by a valuation made by a third party will continue to be bound as between each other even if the valuation is made negligently. The important question is whether the valuation is in accordance with the contract. As was observed by McHugh JA in Legal & General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314 at 335-6 “While mistake or error on the part of the valuer is not by itself sufficient to invalidate the decision or the certificate of valuation, nevertheless, the mistake may be of a kind which shows that the valuation is not in accordance with the contract. A mistake concerning the identity of the premises to be valued could seldom, if ever, comply with the terms of the agreement between the parties. But a valuation which is the result of the mistaken application of the principles of valuation may still be made in accordance with the terms of the agreement. In each case the critical question must always be: Was the valuation made in accordance with the terms of 75

a contract? If it is, it is nothing to the point that the valuation may have proceeded on the basis of error or that it constitutes a gross over or under value. Nor is it relevant that the valuer has taken into consideration matters which he should not have taken into account or has failed to take into account matters which he should have taken into account. The question is not whether there is an error in the discretionary judgment of the valuer. It is whether the valuation complies with the terms of the contract.”

[248] The terms of cl 14 and the retainer and the definition of “qualified valuer” have been set out. The third and fourth defendants allege disconformity between cl 14 of the Development Agreement and the letters of retainer in a number of respects.

[249] The first alleged departure from cl 14 is that the commissioning party was PEL and not PEQ. The third and fourth defendants submit that cl 14 did not allow of any agency on the part of a commissioning party and since PEQ did not retain Hillier Parker it was not retained within the meaning of the Development Agreement. There is nothing in cl 14 to exclude agency. By cl 23 PEL covenanted to perform all of PEQ’s obligations. There is evidence to support Interchase’ s acceptance of PEL’s agency in the letter to Mr Burgess at PEL from Interchase under the hand of Mr Garmston of 22 July 1988 (exhibit 89) referring to the agreement prior to the retention of the valuers that the fees to the valuers would be borne equally by the two commissioning parties, (see also exhibit 76).

[250] The second alleged disconformity is that the valuation was not a market valuation at the date of practical completion because the retainer only identified this date as “prior to mid-April” and never communicated the correct date to Hillier Parker. The date of practical completion was 18 April 1988. This was not known at the time that instructions were issued. In the Development Agreement the date for practical completion was 13 May 1988. There is a shift of dates in the correspondence and notes but Mr Waghorn noted 15 May after a telephone call from Mr Burgess as the date of practical completion and this was the date set out in his valuation report (12 May in letter).

[251] The Colliers July valuation report was at the date of practical completion, 18 April, while the May letter appeared to be 18 May. The third and fourth defendants submit that a possible explanation is that Colliers were not notified of the date of practical completion until after the letter of valuation, in which case the report replaces the letter. Another and likely explanation is typographical error. The letter was produced in some hurry and the co-incidence of the figure “18” and that it was written in May would support this conclusion. The expert valuers agree that there is no difference in value between 18 April and 15 May or indeed July 1988. The third and fourth defendants assert that even so they were not Completion Date Valuations and this mistake cannot be ignored. This alone in my view would be insufficient for Interchase to have avoided paying the Development Sum.

[252] The third and fourth defendants submit that the most serious departure from the provisions of cl 14 is the direction in the letters of retainer that the valuers take into account “all deals done between the date of the valuation and the completion of the report” when cl 14 speaks only of a valuation at a specific date. The commissioning parties, however, clearly agreed to vary this provision in the Development 76

Agreement by issuing common letters of retainer. The advantage in so doing was recognised in the memorandum from Mr Garmston to Mr Berkovic (exhibit 89) as presenting the valuers with the same hard data in a difficult valuation exercise.

[253] The fourth area of disconformity identified by the third and fourth defendants relates to the failure to refer to the discretionary matters set out in cl 14, namely, the rental guarantee, the leverage lease and Myer’s rights under the Myer lease agreement. The letter of retainer did not specifically give the valuers a discretion about each of those three matters but they were included as material to consider. They were directed to take into account the rental guarantee and were given copies of the leverage lease and the Myer lease agreement. Subsequently Hillier Parker was told to ignore the leverage lease after making enquiries for the purposes of valuation. Nonetheless Mr Waghorn had Hillier Parker’s solicitors give him advice about the leverage lease and as to whether it would affect the valuation. The direction to take into account the rental guarantee did not prevent Mr Waghorn from making an appropriate comment about it in the body of his report. The failure to indicate that the leverage lease and the Myer lease agreement terms were to be taken into account or not as the valuer thought fit did not deprive the valuer of that discretion. The consensus of opinion of the valuers was that the existence or otherwise of the leverage lease would make no difference to the valuation of the property. These matters were not so obviously in disconformity with cl 14 as would suggest that Interchase could avoid its obligations under the Development Agreement so as to decline to pay the Development Sum calculated by reference to those valuations.

[254] The third and fourth defendants argue that there was a failure to inform Colliers that they could obtain information from PEQ. In fact Colliers were made aware that information could be obtained from Mr Burgess in the course of the retainer. That it was not set out in the letter of retainer is not of significance.

[255] The final disconformity with cl 14 alleged by the third and fourth defendants was the failure of PEQ through Mr Burgess to instruct Hillier Parker to send a copy of its valuation directly to Interchase. As I have concluded, the failure to include this provisions in the letter of retainer must have been an oversight. Mr Burgess provided Hillier Parker’s valuation letter promptly to Interchase as Hillier Parker knew and the final valuation report when it was received by him was sent to Mr Ryan at Interchase. Any disconformity was waived by Interchase and it was reasonable to do so.

[256] Although not a departure in instructions, the third and fourth defendants contend that the agreement between Interchase and PEL to share the cost of obtaining the two valuations equally rather than that each be responsible for the costs of its own valuation as provided for in cl 14 was a significant departure from the terms of the Development Agreement. This was a matter which they were free to agree about in the way in which they did which in no way affected the purpose of cl 14.

[257] The third and fourth defendants argue for much the same reasons as advanced in respect of the retainers that the valuations produced by Hillier Parker and Colliers respectively acting on the retainers were not Completion Date Valuations. For the same reasons the variations are not such as to suggest that the valuations were not in accordance with the Development Agreement (or as mutually varied) so that 77

Interchase could have avoided the consequences of the Development Agreement, Legal & General Life of Australia Ltd v A Hudson Pty Ltd [1985] 1 NSWLR 314 335-6. The important point is that there was no departure from the essential terms of the Development Agreement for fixing the Development Sum, as was understood by Hillier Parker, such as to affect that knowledge.

[258] Interchase pleads in the alternative that the letters or the full valuation reports constituted Completion Date Valuations, but it pleads that payments made after the delivery of the letters and before the delivery of the reports were made as advances on account of moneys which may have become payable pursuant to cl 10A.2 of the Development Agreement which suggests a contention that the reports were the valuations pursuant to cl 14. Interchase and PEQ (through PEL) appeared to consider that the valuation letters triggered the provisions of the Development Agreement. The terms of the valuation letter of 17 May (exhibit 36) suggested that although interim in the sense that it was not the formal report, it was to be incorporated in the final report and the figure would stand. Further material was provided by Mr Burgess after the delivery of the letter from Hillier Parker for incorporation into the final report which needed to be available for perusal. Clause 14 does not require a detailed report only two figures of valuation for the Valuation Receipt Date (cl 1.1) to arrive for the purpose of cl 10B.1.4 (time for payment). Had the valuers on consideration of the further material adjusted their valuation figure it is likely that it would have been accepted as the Completion Date Valuation. As is mentioned below, had the valuation letter figure been at $380m more likely than not PEQ would have argued that the full valuation report was required before an obligation to pay was imposed. The conclusion to which I come is that the obligation to pay in cl 10A became operative from seven days after the delivery of the report to each party. This will have most relevance to the question of interest.

[259] Although amendments made by Interchase to the statement of claim in the course of the trial pleaded in the alternative that PEQ and Interchase made an oral agreement to treat the letters and/or the reports as Completion Date Valuations the submission was, in effect, that both commissioning parties believed and understood the letters and subsequent reports to fit that description and acted in accordance with that understanding and if they were non-conforming it was not unreasonable of Interchase to have that understanding and to make payments in accordance with the Development Agreement. Mr Ryan’s evidence supports that conclusion (t/s 224-5) as do the minutes of the Interchase board meeting of 26 May 1988, the press release and the annual report (exhibits 38, 67 and 72). Much was made by the third and fourth defendants of the failure to call Mr Hoog Antink and Mr Glew to support this contention. The evidence and submissions do not support the allegation of an actual oral agreement to treat the letters/reports as Completion Date Valuations but I think it is not necessary to go so far. No sensible adverse inference can be drawn from the failure to call Mr Hoog Antink and Mr Glew on this matter. There would have been no foundation for an argument from Interchase that disconformity permitted it not to be bound by the Development Agreement. All parties (given the common directors for PEQ, PEL and CCA) agreed by conduct to treat the valuations as giving rise to obligations under the Development Agreement. The third and fourth defendants cannot argue that any disconformity absolves them from their obligations. 78

Disclaimer [260] The third and fourth defendants contend that the expressions of disclaimer of liability set out in the valuation letter and the report as well as an implied term derived from prior dealings and the custom of valuers excluded liability to Interchase. There is ample authority both in Australia and England to the effect that a person cannot be directly affected by a term of a contract between two other parties excluding liability to that person even though the contract itself might circumscribe the ambit of the duty owed, Haseldine v CA Daw & Son Ltd (1941) 2 KB 343 at 379 (the cases relied on by the third and fourth defendants, Piening v Wanless (1968) CLR 498 (on appeal from Wanless v Piening (1967) 68 SR (NSW) 249), Meth v Moore (1982) 44 ALR 409 and Gardiner v Henderson & Lahey [1988] 1 Qd R 125 do not answer this point); Voli v Inglewood Shire Council (1963) 110 CLR 75; Bryan v Maloney, (supra); Hill v Van Erp, (supra); Leigh and Sillivan Ltd v Aliakmon Shipping Co Ltd [1986] 1 AC 785; and White v Jones [1995] 2 AC 207.

[261] The Hillier Parker letter excluded liability to any third party. None of the officers of Interchase who gave evidence, Mr Ryan, Mr Berkovic nor Mr Garmston regarded Interchase as a third party vis-à-vis Hillier Parker because as far as they were concerned Hillier Parker knew that there were to be two valuations to establish the price under the Development Agreement. They did not regard the disclaimer paragraph, something with which they were all familiar in valuers’ opinions, as giving cause for concern for this reason. There was no reservation of liability when the retainer was accepted by Hillier Parker. It might well be argued that the reference to “all parties to the valuation” in the letter from Hillier Parker to PEL on 7 April 1988 (exhibit 25) was a reference, inter alia, to Interchase (t/s 1384) and Mr Waghorn accepted that that was so (t/s 1606). No previous arrangements for valuations between PEQ (PEL) or Interchase and Hillier Parker established a course of dealing because those valuations were for different purposes. The fuller disclaimer in the report could not operate retrospectively to exclude liability. Since Hillier Parker and Mr Waghorn knew the purpose of this valuation they cannot have contemplated that the other party (Interchase) which would be bound by the average of the valuations, would have come within the description of a third party acting in reliance on it. The mere inclusion of a formula disclaimer against the background of the relationship and the knowledge of Hillier Parker cannot absolve Hillier Parker from any found liability.

Duty of care

[262] Interchase rests its claim to damages from Hillier Parker in tort. The third and fourth defendants have argued that there was no assumption of responsibility to Interchase and therefore Interchase could not make it liable by resort to the contract between Hillier Parker and PEQ. Interchase contends that liability is imposed upon the third and fourth defendants because Hillier Parker undertook the valuation in the knowledge that its purpose was to fix the price under the Development Agreement. Interchase submits that there is nothing novel about this claim which is an example of an established category of case where a duty of care has been found to exist particularly in the context of professional persons. 79

[263] It is settled law that an action for damages for negligence will lie against a valuer to whom the parties to a contract have referred the question of valuation if one of them suffers loss as the result of his negligent valuation, Arenson v Arenson [1977] AC 405; Legal & General Life of Australia, supra per McHugh JA at 335; Holt v Cox (1997) 15 ACLC 645 at 651, 659; and see also the early case of Jenkins v Betham (1855) 15 CB 168 analysed in Arenson in terms of Hedley Byrne principals of reliance at 422. Once it has been established, which I have found it has, that the third and fourth defendants undertook the valuation with knowledge of its purpose and an understanding of the consequences for Interchase it was reasonably foreseeable that a negligently produced over-valuation would cause loss to one party to the Development Agreement whilst a negligently prepared under-valuation would be productive of loss to the other. It requires no further discussion than to note that the established law requires something more than reasonable foreseeability to found liability for economic loss alone which is the case here and that such liability is not readily imposed, Caltex Oil (Australia) Pty Ltd v The Dredge “Willemstad” (1976) 136 CLR 529 at 555, 558-9, 592 and 598. As Gleeson CJ observed in Perre v Apand Pty Ltd (1999) 73 ALJR 1190 at paras [4] and [5] of his reasons the consequences otherwise would be intolerable and the law of negligence must be kept within the bounds of common sense and practicality. The identification of the factor additional to that of reasonable foreseeability is far from certain with various touchstones being selected to lead to the Holy Grail of certainty. Nor can it be said, with any real degree of confidence, what criterion is currently favoured in Australia, Perre v Apand Pty Ltd per McHugh J at para [76]; and Swanton and McDonald, “Liability in Negligence for Pure Economic Loss” (2000) 74 ALJ 17. Whether the touchstone is a relationship of proximity between the parties or whether the facts support a “special” relationship or whether they fall within a category of case being developed incrementally and by analogy or whether the “salient features” of the case support liability, to mention some of the criteria used in recent cases, may not greatly matter in this case.

[264] The factual circumstances reveal a very close relationship between the third and fourth defendants and Interchase. They have been canvassed in detail above. A party in the position of Interchase was not therefore a member of “an uncertained class”, Caltex Oil at 555, 568 and 591. There is no competitive edge gained by a party in the position of Interchase in these circumstances such as to discourage the imposition of liability, Bryan v Maloney (1994-1995) 182 CLR 609 at 618. The valuers’ task in this case was to provide an open market valuation not a valuation pitched as high or as low as possible for the advantage of the retaining party. This also disposes of the “shot at from both sides” argument adopted by the third and fourth defendants from Sutcliffe v Thackrah (1974) AC 727 and Arenson. Any duty of care in tort owed by the third and fourth defendants to Interchase was in respect of the performance of the work in which a corresponding duty, in contract, was owed to PEQ, Hill v Van Erp (1995-1997) 188 CLR 159 at 171.

[265] The third and fourth defendants contend that far from Interchase being vulnerable, a factor disposing towards the imposition of liability in some recent judgments, it could have protected itself by specific terms in the retainer between Hillier Parker and PEQ or by different terms in the Development Agreement. That seems to misunderstand the reference to vulnerability in cases such as Caltex Oil and Perre v Apand. Vulnerability is called in aid as a limiting factor for liability particularly to 80

solve the problem of potentially indeterminate liability. Interchase was vulnerable to the knowledge of the third and fourth defendants because of the terms of the Development Agreement about which they knew. I conclude that Hillier Parker owed a duty of care to Interchase in fixing the valuation of The Myer Centre Brisbane. Mr Waghorn’s liability in his personal capacity raises further issues which it is convenient to consider now.

Personal liability of Mr Waghorn

[266] Interchase has sued Mr Waghorn in negligence in his capacity as a valuer in the employ of Hillier Parker. He signed the impugned letter and report not as an individual valuer but as a member of the Hillier Parker organisation. It was entirely fortuitous that he was principally concerned in carrying out the valuation. Had Mr Richardson remained in employment with Hillier Parker there is little doubt that he would have been the valuer who did the job. The whole course of dealing between Interchase and Hillier Parker demonstrates that it was that company and not any particular individual within its employ that was within its contemplation. The Development Agreement identified Hillier Parker as a “qualified valuer” for the purpose of preparation of a Completion Date Valuation.

[267] The Canadian Supreme Court considered the point in Edgeworth Construction Ltd v NDL Lea & Associates Ltd [1993] 3 SCR 206, a case cited with approval by the House of Lords in Williams v Natural Life Ltd [1998] 1 WLR 830 at 836. The plaintiffs lost money as a result of errors in the specifications and drawings prepared for a Province by an engineering company. The Supreme Court of Canada held that by affixing their seals to the drawings the individual engineers did not assume personal responsibility to the plaintiffs. Lord Steyn in Williams said that the test was whether a plaintiff could reasonably rely on an assumption of personal responsibility by the individual who performed the services on behalf of the company at 837. See also Phelps v Hillingdon London Borough Council [1999] 1 WLR 500 involving the rather different relationship of child and educational psychologist employed by the defendant local authority.

[268] There is nothing in the pleadings and no basis in the evidence adduced at the trial for concluding that Mr Waghorn should be made personally liable for the negligent performance of his work as a valuer employed by Hillier Parker. It is however convenient to continue to refer to him as a defendant in the balance of the reasons.

Standard of care

[269] The standard of care required of the third and fourth defendants was that degree of care and skill which a reasonably competent valuer professing that skill would have applied to the task in hand. Although the usual practice in such cases is to receive evidence from other valuers of accepted expertise the court is not obliged to accept the practice supported by the body of opinion in the relevant profession or trade if it forms the view that that opinion falls below an acceptable standard, Rogers v Whittaker (1992) 175 CLR 479 at 487.

[270] The valuers who gave evidence agreed that there is an aspect of valuation expertise which is not susceptible of precise analysis but reposes in the judgment of the 81

valuer. The profession of the valuer accordingly is not an exact science and experts may differ without forfeiting their claim to professional competence, Subaida v Hargreaves [1993] 2 EGLR 170 at 128A-B.

[271] A number of cases relied upon by the third and fourth defendants have recognised the concept of an acceptable range of value which may vary depending on the complexity and difficulty of the valuation exercise, Singer & Frielander Ltd v John D Wood & Co [1977] 2 EGLR 84; Corisand Investment Ltd v Druce & Co [1978] EGLR 86; Mount Banking Corporation v Brian Cooper & Co (1992) 2 EGLR 142; and Lewisham Investment Partnership Ltd v Morgan [1997] 2 EGLR 150, 153. The third and fourth defendants argue that even if there are negligent aspects to the valuation (indeed even if wholly negligently performed, it would seem) if the valuation figure falls within the appropriate range for the particular subject matter of the valuation it will stand. They rely on Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd (1995) 2 All ER 769 where Phillips J at 789 suggested that “one competent valuer may differ from another by as much as 20%”, and Corisand Investments where Gibson J at 94 accepted a plus or minus margin of 15 per cent from the right valuation. Valuers themselves readily accept the concept of a range and there is a danger in doing so of failing to address the true issue, namely, whether or not the valuer was negligent in performing the task in hand. In Banque Bruxelles in the House of Lords [1997] AC 191 (reported as South Australia Asset Management Corporation v York Montague Ltd) Lord Hoffmann observed at 221 “Before I come to the facts of the individual cases, I must notice an argument advanced by the defendants concerning the calculation of damages. They say that the damage falling within the scope of the duty should not be the loss which flows from the valuation having been in excess of the true value but should be limited to the excess over the highest valuation which would not have been negligent. This seems to me to confuse the standard of care with the question of the damage which falls within the scope of the duty. The valuer is not liable unless he is negligent. In deciding whether or not he has been negligent, the court must bear in mind that valuation is seldom an exact science and that within a band of figures valuers may differ without one of them being negligent. But once the valuer has been found to have been negligent, the loss for which he is responsible is that which has been caused by the valuation being wrong. For this purpose the court must form a view as to what a correct valuation would have been. This means the figure which it considers most likely that a reasonable valuer, using the information available at the relevant date, would have put forward as the amount which the property was most likely to fetch if sold upon the open market. While it is true that there would have been a range of figures which the reasonable valuer might have put forward, the figure most likely to have been put forward would have been the mean figure of that range. There is no basis for calculating damages upon the basis that it would have been a figure at one or other extreme of the range. Either of these would have been less likely than the mean: see Lion Nathan Ltd v. C. C. Bottlers Ltd., The Times, 16 May 1996.” Lord Hoffmann went on to observe at 223 82

“But the valuer would not in my view have incurred any liability if one or more if his comments had been wrong but (perhaps on account of compensating error) the valuation was correct.” If that latter statement needs any elucidation, with respect, it is clear that if no loss flowed from the breach of the duty to take care then an essential element for liability was missing. His Lordship’s observation is not an endorsement of the appropriateness of the range of values approach.

[272] This is borne out by Lion Nathan Ltd v C-C Bottlers Ltd [1996] 1 WLR 1438 a decision of Privy Council on appeal from the Court of Appeal of New Zealand where Lord Hoffmann delivered the judgment of the Privy Council. The appeal concerned the extent of the liability of a vendor of shares who gave a limited warranty as to the preparation of a profit forecast upon which the purchaser of those shares relied. It was submitted that since there was a range of deviation in any forecast the calculation of loss should be based on the difference between the forecast arrived at and the highest possible result within the range. At p 1444 his Lordship observed “The concept which the judge seems to have had in mind is the range of deviation from the mean which is a necessary element in any forecast. A forecaster who predicts that profits in a given period will be, say, $2,223,000, is not doing anything so silly as to say that in his opinion the profits will be precisely that figure. He is saying that $2,223,000 is in his opinion the most probable outcome but that figures slightly higher or lower are almost equally probable and that on either side of them there is a range of possible figures which become increasingly less probable as they deviate from the mean. The forecaster, if asked, should be able to supplement the bald figure with a statement of the limits of deviation to which confidence can be attached. In some cases, the information which he has may enable him to say that the probability of deviation outside fairly narrow limits is very small. In other cases, the possibility of the outcome being affected by unknown or unforeseeable factors may be much greater and the limits of foreseeable deviation therefore much wider. The same is true of a valuation of property, which is no more than an estimate of what a property would fetch on a given date, based upon induction from information about what similar property has fetched.” and at p 1445 he concluded “Their Lordships can for the moment postpone consideration of this question because in their opinion the judge’s use in this context of the concept of reasonable foreseeable deviation was in itself erroneous. As has been said, a forecast is always the forecaster’s estimate of the most probable outcome, the mean figure within the range of foreseeable deviation. The judge appears to have assumed that if a figure would have been within the range of foreseeable deviation from the mean of a properly prepared forecast, it must follow that it would have been proper to put that figure forward as the mean. This proposition has only to be stated to be seen to be fallacious. There is no connection between the range of foreseeable deviation in a given forecast and the question of whether the forecast 83

was properly prepared. Whether a forecast was negligent or not depends upon whether reasonable care was taken in preparing it. It is impossible to say in the abstract that a forecast of a given figure “would not have been negligent.” It might have been or it might not have been, depending upon how it was done. Assume, for example, that the vendor had forecast $1.25m. and that the limits of foreseeable deviation would have been regarded as $50,000 either way. Assume that the forecast was unexceptionable in every respect but one: there had been a careless double counting of sales which, if noticed, would have reduced the estimate by $25,000. To that extent, the estimate has not been made with reasonable care. If on account of some compensating deviation the outcome is $1.25m. or more, the purchaser will have suffered no loss and the vendor will incur no liability. But if the outcome is less than $1.25m., their Lordships think that the purchaser is entitled to say that if the estimate had been made with reasonable care, the figure put forward by the vendor as the mean and upon which he relied in fixing the price, would have been $25,000 lower. To this extent, he has suffered loss by reason of the breach of warranty. It is nothing to the point that the outcome is still within what would have been predicted as the limits of foreseeable deviation. His complaint is that the whole range of possible outcomes would have been stated as $25,000 lower. The purchaser has accepted the risk of any deviation attributable to factors which were unforeseeable, unknown or incalculable at the time of the forecast. He has accepted the risk of such deviation whether its true extent would have been foreseeable at the time of the forecast or not. But he has not accepted the risk of any deviation which is attributable to lack of proper care in the preparation of the forecast. The only tolerable forecast is one which, on its facts, was prepared with reasonable care.

Their Lordships think that the judge confused the concept of potential deviation between the forecast mean and the eventual outcome with a related but different concept, namely the variation which may exist in forecasts of the mean by different forecasters, all of whose forecasts are made with reasonable care. In other words, we are concerned here not with the possible variance between forecast and outcome, but with possible variances between one reasonable hypothetical forecast and another. Because the prediction of the mean involves questions of judgment and degree, there will obviously be a range of possible forecasts which can all be regarded as reasonable interpretations of all the relevant information.”

[273] It is, in my view, no distinction that the breach of duty in Lion Nathan was of an express contractual warranty whilst here the duty which was breached is in tort. The extent to which the cases, upon which the third and fourth defendants have relied, might suggest that there is an acceptable range of valuation and if the subject valuation falls within that range it cannot be negligent ought not be followed. As the Privy Council observed, this confuses two different concepts, namely, the potential deviation between the subject valuation mean and the correct valuation 84

and the variation which may exist in valuations by different valuers all of which are made with reasonable care.

[274] The expert valuers who had prepared reports and gave detailed evidence as to the practice of valuers in 1988 were Mr Cox, Mr Kernke and Mr Brett. Mr Willington, a very experienced valuer, as mentioned, had prepared a valuation for the underwriters to the Interchase float in 1987 and he was examined on these matters. They were generally agreed as to the appropriate methodology and approach that should be taken to a valuation exercise of this kind. Mr Brian Cox said of The Myer Centre that it was “Probably as complex as anything I’d encountered up to that point ... It stood outside the historic norm. It was - as I have said, it was somewhat experimental. It required somewhat of a revolution in the shopping habits of Brisbane South-east Queensland to draw shoppers back into the CBD. It was of a size and number of levels which were unique and to a large extent untried. It had a diversity of rental income from a diversity of different sources, not always traditionally related to a shopping centre, such as Taverns. The introduction of theatres was somewhat of a new concept at that time. Certainly the entertainment floor was largely a new experiment for a CBD.” (t/s 633-4) The differences between the valuers lay in matters of detail and although significant for the final valuation figure nonetheless make it possible for a common approach to be recognised. Their methodology differed significantly from that of Mr Waghorn.

[275] The valuers agreed that the principal valuation method to be used in valuing an income-earning investment property such as The Myer Centre in 1988 was the capitalisation of sustainable income. In 1988 there were alternative methods which tended to be used to check the capitalisation of earnings method. These included, ascertaining a rate per square metre value for the net lettable floor area which could then be easily compared to that of comparable properties; an analysis of future cash flow to determine at the adopted value that a satisfactory internal rate of return (IRR) is demonstrated, and the summation method of valuation which requires the valuer to ascertain the land value and construction cost less depreciation as a comparison with the valuation figure arrived at by the capitalisation method (in a new building development any significant discrepancy would be attributed to developer's profit, possibly in the vicinity of 15 per cent (exhibit 188)). As explained by Mr Cox (exhibit 188 page 6) the capitalisation of income method involves four basic steps

· the ascertainment of passing rental for the property;

· the ascertainment of market rental for the property;

· the adjustment of rental up or down to a sustainable level as indicated by the market and other relevant factors; and

· selection of an appropriate capitalisation rate having regard to all relevant factors including market sales evidence and security of the income adopted and applying it to that income. 85

[276] The lower the yield the higher the years purchase and consequently the higher the valuation figure. The yield is the market’s measure of the desirability of the property based on its ability to produce, maintain and increase its net income so that the more secure the income and the more potential there is for increasing income the lower the yield or capitalisation rate. Low capitalisation rates reflect low risk income and high income growth potential. The selection of the two multipliers, the net income and the yield, is dependent upon market research and analysis.

[277] The major criticism of Mr Waghorn’s valuation method as revealed in his report was a failure to investigate and substantiate the rents and a failure to engage in adequate sales analysis. If he had done so, Interchase maintains, he would have adopted a lower sustainable income and a higher capitalisation rate. Each of Mr Brett, Mr Cox and Mr Kernke analysed the rental streams of The Myer Centre and compared those rents with similar streams elsewhere and applied their findings to the tenancies in the Centre against the background of the rents agreed to be paid and, finally, compared the rental streams within the Centre.

[278] Mr Cox prepared a forensic report analysing Mr Waghorn’s valuation report (exhibit 188). The third and fourth defendants submitted that Mr Cox was isolated from the other expert valuers but that was not the case when looked at more closely. Apart from differences about the weight to be given to comparable sales, the major differences in approach were the reliance placed on early turnover figures by Mr Cox which Mr Brett and Mr Kernke considered of little or no value and the approach to the sustainability of the rentals for the Beaumonts. Those are differences which will be considered in due course.

[279] The third and fourth defendants submitted that there is a degree of irrationality in segmenting the capitalisation rates of a property like a large shopping centre when assessing the risk of the investment. This was the approach of the three expert valuers. The third and fourth defendants were critical of an approach which considered the sustainability of rentals and made any necessary adjustments and still made a decision about the appropriate capitalisation rate for each stream of income rather than an overall capitalisation rate. That process simply reflects an accepted view amongst valuers which is not unreasonable that at any given period under consideration not just the sustainability of the rentals but the degree of risk associated with that kind of tenancy ought to be considered.

[280] Mr Cox has been criticised by the third and fourth defendants for not applying the principles and practices set out in exhibit 188 to his own valuations or those of Richard Ellis by whom he was employed at the time. The third and fourth defendants particularly identify the failure to apply a segmented capitalisation approach to the valuation of The Myer Centre done by Mr A Weir in March 1989 where a single capitalisation rate of 7 per cent was applied (exhibit 286). This was not a valuation in the usual sense as is discussed below. Mr Cox signed (with Mr Kernke and Mr Weir) a valuation of Indooroopilly Shoppingtown in December 1988 (exhibit 203) which applied a single capitalisation rate. Mr Cox explained that this was one of a regular six monthly valuation exercise carried out for the Westfield Property Trust for a well established shopping centre which did not then have the disparate features of cinemas and taverns and did not have a paying car park. Nonetheless two valuations, the Wintergarden in Brisbane with a similar mix of tenancies in 1989 signed by Mr Cox (exhibit 204) and a Richard Ellis valuation 86

of Centrepoint and Leviathan Buildings in Melbourne in 1988 with many components was valued with a single capitalisation rate.

[281] The segmented capitalisation rate was regularly used even before 1988. It was referred to by Mr Richardson and was used by Hillier Parker for The Myer Centre Adelaide valuation. It was and is a convenient and rational way of approaching the difficult exercise when the income of the property derives from disparate rental components. Failure demonstrably to do so would not of itself suggest negligence but a valuer would need to make a very nice adjustment to the rentals of a shopping centre without trading form, one would think, not to go astray if this process was not used.

[282] Before embarking on his forensic analysis of Mr Waghorn’s report Mr Cox set out what he regarded as the approach which a competent valuer would take to a valuation of a property such as The Myer Centre (exhibit 188 pages 4-34). The only real dispute about what a valuer might have done in 1988 related to the extent of the investigation which should have been carried out in respect of the market data internal to the property for sustainability of the rents and other payments and the financial stability and standing of the tenants in respect of a property which has just commenced trading. An essential source of information for a valuer of a shopping centre was said to be centre management. That is relevant where the centre is established and irrelevant when the property to be valued has not started to trade. In this part of his forensic report Mr Cox suggested a number of ways in which a client might seek to influence the outcome of the valuation and the circumstances in which a valuer ought to decline instructions (exhibit 188 p 32). I did not discern any disagreement with those principles amongst the valuers who gave evidence.

[283] The magnitude of the task and the degree of care and detail which was expected to be brought to bear, Interchase contends, was reflected in the fee negotiated. Hillier Parker had charged $200,000 for the Richardson valuation of the Brisbane Myer Centre and a fee of $20,000 for Mr Waghorn’s review of that valuation in November 1987. It was expected that Hillier Parker, because of this experience, would be one of the valuers and is mentioned in the Development Agreement as qualified. This experience was the basis of the letter of instructions and retainer. The fee was $80,000 compared to that of Colliers of $115,000. Mr Willington said that a fee of $10,000 which his firm was paid for his overview valuation of The Myer Centre in February 1987 would reflect 10 “valuer-days” of work (t/s 349). While the magnitude of the fee should not be given undue weight it can assist in a controversial case in assessing the ambit of work expected. However no one in this case suggested other than that task in hand was complex and difficult and would require great care and skill to bring it to a satisfactory conclusion.

[284] Hillier Parker was a large, well known, international and national group with valuers upon whom it could draw in the main capital cities in Australia. Hillier Parker clearly regarded itself and was regarded by PEQ and PEL and, to the extent that it is relevant, by Interchase, as having the competence and skill to undertake the task. Mr Waghorn had available to him the resources of Hillier Parker in Brisbane and other Hillier Parker offices. He maintained that he was under pressure of time to complete the valuation but at the commencement of the retainer he was aware that the valuation would be required by mid-May as were other officers of Hillier Parker. The fee proposal provided by Hillier Parker in early April 1998 87

acknowledged that the valuation was required by 15 May. At no time was there any suggestion by Hillier Parker that this was too short a period to undertake the work to the requisite standard. It is not apparent from the material that anyone else in Hillier Parker was working on the valuation apart from receiving documents and enquiries from Mr Burgess whilst Mr Waghorn was away for two weeks. Mr Waghorn did not seek an extension of time. There was no evidence of an attempt to provide a more complete report containing missing material after the final report was delivered in July 1988. No expert valuer suggested that deficiencies in the report might be attributable to lack of time.

Breach – Mr Waghorn’s method of valuation

[285] It is not clear from Mr Waghorn’s valuation report which methods or method was used by him in his approach to the task. At page 49 of his report (exhibit 2) he states “From our experience in both the sale and valuation of properties in today’s real estate market, we believe that the ceiling price for ‘Retail Investment Properties’ is reflected by the capitalisation of the relevant nett income.” On page 46 he gives the yields for five comparable sales. On page 48 having concluded that there were no comparable sales he stated “In the absence of good comparable market evidence, we prefer our future income IRR analysis as to bases [sic] for the valuation herein.”

[286] When asked about these differences in his oral examination on 10 December 1993 in the Federal Court he demonstrated a degree of confusion about which was his prime method of valuation (exhibit 191, pages 263-267). In evidence-in-chief in this trial Mr Waghorn maintained that he used a segmented capitalisation of earnings method of calculation - the approach favoured by the expert valuers. However the files upon which Mr Waghorn was most dependent were those known as the “red book” (substantially contained in exhibit 3). It contains hundreds of spreadsheets of tenancy schedules, sensitivity analyses and net present value calculations. They do not support any particular approach. Mr Waghorn said that while he was using the discounted cashflow computer model, concurrently he carried out manual calculations and “Lotus” calculations adopting a capitalisation of earnings method and these calculations were kept by him in a folder marked “calculations” which was subsequently lost (t/s 1456). He attempted to reconstruct this lost calculations document which was tendered as exhibit 259. The evidence does not support this reconstruction. Mr Waghorn worked from the discounted cashflow computer model and reached his valuation by using that model.

[287] It is not unlikely that after obtaining a valuation using this model Mr Waghorn then considered segmented capitalisation rates and employed those that had been used in the November 1987 review which had an end capitalisation rate of 7 per cent for the discounted cashflow model. In order to produce a capitalisation rate of 6.75 per cent he reduced the Myer Store capitalisation rate from 6.5 per cent to 5 per cent. Myer was, of course, a very strong tenant but even so, both Mr Cox and Mr Brett fixed on a capitalisation rate of 6 per cent for the Myer Store. Mr Waghorn did concede that there was no capitalisation of earings calculation in 88

the valuation report nor in any of the drafts or papers upon which he was working and which were produced (t/s 1670). The net rental figure in the “red book” when Mr Waghorn was discussing the capitalisation rate with Mr Burgess was $33,819,000. When he said that he had given Mr Burgess a breakdown of the capitalisation rates it seems likely that he was referring to these income streams mentioned on 20 November 1987 because there was no evidence to show that anything had changed between then and 13 May on the print-outs. Mr Waghorn accepted that there had been no alterations and as a matter of calculation 6.75 per cent into the rounded up figure of $33.9m rent gives a valuation of $510m (t/s 1671-3).

[288] There is a real possibility that the calculations which Mr Waghorn believed lost which would indicate that a segmented capitalisation rate analysis was undertaken by him for The Myer Centre Brisbane were the calculations which he did for The Myer Centre Adelaide. That valuation report does include a segmented capitalisation rate calculation and exhibit 264 is a manilla folder with “Calcs” written in Mr Waghorn’s hand in pencil on the cover and contains many calculations identical to those contained The Myer Centre Adelaide valuation report. Mr Waghorn appears to have accepted that this was the case (t/s 1674-6).

[289] There are many errors in Mr Waghorn’s valuation. Some of them are of no importance and have no effect on the final figure merely indicating a lack of attention to detail. Others are more significant and have had a direct effect upon the calculation of the valuation figure adopted by Mr Waghorn. Some of these errors were admitted by Mr Waghorn in cross-examination and, with some adjustments in submissions, the calculations are not disputed by the third and fourth defendants.

[290] Interchase has included a schedule of errors of fact in the valuation report in its submissions which, with some modifications and deletions, is set out. Some are trifling and would not in the ordinary course be mentioned, but since there are many more serious there is some purpose in setting them all out.

Page Errors of Fact in the Hillier Parker Valuation

· Title “Date of Inspection: 10 May 1988” Mr Waghorn admitted that no inspection of The Myer Centre took place on this day.

· 2 “Purpose of Valuation” This statement remains from Mr Richardson’s earlier valuations. It was not recast to state the instructions upon which the valuation was to be prepared. It states that the Centre was being valued “today” rather than at the date of practical completion.

· 4 “Property Identification” This remains from Mr Richardson’s valuation. Hillier Parker did not obtain “Deeds of Grant/Certificates of Title” from the Titles Office. By the time of this valuation, there was only one certificate of title for the amalgamated lot (exhibit 2/5). It was provided to 89

Hillier Parker by Mr Burgess, and not obtained by Hillier Parker from the Titles Office (exhibit 2/5).

· 5 “Zoning” Contrary to the statement in the text, the relevant map and section of the Town Plan is not in the Appendices to the Report.

· 13 “The external facade ...” These paragraphs are included in section (g) concerning the Fantasy - Leisure Floor. They are concerned with unrelated topics (viz. the external facade of the property and the fall of the land across the site).

· 20 “Leasings” The statement that the vacancy of retail specialty space “is expected to be (zero) 0% by the end of this financial year according to the managers. See Appendices.” is not in accordance with the relevant appendix. Appendix 4 records the Centre Manager (Mr Clare) predicting a vacancy rate of 2 per cent or less.

· 21 “We have obtained from Myer Stores ...” The passage in the report reads

“We have obtained from Myer stores their estimate of turnover from the new store of 31,000 square metres for the next 15 years. Refer to photocopy of Myer stores letter in Appendices.

These forward estimates, the rate of growth and the trade per square metre, are as follows:-“

There is no photocopy of a Myer Stores letter in the Appendices.

These turnover estimates set out in the table were calculated by Mr Richardson not supplied by Myer. Myer gave specified turnover figures for each future year to Mr Richardson, exhibit 6. He calculated from these figures a column entitled “% increase for previous year”. After the opening, Myer advised that their projected turnover for the first year was now $110,000,000. Mr Waghorn projected this new expectation of turnover into the future at the rates of growth calculated by Mr Richardson.

· 26 “Turnover Rent Forecasts” The report states erroneously that there is a computer model of the Myer turnover rent included in the Appendices. 90

· 28 “The Beaumont Interests” The report describes the Beaumont interests as a percentage of “a total specialty lettable area of 35,387 square metres”. The net lettable area of specialties was approximately 18,000 square metres (exhibit 2 Annexure 23). The area quantified in the report is for the whole Myer Centre (including car park, theatres) excluding only the Myer Store itself (exhibit 2/23). The Report describes the Beaumont rent as a percentage of “total specialty rental income of $30,618,000”. The specialty rental adopted by Mr Waghorn is approximately $18,094,000 (exhibit 2/23). The rental quantified in the Report is for the whole Myer Centre, excluding only the Myer Store.

· 29 “The Beaumont Interests” The report contains references to material said erroneously to be included in the Appendices: “supporting material in the Appendices” relating to the Beaumont’s financial standing; and a photocopy of a letter dated 19 November 1986 concerning the Beaumont’s obligation to pay outgoings.

· 31 “Specialty Shops, Kiosks & Storage Areas” · The report stresses the importances of the above components but contrary to the statement in the report, there is no calculation sheet in the Appendices disclosing the calculation of an IRR; · Contrary to the report, there is no schedule of Specialty Leasings and Vacancies in the Appendices; · The leasing summary that is included as Appendix 23 contains errors in relation to specialty leasing (discussed below); · The IRR model allows for vacancies from year 4 (and not year 3 as is stated in the report) onwards (exhibit 3 at 102).

· 33 “Kiosks” The report suggests that 10 permanent kiosks were to be created. Mr Waghorn was instructed that there were 11 permanent kiosks and 11 appear in the “red book” tenancy schedule. The report states that, in respect of 8 casual kiosks, a schedule of letting on weekly licences for the period to Christmas 1988 had been prepared and was included in the Appendices. The only schedule which was prepared was a proposal for casual leasing of promotional and centre stage areas. This schedule is included as Appendix 9.

· 34 “Storage Areas” Contrary to the statement in the report, there is no tenancy schedule in the Appendices which identifies the storage areas which are let and vacant. 91

“Theatre Complex” There is an incorrect statement in the report about the rent review clause of the Hoyts lease as being reviewed every 5 years. The clause calls for no rent review for the first three years, with an annual increase thereafter of 7.5 per cent, (exhibit 2/19).

· 35 “Car Park ... Percentage Rental” The report states in respect of the car park that “We understand that the rent may remain constant for the first few years ... Therefore, in our financial projections, we have allowed an income from the car park to be fixed for the first five years. We have then applied a growth factor to provide for rental growth from year 6 onwards.” In reality in projections, Mr Waghorn allowed for a continual increase in the car park rent at a rate of 10 per cent per annum from year 1 which was inconsistent with the terms of the lease.

· 36, 49 “Sundry Incomes” The report states that “we have ignored [electricity profit] as any surplus balance will be consumed as the lessor’s contribution to the promotional fund”. Mr Waghorn’s calculations included the electricity profit but neglected to deduct any contribution by the lessor to promotional funds.

· 49 “For the vacant specialty shops ...” The report states that, “For the vacant specialty shops, we have ... adopted an estimated market rental level which we believe is appropriate for those areas. This level of rental is often below the target rent the developer has set for the vacant space. However, we believe it provides a measured degree of flexibility between the rents that are asked and the rents that may be achieved.” Mr Waghorn initially assigned rents to vacant specialty shops which were often below the developer’s target. These assessed rents were disregarded and the developer’s target rents adopted when undertaking the valuation calculation.

· A 4 “Letter of Instructions” This appendix does not contain the letter of instructions to Hillier Parker (exhibit 26). It contains later instructions concerning vacancy rates, some turnover figures and electricity profit and outgoings shortfalls.

· A 8 “Brisbane City Council’s Letter of Approval” This appendix is not a letter of approval by the Brisbane City Council. It is a letter of 3 July 1986 which advises that a 92

Committee of the Council has decided to support the proposed development.

· A 9 “List of Interests” This appendix contains a schedule of proposed casual leasing arrangements for two promotional areas in the Centre. It would appear that Mr Waghorn had erroneously regarded it as recording the licensees of casual kiosks (exhibit 2 p 33).

· A13 “Myer Stores Letter of Trading Projections” This appendix does not include a letter of trading projections for the Myer Store but duplicates part of Appendix 4.

· A23 “Schedule of Tenancy Areas & Rents Summarised” This schedule incorrectly includes the electricity profit and the developer’s budgeted rents (and not Mr Waghorn’s assessed rents) for vacant specialty shops.

· A25 “IRR Calculations” The full IRR calculations are not included in this Appendix. These calculations are in exhibit 255 (t/s 1525/55-1526/20). These calculations contain errors: · the inclusion of electricity profit.; · the use of an incorrect growth factors for rental from the car park, Hoyts, Butlers and Queen St Eat; · the use of developer’s budgeted rents (and not Mr Waghorn’s assessed rents) for vacant specialty shops.

[291] Calculation and other mechanical errors had an impact on Mr Waghorn’s calculation of the value of The Myer Centre.

(i) Electricity profit

[292] Mr Waghorn conceded that he had erroneously included the profit from the sale of electricity without an offset from the loss of outgoings in his computer model. This meant that the income for The Myer Centre for the first year was overstated by $506,000. When this was inserted into the computer model this income was treated as growing at an annual rate of 7 per cent for 10 years and capitalised in the eleventh year at a rate of 6.75 per cent. As a result the value of the centre was effectively overstated by approximately $6.6m.

(ii) Rental from the car park

[293] The computer model recorded the car park rental as growing at a rate of 10 per cent per annum for the 10 years of the model but the car park lease provided for the rent to remain fixed for the first three years and thereafter to increase at a minimum of 5 per cent per annum. The model capitalised the eleventh year’s income at a rate of 93

6.75 per cent. The effect of this error was to overstate the value of The Myer Centre by approximately $16.3m.

(iii) Rental from Hoyts

[294] The computer model recorded the cinema rental growing at rates between 0 per cent and 24 per cent when the lease itself provided for the rent to remain fixed for the first three years and thereafter to increase at a fixed rate of 7.5 per cent per annum. The model capitalised the eleventh year’s income by reference to these increases at a rate of 6.75 per cent. The error lead to overstating the value of The Myer Centre by $1.135m.

(iv) Developer’s budgeted rental for vacant specialties

[295] Mr Waghorn said that he had assessed the market rental for vacant specialty shops. The computer model applied the developer’s budgeted rents rather than his assessed market rental which resulted in an overstatement of the rents for the specialty shops of $229,239. This rent was shown on the model as growing through the 10 years cashflow period and capitalised in the eleventh year at a rate of 6.75 per cent. This error in effect added $3.2m to the value of The Myer Centre.

(v) Butler’s rental

[296] The computer model set out the rental from Butlers growing in the first year at 20.4 per cent rather than 7 per cent as Mr Waghorn had intended and showed this rental as growing throughout the 10 years of the cashflow period and capitalising the eleventh year’s income at a rate of 6.75 per cent. The effect on the value of The Myer Centre was to overstate it by $8.6m.

(vi) Queen Street Eat rental

[297] The computer model set out the rental growing during the first year at 22.5 per cent rather than 7 per cent which Mr Waghorn had intended and showed that rental as growing through the 10 year cashflow period and capitalised the eleventh year’s income at 6.75 per cent. The effect of this error was to overstate the value of The Myer Centre by $7.8m.

[298] The total of those errors in the calculations carried out to support the valuation was $43.6m. When asked to do so by Mr Hampson Mr Waghorn described his valuation “The valuation itself was certainly the right answer in my opinion. It had been very well researched by me and my team of colleagues in Hillier Parker and we had researched outside Hillier Parker in the market place. I believe it was a first class effort of arriving at a correct answer - at the correct answer.” (t/s 1501) The calculation errors, which were not exposed until after cross-examination, would suggest that this was an entirely misconceived view of the quality of the valuation report and without more indicates a departure from the standard of a reasonably competent valuer in 1988 (or at any time).

[299] Apart from these errors of calculation Interchase pleads particulars of specific breaches of duty, not all of which survived to submissions. Those no longer pressed 94

are para 26(A)(1)(j) and para 26(C)(viii) (pp 117 and 120 of the consolidated pleadings respectively). The particulars of breach are

· failure to consider separately each of the different income streams constituting the The Myer Centre’s total income to an annual rental of approximately $33m when a valuer, exercising reasonable skill and care, would have calculated the appropriate capitalisation rate only after assessing, weighting and averaging the different capitalisation rates appropriate for each of the different components in The Myer Centre, to arrive at an overall capitalisation rate of not less than 8.5 per cent being the minimum capitalisation rate appropriate for the income figure adopted by the third and fourth defendants (para 26A);

· in the alternative an appropriate capitalisation rate overall was 8.5 per cent (para 26B);

· the valuation was based on an assessment of a sustainable rental of approximately $33m when the sustainable rental was no greater than $27,877,110 (para 26C);

· no evidence of any potential purchaser who would be willing to purchase The Myer Centre for $490m was disclosed (para 26E);

These particulars were further particularised in great detail. They included an allegation that Mr Waghorn was unduly influenced by Mr Colin Reynolds’ address to the valuers’ conference in March 1988 and by Mr Burgess’ request for a value of The Myer Centre of $490m (para 26).

[300] When Mr Waghorn was carrying out his valuation the highest recorded sale price for a property in Australia was $340m for Central Plaza 1 and 2 (t/s 1666). That, of course, did not imply that The Myer Centre could not be valued in a significantly higher amount but it did call for a high degree of understanding of the property world in the Australian and Queensland context as well as meticulous analysis and Mr Waghorn did not appear then to have a sufficient understanding of the market to be responsible for such a difficult task.

[301] The valuers’ task was inter alia to assess the risks involved in this development. Since it had been open only six weeks at the time of the letters of valuation and just over three months when the full valuation report was delivered there was little by way of performance available to a valuer to assess the likelihood of success. The developers and all associated with The Myer Centre were enthusiastic about its concept and realisation and spoke only of its success. It was for an independent valuer charged to prepare an open market valuation to keep firmly in mind any areas of weakness. The size of The Myer Centre was a matter of significance. The completed Myer Centre represented almost one-third of the available CBD retail floor space (exhibit 247 page 4). The projected 1988 turnover of $259m for The Myer Centre represented 57 per cent of the existing CBD turnover. In order to satisfy the targets which had been identified by Remm, The Myer Centre required rentals of approximately $33m. They were higher than historical market rents by a significant amount. In order to sustain these rents the level of sales for the traders would need to be high (Brett t/s 2621-2). The Myer Centre had six levels of trading and at the time experience expected that customers were not prepared to venture 95

much beyond the entry level and perhaps one level above in a retail shopping complex (Cox t/s 616; Brett t/s 2631).

[302] The suburban shopping centres provided free car parking and it was unknown whether the retail shopping public would be prepared to pay although the bus exchange provided extensive coverage of suburban areas. Mr Brett agreed that the risk that persons using the car park would not be shoppers or that shoppers would not find it attractive to pay for their car parking was a factor that needed to be taken into account (t/s 2622). Contrary to suburban shopping centres The Myer Centre had no exclusive population catchment areas and overlapped with the existing catchments of a number of suburban shopping centres (exhibit 267 page 4). The Myer Centre had no supermarket unlike suburban and regional shopping centres. The theme floor, Tops, was an untried concept both in the CBD and the suburbs although there was a fun park area associated with the Paradise Centre at Surfers Paradise. The concept was modelled on a large shopping centre in Edmonton in Canada. Most of the experts agreed that its success was dependent upon management expertise. Accordingly a close analysis of the Beaumonts’ capacity to operate this concept was important.

[303] The concept of the Butlers Food Court was modelled on the Market Street lower ground floor Food Hall of David Jones in Sydney but larger. Its success too was dependent upon the management skills of the operators so that people would come specially to purchase gourmet foods as occurred in Sydney. The Beaumonts, so far as the evidence went, had no experience with this kind of enterprise. They were the lessees of a significant percentage of the floor space in The Myer Centre and the viability of their various enterprises would have a significant impact upon the sustainability of the rents. A valuer of The Myer Centre therefore had to be satisfied about the Beaumonts’ capacity not just to meet the level of rents over a period of time but to operate the quite different enterprises of Tops, the taverns and the gourmet food hall successfully so as to play their part in making the Centre an attractive place for consumers. It was the assessment of the sustainability of the Beaumont rents which was a source of difference between the valuers. Only Mr Cox took account of the knowledge which Mr Waghorn had with respect to them.

[304] It was, of course, appropriate to express the positive aspects of the Centre but Mr Waghorn made little reference to the risks and only Tops with a capitalisation rate of 12.5 per cent showed any real attempt to do so.

[305] Turning to specific aspects of the valuation which have been the subject of criticism

· rentals

[306] There is no discussion of comparable rentals in the valuation report. Mr Waghorn had some rental comparisons carried out by officers of Hillier Parker for The Myer Centre Adelaide but he agreed that he did not do any careful comparison of market rentals for Brisbane because he was of the view that The Myer Centre established its own market. He did adjust downwards the Remm rentals targeted for the vacant shops because he concluded that it would be easier to lease them (t/s 1676). Mr Waghorn’s approach to comparable rentals is contained in this passage of evidence 96

“A valuer is trained to look at market evidence, and I’m going to digress for the moment, if I may. If I were to value a house in a street and that house had been sold in the last month, the best evidence of the market is that sale. As a valuer I would check whether the parties were related, whether there were any incentives gifts or Rolls Royces rolled up somewhere out of sight. That means talking to both parties if I can but the best evidence is that sale. If I’m asked to value a house in a street of similar properties but there hasn’t been a sale of the subject property in the recent time but there are sales of very similar properties in the same street I examine those sales in the same way. I don’t go and look in another street. Coming back to rental issues, 190 plus tenants of specialty nature plus the majors had committed to this centre and that is the market evidence. I don’t go primarily outside that market evidence and go elsewhere in the town or another town when I have before me 190 plus individual parties who have negotiated a rental at arms length. There are no - there were no incentives. Apart from the Myer Store there were no incentives. I’ve been through as much of the documentation as I could get access to and that market is there before my eyes. Reference to the Wintergarden, a very inferior building, an Arcade of shops linking two streets - or two arcades of shops really linking two streets at that time - is not good evidence balanced against the market evidence within the subject property. In addition, I had a little bit of an advantage in that I had also examined further evidence of an almost identical centre in Adelaide. It was not yet built but there were tenancy commitments. So I had more than 190 bits of market evidence and to me that was absolutely conclusive. Indeed, the average valuer asked to do a valuation of retail rental would be bowled over if he was given 190 comparables and so that was the weight of my view that my assess - income figure of approximately 33 million was entirely correct and based on sustainability as well. ... The sustainability is a matter of opinion when one is valuing a new project but I had been through the financial backgrounds of most of the specialty tenants. I had seen in John Pearson’s office there the individual tenants’ predictions for turnover in the first two years, their set up costs, their experience and in nearly all cases there was substantial evidence of experience and therefore the sustainability question is answered by those people’s approach to their own business of locating themselves into the Myer centre. They would not commit to the lease terms, length of lease that these people did, which was, with hindsight now, much longer terms than are current in the market today, unless those people felt that they could sustain their income and therefore I could conclude that the rent was sustainable.” (t/s 1507-8)

[307] Mr Waghorn said that he regarded the Wintergarden, the nearest comparable property to The Myer Centre in Brisbane as so inferior as to make it unnecessary to consider the rents charged there for a comparable level. When it was put to him that there was in fact a 100 per cent differential in rent between the upper levels of the two centres he dismissed it as an inappropriate comparison (t/s 1680). It is the 97

case that the Wintergarden in its time had set a new level of rentals in the Brisbane CBD but it was something that Mr Waghorn ought to have considered in his report if only to explain why he regarded it as a factor which would not influence his approach to the sustainability of rents in The Myer Centre. For example, that a significant number of traders in the Wintergarden were proposing to relocate or take space in The Myer Centre at these much higher rents. It was the very issue of sustainability of these rents which was essential to Mr Waghorn’s task.

[308] The difficulty in relying upon the agreements reached between the landlord and tenant as a basis for making a conclusion about sustainability was that in the case of The Myer Centre those rentals had not been tested by trading (t/s 2629). To rely upon those rentals alone in the absence of any other comparative analysis did not bring any judgment to bear as to their sustainability. In his oral examination Mr Waghorn said of his approach to testing the rentals for the specialty shops for sustainability that he “tested in my own mind the ability of that tenancy” (exhibit 191 page 446).

[309] Although Mr Waghorn said that he spoke many times to the tenants particularly at the Albert Street level and visited the Centre on numbers of occasions there are no diary appointments or file notes which record any of his observations. He said he did not speak to Mr Clare at Centre Management about this topic nor did he ask Mr Burgess to obtain the first two monthly turnover figures for the specialty tenants and while Mr Brett and Mr Kernke doubted the usefulness of those figures with such a short period of trading, nonetheless, as Mr Cox noted, when there is nothing else and the property so novel it might give some clue for the future. Mr Brett agreed that the selection of a capitalisation rate would be affected by two principal factors, the security of the income stream for the particular purchase and the potential for growth of that income stream. If there was a confirmed trading history as opposed to a business which had not yet commenced in operation then the income stream would be seen as more secure where the business was operating (t/s 1579-80 and Cox t/s 635).

[310] The range of rents within the Centre also called for some comment. The disparity, for example, between the rental being paid at the upper and lower levels of The Myer Centre was significant: Tops was about 150 per cent higher than the rental asked for the Hoyts Cinema Complex, an area devoted to entertainment and with a similar net floor area. Mr Waghorn said that although he noted this discrepancy it did not concern him (exhibit 191 page 615).

· comparable sales

[311] Each of the expert valuers considered a range of properties in many different locations should be examined in order to present a picture of the market. The uniqueness of The Myer Centre meant that a wider range of properties would need to be considered in order to have some understanding of how the market might react to such a large property.

[312] The experts generally agreed that the approach to the analysis of sales in 1988 was to attribute the lowest capitalisation rates to first class office buildings, for CBD shopping centres to have slightly higher capitalisation rates, while suburban shopping centres were higher again. This was because office tenants were seen as 98

long term and stable compared to retail tenants who were dependent upon matters beyond their control which could be quite volatile such as traffic flow, competing centres and the tenancy mix which would affect their capacity to pay rent. These factors were not present in office buildings. Mr Brett concluded, as a matter of generality, that where a rental income stream was derived from operating businesses such as a shopping centre which required a degree of management and expertise, and professionals in offices who required less management and expertise the income stream of the former would not be seen to be as secure as the latter the eyes of a purchaser or vendor (t/s 2579-80).

[313] Mr Waghorn made reference to 10 sales transactions in his valuation report. Four were referred to by Mr Richardson in his October 1986 valuation (exhibit 5). They were the Belconnen Mall in Canberra, the Redbank Plaza, the Qantas Building in Sydney and the Riverside Centre in Brisbane. Three further transactions were identified by Mr Waghorn when he was preparing The Myer Centre Adelaide valuation: the Maritime Plaza and the Hilton Hotel in Sydney and Central Plaza I & II in Brisbane. He knew nothing more than an approximate sale price of $182m for the Maritime Plaza; nor anything more than a reported sale by Bond Corporation to unnamed Japanese investors in January 1988 of the Hilton Hotel complex in Sydney for $300m. Neither of those sales could be analysed for the purposes of comparison. Of Central Plaza I & II he knew nothing more of it than its purchase in 1987 at $340m and was only able to assume that it was an arm’s length transaction. He made reference to the sale of half interests in shopping centres in suburban Adelaide and in Indooroopilly but noted that they were partial interests and were not at arm’s length.

[314] The two other properties which Mr Waghorn identified were the sale in April 1988 of the Southern Pacific Hotel Corporation chain which was sold for $540m to a Hong Kong based businessman. Nothing further is set out in the valuation or apparently known about it. A chain of hotels is not usefully comparable to a shopping centre, but it does show that someone in the world was prepared and did to outlay that amount of money for property. The other sale referred to by Mr Waghorn was “the recent sale” of an approximately 30 per cent interest in Grosvenor Place in Sydney. Mr Waghorn had no exact information about the sale noting that the capitalisation rate was “reportedly somewhere at the lower end of the scale 4%-5%. As such this prime CBD property has an indicative value of just under $1 billion dollars for 100 per cent of the project,” (exhibit 2 page 48).

[315] The report shows a capitalisation rate of 8.7 per cent to the Belconnen Mall, 9.8 per cent to Redbank Plaza, 6.73 per cent to the Qantas Building, 7 per cent to the Riverside Centre and 6 per cent (estimated) to Central Plaza I & II. Mr Waghorn said that he had particularly relied upon the Central Plaza I & II “The sale of Central Plaza One and Two brought to me the feeling that there was a buyer for an item at $340 million. That’s the property I’ve described which - at the time of sale, only Central Plaza I was well out of the ground but it had really no major tenants and Central Plaza II hadn’t been started, so that purchase at $340 million for the land and buildings that are about 43 per cent of The Myer Centre’s total size - and I’m talking of land only, I’m not talking about building mass - was to me a clear indication that The Myer Centre, with all its components, would find a buyer. I felt that 99

the capitalisation rate for the CP1 and CP2 with such a high degree of vacancy and no rental guarantees, whilst of a different commodity, being commercial office, nevertheless pointed quite clearly as to what another CBD type of property’s capitalisation rate might be if properly analysed.” (t/s 1483) Central Plaza was not a useful sale for close analysis since at the time of sale there were no agreed rents and it was not possible as a matter of mathematical calculation to work out a capitalisation rate. It was clear that there was simply market talk as to what a sale price of this kind might mean for a capitalisation rate which was somewhere in the vicinity of 6 per cent or slightly higher, (Cox t/s 642 and ff; Brett t/s 2662). Mr Waghorn, to a large extent, relied on newspaper reports as shown in Appendix 2 of his report for information about these sales. Whilst it is accepted that a newspaper report might set a valuer on a line of enquiry it is not an appropriate source of information for the analysis of a comparable sale, particularly where it appears to have been very influential.

· other relevant information

[316] The expert valuers agreed that when valuing a new centre it was desirable and appropriate to have regard to any feasibility studies carried out for the development to consider whether the turnover expectations were likely to be fulfilled and whether they would support the proposed rentals (Brett t/s 2628; Cox, exhibit 188 page 11). Mr Waghorn had available for his use the Retail Surveys Australia Pty Ltd Report (exhibit 315) which had been commissioned by Remm in respect of the proposed Myer Centre and revised in September 1986. There was no evidence that he made any use of it in preparing his valuation report. He also had available a similar report for Adelaide (exhibit 262/1). The report for Brisbane did not include the carpark, Tops, cinemas, tavern and casual kiosks. However the Adelaide report noted that Tops was an untried concept. The Brisbane report expressed some reservation about a gourmet food concept of a size comparable to David Jones, but otherwise was positive in its forecast performance levels for The Myer Centre. “The centre as a whole, providing the space is leased, will achieve sales of around $260 million in the first year which is similar to the current sales (adjusted to 1988 values) achieved by Westfield Parramatta of comparable size. This will provide a viable trade for the specialty stores and major tenant, which together with suitable promotional effort will be likely to provide the basis for strong long-term growth.” (exhibit 315 page 7).

[317] According to Mr J Norling, an accountant and expert in market, economic and financial feasibility studies, when the Retail Surveys’ projected productivity for each level is compared to the leases the occupancy cost ratio is said to be higher overall at 12.8 per cent rather than what was generally regarded as sustainable at below 10 per cent. The occupancy costs for the Myer Store were less than 5 per cent but for the rest, mainly specialty shops, Mr Norling calculated “extraordinarily” high levels at 18 per cent. He noted that outlets such as fast food and hairdressers can sustain occupancy costs of 15 to 20 per cent (confirmed by Mr Pearson who was very experienced in this area) but the majority of shops could not sustain occupancy costs higher than about 12 per cent (see Mr Kernke’s report, exhibit 288 Appendix 4). It was Mr Norling’s view that a comparison made in 1988 of the Retail Surveys’ projections with total occupancy costs would have revealed 100

that the occupancy costs of The Myer Centre excluding the Myer Store could not be sustained by the projected turnovers (exhibit 247 page 7). Mr Norling’s analysis has been criticised in some respects by the third and fourth defendants but had Mr Waghorn had regard to these matters, he would at least have raised questions in his own mind about the sustainability of the rents, particularly at the upper levels.

[318] It was accepted by the expert valuers that it was good practice to make enquiries of the centre manager of the retail property being valued. Mr Cox commented that if the client declined to give a valuer access to a centre manager or to material which the centre manager might be expected to have about the tenants such as turnover information, debtors, incentives and other rental information then a valuer might decline the instruction. There was relevant data available from Centre Management when the letter of valuation was delivered on 17 May and again when the valuation report was delivered on 8 July dealing with the early turnover results. The limited number of 30 retail specialty turnover rents provided to Mr Waghorn by Mr Burgess should have signalled to him that other figures were likely to be available and that he may have been provided with only the favourable figures. Even if, as Mr Waghorn suggested in evidence, Mr Burgess said that any information that he wanted could be accessed through him and not through Mr Clare he did not say that he sought this information. In fact he said he had not spoken with Mr Clare. Mr Ryan and Mr Garmston both said that they would, if asked, have directed Mr Clare to provide the information. Accepting that little could have been extracted from early information nonetheless it may have flagged areas of concern which would have been revisited.

[319] The expert valuers agreed that visits to a centre being valued were useful to a valuer because they gave some indication of how the centre was trading. Mr Waghorn was initially vague and then specific as to dates of his inspections. He was certainly particularly specific that he visited The Myer Centre to collect photographs after his participation in the air race and that he had seen the Centre then but was able to say very little about site inspection visits. The first draft of the valuation prepared on 10 May suggested that Mr Waghorn did not have a basic appreciation about the physical attributes of The Myer Centre. The names of the taverns needed checking and notes in Mr Waghorn’s handwriting alerted him to check physical matters (t/s 1597). Mr Burgess corrected the error that there was a mezzanine level. On these inspections he said that he did not speak to tenants (t/s 1601) although he maintained that he had spoken many times to the tenants on the Albert Street level and they made no complaint. I was not persuaded by Mr Waghorn that he had visited The Myer Centre for the purposes of his valuation report on the number of occasions which he claimed.

· turnover

[320] It was generally accepted that turnover figures were an important indicator available to a valuer to ascertain the likely sustainability of the nominated gross rents. Where there was only a short history of trading only Mr Cox was prepared to say that they ought to be taken into account and were a reliable guide. The third and fourth defendants argued that since the valuation was to speak from 18 April 1988 only three weeks of trading figures would be available, a quite useless and likely misleading piece of information (Norling t/s 1147; Tidbold t/s 1797; Waghorn t/s 1680; Cox t/s 602, 609). In 1988 the practice of assigning an industry 101

percentage for occupancy costs to turnover ratio appears to have been just emerging.

[321] Mr Norling said that in 1988 the company for which he worked was regularly engaged by developers to provide turnover estimates for proposed retail developments to assist them to fix projected rents as part of the feasibility study for the proposed development. In the first half of 1988 he was in the practice of making a comparison of turnovers with benchmark turnover figures to determine problem areas in an existing retail centre or to identify its successful areas There were then some rules of thumb applied and for specialty stores it was expected to be slightly less than 10 per cent or in the 10 to 12 per cent range. He said it was accepted that once the rents went over 15 per cent or so as a percentage of turnover then certain tenants did not have the capacity to pay (t/s 1146-8). It is fair to comment that the practice had not then achieved universal currency and the first generally available figures per category to valuers probably appeared in an article by Mr Willington in “The Valuer” of October 1987 (exhibit 106). Even then there were many other factors which would influence the ratio of “tolerance” such as location, age of the centre and other competition but at best they could give a rough guide and were something to consider.

[322] Hillier Parker was aware of the technique as early as August 1986 when a preliminary discussion was held with Mr Burgess and a number of Hillier Parker personnel about the review of The Myer Centre. The Retail Surveys feasibility study mentioned in the Adelaide report that a 16 per cent occupancy cost to turnover ratio was conservative (exhibit 262/1 page 6). Mr Waghorn admitted that he knew of this practice (t/s 1680). Mr Tidbold was aware of it (t/s 1797). Mr Clare acknowledged that records were kept by him to see how the tenants were performing (t/s 120). Mr Norling conceded that food courts could sustain a 20 per cent ratio. This was Mr Pearson’s experience over many years operating the food outlets in The Myer Centre lower level.

[323] Mr Brett did not regard the early trading figures as having any material effect on the valuation. He thought that even three months from the opening was too limited a period to be useful. But he did adopt The Myer Store’s turnover figures for only one month for the purposes of assessing the profit rent component of the valuation (exhibit 330 page 11; t/s 2585). It seemed to be an area with which he did not have a great deal of familiarity (t/s 2674-6). I accept that such a short period of time so close to the opening could not indicate trends particularly as the Christmas retail period was not able to be included to bring up the turnover of many of the retail shops. Further there is a well-recognised settling-in period for a new centre. When The Myer Centre opened it did so against a great deal of favourable pre-opening publicity and was seen to be an outstanding success in terms of numbers frequenting it. Trading was so favourable that the Myer Store increased its turnover projections for the year. There were many visitors going through the Centre as a consequence of the number of people drawn to the city because of Expo 88. That being so one would think that these extraordinarily buoyant conditions would have been taken into account in considering the turnover of the stores. Against that background the first month’s trading for Bertie’s Tavern, Butlers, Queen Street Eat, Tops and many others of the specialty shops could not be described as satisfactory or even as part of a settling in period (exhibit 190). If the first three months were considered the position improved but the occupancy cost to turnover ratio for the 102

car park of 149.7 per cent, 84.1 per cent for Bertie’s Tavern and 73 per cent for Butlers did not look promising even in the longer term and required further enquiries. The Myer Store after three months had a ratio of 4.3 per cent it did have favourable rental terms. In his evidence in the Federal Court Mr Waghorn said he did not have the time to check Centre Management reports for April/May/June (exhibit 191 pages 589-90).

[324] Accepting all the qualifications which were made about the use of such limited figures and whether they can be applied across the board as an industry standard these were figures which Mr Waghorn ought to have sought and, whether or not he regarded them as part of the settling-in picture, they ought to have been referred to in the valuation if only to be discounted, and were important for an assessment of the Beaumont interests. He would have seen some risk with respect to some of the very poorly performing tenancies and would have reassessed those rentals.

· the Beaumont interests

[325] Mr Waghorn set out in his report (pages 28-29) the companies controlled by the Beaumonts that had taken leases in The Myer Centre, the percentage area leased and the percentage rent. Of the total specialty lettable area of 35,387 m2 the Beaumont areas equated to 27.45 per cent. The first year’s rent to be paid by the Beaumont interests was $6,038,455. As a percentage of the total specialty rent it equated to 19.72 per cent. Mr Waghorn recognised that since this high proportion of the rent was the responsibility of one family its financial standing was of crucial importance to the covenant supporting the performance of the agreements to lease and the leases. There was no supporting material in the appendices. In his oral examination Mr Waghorn said that material about the standing of the Beaumonts was of crucial importance but that he “left to the client to procure it” (exhibit 191 page 456). He had already caused investigations of the Beaumonts between November 1987 and March 1988 when he was carrying out The Myer Centre Adelaide valuation. He had had extraordinary difficulty in getting any firm information as to their financial standing. Mr Waghorn was aware that their major business interests were in running hotels some of which incorporated family restaurants and some of which had some small entertainment area associated with the restaurants. There was no evidence that the Beaumonts had any experience in a novel enterprise such as Tops or a gourmet food emporium along the lines of David Jones in Sydney or, indeed, of a large food court. All of these activities required a high degree of management expertise.

[326] Throughout Mr Waghorn’s file notes he has mentioned the close relationship between the Beaumonts and Remm suggesting some joint venture arrangements in both Myer Centres. The rents were very high and this relationship should have called for comment by Mr Waghorn. Not only were the Beaumonts undertaking the onerous commitments in The Myer Centre Brisbane but to Mr Waghorn’s knowledge they were proposing to carry out identical businesses in The Myer Centre Adelaide. The fit-out cost to the Beaumonts for The Myer Centre Brisbane was in the vicinity of $17m. Similar costs might be expected in Adelaide. The rental commitment in Adelaide was likely to be greater than the $6m in Brisbane.

[327] The financial information about the Beaumont interests was a letter from their accountants dated 29 October 1986 contained in Mr Richardson’s valuation 103

(exhibit 5). At that time the group of companies was said to have a current annual turnover of approximately $100m. The net tangible assets of the Group was said to exceed $25m comprising mostly the freehold land and buildings of the hotels as well as their improvements. Mr Beaumont was said to have more than 30 years’ experience in all aspects of the hotel business which he ran with two of his sons. Nothing further had become available despite Mr Waghorn’s earnest endeavours, particularly for Adelaide. He conceded that the bland letter which he did receive in respect of The Adelaide Centre was of no particular value.

[328] Mr Waghorn was aware that the fantasy floor, Tops, was doing very poorly from the time it opened due to poor management skills. This would have been apparent to anyone who had walked through the area. The kinds of things that could have been seen were set out by Mr Clare in his letter to the Beaumonts (exhibit 56). Mr Waghorn was adamant that these concerns were management concerns and would be set to rights. Mr Brett assessed the Beaumont interests on the basis of an undated note prepared, apparently, for Remm. There is no evidence to show that this was passed on to Mr Waghorn. It recognised that a consolidated profit for the year ending June 1986 of $4.5m for the group needed to be adjusted downwards by $1m. Mr Brett concluded that this apparently satisfied the lessor (then Remm) and in any event the net worth was only relevant in the event that the guarantees were called upon (exhibit 330 page 13). Neither Mr Brett nor Mr Kernke were aware of the extent of Mr Waghorn’s knowledge about the Beaumonts much of which he had gleaned from his experience in valuing The Myer Centre Adelaide.

[329] Although Mr Waghorn identified the crucial importance of the Beaumonts to the sustainability of rents in The Myer Centre he apparently failed to recognise the high level of risk associated with their tenancies or, at least, made an adjustment to reflect that risk only for Tops and then modestly. Their tenancies and some others are discussed in more detail.

Tops

[330] Mr Waghorn accepted the full asking rental for Tops of $1.61m as sustainable. He treated this income as growing at an annual rate of 7 per cent for each of the following years and capitalised the income at the end of the 10 year period at a rate of 6.75 per cent. This failed to take account of the highly adventurous nature of this enterprise, that it was located on the upper floors of a retail centre, it was an untried venture as an adjunct of a retail centre in Australia not in a holiday location, it was almost totally dependent upon managerial skills in attracting visitors to the upper level to participate not just in the core business of the rides but also to shop at the small tenancies associated with it and the problems for the lessor in finding a replacement tenant should the Beaumonts abandon their leases. There were, apart from these problems, negative signs after The Myer Centre opened associated with the serious noise problem symptomatic of a lack of experience, the grubby and unkempt appearance of the area suggesting poor management, the lack of numbers and the very poor early trading figures which could not be attributed solely to a settling in problem against the background of a buoyant and carnival-like atmosphere for the opening.

[331] Mr Cox took as the closest and only reasonable comparison, Grundy’s Entertainment Centre in the Paradise Centre at Surfers Paradise. The rent for Tops 104

was 150 per cent higher. Grundy’s was located on the first level in a shopping complex and was in Surfers Paradise, a tourist and leisure location. Mr Cox made some comparisons with a number of CBD leisure areas in Sydney, Melbourne and Brisbane as well as the Surfers Paradise Hotel. These large areas which included food courts, restaurants, taverns and nightclubs demonstrated that the rates per square metre per annum diminished as the floor area increased. Mr Cox reduced the rental to $1,138,750 gross or $21,247 net. The discrepancy between those two figures was because Tops contained a large area on which the company was required to pay the outgoings at the same rate per square metre as small retail shops on prime Level Q. Mr Cox adopted a capitalisation rate of 10 per cent. Mr Brett also reduced this rental substantially from $598 per square metre per annum to $300.

Queen Street Eat

[332] Mr Waghorn accepted that the full rent for Queen Street Eat and treated it as growing at varying rates for each of the 10 years following and capitalised it at a rate of 6.75 per cent. The rental was significantly higher than the food court at the Wintergarden, its closest comparison, which also included in its price per square metre, fit-out and equipment, and the Centrepoint and Post Office Square food court areas. The occupancy cost to turnover after three months’ trading was quite high at 31 per cent but it was observed to enjoy good patronage which would likely improve after a settling in period. Mr Cox was of the view that the rental to be sustainable would require a downwards adjustment to approximately $1.3m and the adoption of a capitalisation rate of 7.75 per cent. This reflected his perception of the risk together with an appreciation that there was some real prospect of growth. Mr Brett on the other hand adopted the passing rent and adjusted the capitalisation rate to 7.25 per cent to reflect the risk to arrive at a sustainable rental.

Butler’s

[333] Mr Waghorn accepted that the agreed rent of $1.998m per annum was sustainable and treated it as growing at varying rates for each of the next 10 years and capitalised it at the end of that period at a rate of 6.75 per cent. He did not apparently give weight to the fact that this was an untried venture in Brisbane and that this large area which included seating and walking areas in the demised areas would find it difficult to generate sufficient turnover. It did not do well in the early weeks of opening and the early trading figures were very poor. The two large tenancies opposite Butler’s of Chandlers and the East India Co had significant lower rents per square metre per annum. Chandlers’ rent was $675 per square metre for 465 square metres compared to Butler’s $1,457 for an area of 1,649 square metres. Near to the Butler’s area were eight vacant shops.

[334] Mr Cox accepted a sustainable gross rental of $650 per square metre per annum and applied a capitalisation rate of 10 per cent. Mr Brett adopted as sustainable the passing rent but to recognise the risk factor applied a capitalisation rate of 10 per cent. This was the same capitalisation rate by Mr Cox but he had decreased the rent by almost half. 105

Taverns

[335] Mr Waghorn accepted the rental in the agreements for lease and predicted a growth above CPI and capitalised the income at 6.75 per cent for the Metropolis Tavern and Bertie’s Tavern both leased by Beaumont companies. Bertie’s Tavern was located on the service level of the Centre with access via a stairway down from Elizabeth Street. It was isolated from the rest of The Myer Centre and Mr Cox noted that this section of Elizabeth Street received very little pedestrian traffic. He was of the view that it obtained no discernible benefit from being located in The Myer Centre so that shoppers or users of the Centre were more likely to be drawn to it than to any other tavern. Mr Brett thought, on the other hand, that there was a benefit which would justify its very high levels of rent. The gross rental of $642 per square metre per annum was very high in contrast to other tavern rental evidence and also high compared to the rental for the Metropolis Tavern at $394 per square metre per annum.

[336] Bertie’s Tavern did particularly poorly in its first three months of trading and whatever reservations might be made about using such a short period of time, an occupancy cost ratio of 84 per cent, even with significant adjustments, was an indication of an unsustainable rent. Mr Cox and Mr Brett differed as to the floor area adopted for the calculation. Whilst it does have some effect on the calculations it is not great and it is unnecessary to resolve the difference. Mr Cox accepted the rent and adjusted the capitalisation rate for Metropolis Tavern to 10 per cent, the same as that applied by Mr Brett. He reduced the passing rent by almost a half for Bertie’s Tavern and applied a capitalisation rate of 10 per cent. Mr Brett applied the same rate but did not reduced the rent.

Specialties

[337] Mr Waghorn adopted the agreed rents as sustainable rents and where there were vacancies his computer model applied the developer’s budgeted rent. Even though these rents were recognised as high for Brisbane Mr Waghorn factored in a potential for growth greater than CPI for the first seven years and capitalised the income at 6.75 per cent. He apparently took no account of the serious problems in the Albert Street tenancies. They had been ventilated in the press and the clippings were in the Hillier Parker files. Centre Management had received a steady stream of letters of complaint. A critical inspection of those areas would have revealed much of this difficulty to Mr Waghorn. He says that he did not discuss these issues with the tenants concerned. He was content with the assurances that these were management issues which would be addressed. The turnover figures for these tenancies would have revealed their difficulty in maintaining rents. Ten of the tenancies on the Albert Street level were receiving rental subsidy shortly after the opening of the centre. A number of the tenants were not experienced traders and there was some failure in the tenancy mix. These were problems that probably would be rectified in time but would involve the loss of some revenue. There was a threat of Trade Practices Act type litigation. At the Elizabeth Street level five tenants were in receipt of rental subsidies and eight shops were vacant.

[338] Mr Cox thought that since the Queen Street and Level 1 of the specialty shops comprised numbers of well known national traders with proven retailing backgrounds the rent levels, although distinctly higher than the Wintergarden or 106

Centrepoint Sydney, would be likely to be met. He applied a capitalisation rate of 7.5 per cent for those levels to recognise the risk inherent in the high rents and their lack of growth potential. Mr Cox reduced some of the Albert Street specialties rent particularly in the walkway from the bus station and selected a capitalisation rate of 7.75 per cent. On the hand Mr Brett left the passing rent for the Albert Street specialties as sustainable and used a capitalisation rate of 7.25 per cent. This was the yield rate that he applied to all of the specialties save Level 2 which he increased to 7.5 per cent. Mr Brett noted the number of tenancies on Level 2 occupied by those whom he described as traders without extensive experience. In his view the asking rent was excessive for Level 3 retail traders. Mr Cox made no adjustments to the rentals but applied a higher permanent vacancy factor of 5 per cent with a capitalisation rate of 7.75 per cent to reflect the risk.

Car park

[339] Mr Waghorn adopted the passing rental for the car park and increased it at a rate of 10 per cent per annum which was contrary to the terms of the lease and capitalised the income at 6.75 per cent. Both the agreements to lease and the guarantees showed that Goldrock Pty Ltd, the tenant of the car park, was a company associated with the lessor. Hillier Parker were aware of this and knew that assessment of the rent called for care. There was no evidence that Mr Waghorn considered any comparable car parking rents and appeared prepared to accept the passing rent as sustainable.

[340] The expert valuers accepted that the normally accepted rental formula in 1988 for car parks was for the lessee to pay a gross rental equivalent to 70 per cent of gross receipts. This was included in the agreement to lease as a percentage above base rental. The gross rental of $4,250,000 required annual receipts in excess of $6m. Accepting the limitations in the three month annualised turnover figures prepared by Mr Cox the figures for the earlier months of the car park were low. Mr Kernke referred to a car park valuation which would not have been available to a valuer in 1988 which was however closer to these rents. Mr Brett accepted the passing rental as sustainable and applied a capitalisation rate of 7.5 per cent. Mr Cox reduced the rent to $3.335m per annum and applied a capitalisation rate of 7.75 per cent to reflect the high rental that was asked and the difficulties identified in the Retail Survey Report of processing sufficient cars per bay to give an appropriate turnover of vehicles. As will be discussed below, I have concluded that notwithstanding these concerning opening figures for the car park a close analysis would show the need for more city car parking space and that lessees were often prepared to shoulder losses in early years for long term gains.

[341] Interchase has contended that Mr Waghorn was in a position which rendered it difficult for him to take a robust and independent approach to his task of valuing The Myer Centre. He was relatively new to Hillier Parker and had a limited experience in valuations in Australia between 1985 when he arrived in Australia and 1988 when this valuation was undertaken. He was a valuer with general experience and had valued in Queensland two minor shopping centres prior to The Myer Centre. He was able to draw upon the knowledge and expertise of the range of valuers employed in Hillier Parker and was also able to discuss the market outside the offices of Hillier Parker with, for example, people from JLW and also with Mr Burgess. He does not , from his contemporary file notes in particular, give 107

the impression of a great depth of understanding of the market himself. He was following in the footsteps of Mr Richardson’s valuations, a person whose opinion he respected. It can readily be accepted that he was placed in an awkward position if he were to depart from that opinion. There was a general expectation that the completion valuation would be no less than Mr Richardson’s valuation of $470m. There is a significant amount of evidence which has been discussed above which would support the conclusion that Mr Waghorn was working towards a figure and that was a figure wanted by the client.

[342] When he carried out the November 1987 review of Mr Richardson’s valuation for the Prospectus which was to be used for an approach to the Bank of New Zealand (unknown by Mr Waghorn when he did his review) he was aware that the client expected Mr Richardson’s valuation to be confirmed. Mr Waghorn prepared his letter of review as soon as he had established that the rental schedule for The Myer Centre, which included the budgeted rentals prepared by Remm, produced a higher rental stream than had been adopted by Mr Richardson. The computer model indicated that with these figures the value was approximately $480m and yet Mr Waghorn did not value the centre at this figure but at $470m. It was not until later that he revealed this figure to Mr Burgess.

[343] Prior to doing this review Mr Waghorn was involved in the review of The Myer Centre Adelaide. On 12 November 1987 he advised Remm that he expected to value The Adelaide Myer Centre at $510m with a capitalisation rate of 7.75 per cent. Mr Don Innes of Remm made it clear that this was not an acceptable figure. On 18 December 1987 Mr Waghorn then advised Remm that he was proposing a figure of $530m with a capitalisation rate of 7.25 per cent but Mr Innes indicated that such a capitalisation rate was unacceptable. On 3 March 1988 Mr Waghorn told Mr Innes that he was proposing a capitalisation rate of 7.2 per cent which would give a value of $545m. Whilst Remm appeared to accept this figure subsequently he was asked to round up the valuation to $547m and this was the figure at which the final valuation was delivered.

[344] The subject valuation was to be an open market valuation rather than a review despite the use of the expression in some earlier correspondence. As early as the first meeting Mr Waghorn advised Mr Burgess that the valuation would come in at no less than $470m. Mr Waghorn denied that he had been influenced by Mr Reynold’s keynote address at the Pan Pacific Valuers Conference in New Zealand in March 1988 when he had said that there was an expectation of a value of $490m for The Myer Centre Brisbane with an income greater than $32.9m and a capitalisation rate of 6.75 per cent. It seems more than coincidental that shortly afterwards Mr Waghorn adopted a capitalisation rate of 6.75 per cent without any apparent further research or investigations into sales. Mr Waghorn told Mr Burgess in the middle of May that he had settled on a valuation figure of $480m. Mr Burgess indicated that PEL was looking at $490m. By the following day Mr Waghorn had adjusted the model to achieve $485m and, following a meeting with Mr Burgess, the final print-out produced a figure of $488,206,000 which was rounded up to $490m.

[345] On every occasions Mr Waghorn appeared to accept uncritically information provided to him by Mr Burgess. It does not seem unfair to state that the impression gained from looking at the various drafts of the computer model, particularly after 108

conversations with Mr Burgess, was that Mr Waghorn was experimenting with figures rather than considering the issues that a valuer would consider when assessing the risks which would directly relate to the sustainability of the rents being sought.

[346] Interchase has submitted that Mr Waghorn’s lack of experience with the use of the computer program contributed in a fundamental way to the calculation errors which have been described and led to an inappropriate reliance upon it rather liberating him from the arithmetic so that he would exercise his own judgment. It is unfair to be critical of Mr Waghorn for his lack of computer skills in 1988 but there may be something in the observation.

[347] I have little difficulty in concluding that as a consequence of Mr Waghorn’s approach to aspects of the valuation he negligently accepted rentals which were unsustainable and was inappropriately influenced by “the client” and this ultimately led to too high a valuation figure.

Other valuations

[348] Before proceeding to consider what should have been the valuation of The Myer Centre in mid-1988 valuations made of it near that date which were relied upon by the third and fourth defendants as supporting their valuation need to be considered. They are Mr Richardson’s valuations of 16 October 1986 and 27 February 1987; that of Mr Willington and Mr Higgins of 23 February 1987; the valuation by Mr Tidbold the subject of this litigation of 18 July 1988; and a valuation by Richard Ellis of March 1989 for Operation Oxford.

The JLW/Willington valuation

[349] As mentioned above, in February 1986 Mr Willington was involved in the preparation of a report by JLW for DBSM who were to be the underwriters for the public listing of Interchase.

[350] Mr Higgins was instructed by Mr W Chant from DBSM in Sydney and passed those instructions to Mr Willington in Brisbane. The instructions were not to undertake a complete valuation of The Myer Centre but to confirm the Richardson valuation. The quoted fee of $10,000.00 was said to indicate the limited extent of the work. Mr Willington was the valuation director of JLW in Queensland. He had been a registered valuer since 1976 and in 1986 was one of a small group of valuers carrying out shopping centre valuations in Queensland. He carried out regular valuations for clients such as AMP, who owned shopping centres at Pacific Fair at the Gold Coast, Garden City at Mount Gravatt and at Mount Ommaney. He had valued the Toowong Shopping Centre.

[351] During February 1987 Mr Willington had some 5 or 6 meetings with Mr Burgess and Mr Smith in Brisbane. He had known Mr Burgess when he had worked in industrial sales at JLW. He had meetings with Mr Nash and Mr Pearson from Remm. They provided him with information on leases and projected rents for tenancies in The Myer Centre. Mr Willington and his team considered the rental of each of the proposed shops and its sustainability. Consideration was given to the projected rentals estimated by Remm, the layout of The Myer Centre, the tenants 109

already committed to leases and comparable rental levels in Brisbane, particularly those in the Wintergarden which was then thought to be offering the best comparison for The Myer Centre, and rental levels in major shopping complexes around Australia available through the JLW offices in other capital cities. A detailed tenancy schedule was prepared for the speciality shops showing the JLW sustainable rent for each shop as at February 1987, the agreed rent (if any) and the “asking” rent. Remm is shown as expecting $21.662m in rent for the specialty shops whilst JLW suggested a sustainable rent of $14.359m.

[352] On 12 February 1987 Mr Willington had carried out some calculations in a preliminary way based on the figures for rents that he had obtained using segmented capitalisation rates. He arrived at a high value of $337.397m with an average yield of 7.76 per cent and a low figure of $316.297m with a yield of 8.28 per cent. After further information and analysis Mr Willington concluded that The Myer Centre had a value of around $360m to $370m based on an estimate of a sustainable market rental of around $27m capitalised at 7.5 per cent. He was aware that Remm was projecting a total annual rental in excess of $32m.

[353] Following this initial analysis Mr Higgins and Mr Willington met with Mr Smith and Mr Burgess on 17 February 1987 at the Brisbane offices of PEL. They mentioned valuation figures of $360m to $370m and that their major concern related to the excessive levels of rent being projected which were well above market and were not thought to be sustainable in the long term.

[354] Mr Willington said that Mr Burgess and Mr Smith were “not impressed” with that conclusion and advised that the rental levels sought would be achieved and sustainable and asked JLW to prepare a letter for DBSM setting out the estimate of market value assuming that the projected Remm rentals were obtained and sustainable. Mr Willington said that he was not comfortable with these instructions but was prepared to comply so long as the basis of the opinion was set out.

[355] He recorded his concerns about the sustainability of the rents in a file note dated 17 February 1987 (exhibit 101). He noted the car park was to be operated by Goldrock Pty Ltd a company associated with PEL and Remm and was particularly concerned that the physical configuration of the car park would not allow for the ingress and egress necessary to produce sufficient turnover of car park spaces to justify the rent. He thought that the rental for the cinema complex (then proposed to be with a company named AMC) being higher than any in Australia might not be sustainable in view of concerns amongst existing cinemas in the CBD of the availability of sufficient numbers of quality films to support the number of screens proposed.

[356] Mr Willington was particularly concerned at the number of large tenancies being taken up by companies controlled by the Beaumont family – Tops, the two taverns, the Butler’s gourmet area and the Queen Street Eat. He was particularly concerned at the high level of rent for the size of the Tops tenancy, the novelty of the concept (something previously untried in Australia), its location at the very top of a multi-storied complex and that although the Beaumonts were successful tavern operators they had no proven experience in such enterprises. Should it become necessary to convert this area to an alternative use in the event that Tops should fail Mr Willington thought it unlikely that the high rents which the Beaumont 110

companies had agreed to pay could be achieved. Notwithstanding personal covenants he considered that there was considerable risk attached to the Beaumont tenancies.

[357] Mr Willington thought the taverns rents were extremely high and noted that JLW was “unable to satisfy” itself that the figure could be achieved (exhibit 102). After discussion with local traders and considering other rentals Mr Willington expressed some doubt that the Brisbane market would be able to support an operation similar to the David Jones food hall in Market Street in Sydney. He noted that the Beaumont companies were paying rent for seating areas not the general practice in, for example, places such as the Wintergarden food court.

[358] Mr Willington noted that subject to the location and the development of the kiosks the targeted rentals may not be achieved on some of the lower or upper levels.

[359] Mr Willington considered the rentals achieved in the Wintergarden and other areas within the Brisbane CBD area in 1986 together with the configuration of the shops over 5 floors. He estimated that rentals of up to $2,000.00 per square metre would be achieved for prime shops at the Queen Street level but that the upper levels would be considerably less and that overall an average rental of $660.00 per square metre could be achieved including storage areas at nominal rentals. He noted that a number of the commitments for the better areas on the Queen Street level were at rentals above those estimated but that they were to be effective as at the opening date in May 1988 and there was no provision for escalation. He concluded that the high levels of rental targeted would not be achieved over the entire development noting the average rental proposed by Remm was $996.00 per square metre. He accepted a long term vacancy factor of 5 per cent as appropriate.

[360] The JLW letter of valuation dated 23 February 1987 addressed to DBSM prepared by Mr Higgins and Mr Willington reflected the instructions of 17 February that it was to be a “possible value” on completion of the development in April 1988 “on the basis of the successful leasing of the Centre”. It noted that the comments were related to a future date “and we have therefore by necessity made certain assumptions, particularly in relation to rents, outgoings and appropriate yield, and we have qualified these assumptions in our report” (exhibit 104).

[361] The Myer Centre was described as “marginally fringe”, that is, outside the existing pedestrian mall which had tended to focus the centre of the shopping precinct of Brisbane adjacent to David Jones and the Wintergarden. The letter noted the proposal to extend the mall which would strengthen the retail precinct. The success of The Myer Centre was said to be dependent upon its capacity to alter established shopping habits during weekdays, weekends and designated late night shopping areas. The size of the facility, its proposed quality, the car park and bus interchange systems and the extension of the mall offered strong competition to the regional shopping centres. The report drew attention to the redevelopment of the Expo site to occur in 1989 which would assist in consolidating the southern sector of Queen Street as a prime retail area. The movement to city shopping in some developments in Sydney was noted. The Myer Centre was described as a “unique development” in that it offered a strong anchor tenant and a wide merchandising range of speciality operators, gourmet food areas, taverns and extensive entertainments. However, 111

“Whether or not the fantasy - leisure area is a success is difficult to comment upon as it is a new concept by Australian standards and will depend upon the expertise of the operator” (p 3).

[362] Whilst the complex was seen to be novel and it was not expected that all of the concepts would succeed, any weaknesses would be likely to be outweighed by its strengths. The report noted that JLW had been provided by PEL and Remm with a proposed tenancy mix and forecast rental schedule and that it had undertaken a comprehensive study of the level of rentals achieved in other major prime central business district retail locations throughout Australia. Accordingly, “Our analysis leads us to the conclusion that we are not able to support the level of rent indicated to us by the leasing agents, based on the current level of available evidence. We appreciate that the proposed rents apply as from the planned completion date of the Centre, and we have therefore discounted these rents by 10%, to indicate a present level of rents in comparison to other centres analysed. Again, we make the comment that based on the range of rents achieved for other major retail centres throughout the capital cities in Australia, the rents are in our view excessive.” (p 3) They noted however that some of the asking rents had been finalised.

[363] The ultimate success of The Myer Centre was seen to be “dependent upon the successful leasing of the specialty shops to a wide range of both national and local retailers. In addition, the acceptance and support by the tenants of the proposed rents, and the ability of the Centre to attract turnover levels necessary to support the proposed rents and future growth patterns” would be critical (p 4).

[364] Finally, the report noted “Our instructions require us to express a view as to the possible value of the Myer Centre, on completion of the development in April 1988, subject to the proposal and the successful leasing of the Centre.

We state that our assessment is not to be construed as a formal valuation, but rather an estimate of a range of possible values based upon stated criteria.

Whilst we have already stated that we are not able to provide current market support for the rents proposed, more particularly the rent for the aggregate specialty shops and the theatre complex, we have based our assessment on the asking rents (to be effective from April 1988) being achieved. Individual retail traders will assess their potential market share and anticipate a turnover within the subject property and will be prepared to pay a rent which can be supported by projected turnover.

The Myer Centre will in our view be unique in the Brisbane retail market and for that matter unique in the Australian retail market. Its uniqueness and size results in difficulties being experienced in 112

comparing the complex with the limited sales evidence available and the establishment of an appropriate yield. Quality City retail investments, whether they be located in Brisbane, Sydney or in other Capital Cities, are only occasionally traded, as they are primarily tightly held by institutions. Also the sheer size of the subject property and the different income components results in difficulties of comparison.

We have analysed the limited sales evidence available and have canvassed relevant sectors of the market place in order to achieve a “feel” for a development such as the Myer Centre.

We consider that if the building was let at appropriate market rental levels that it would not be unreasonable to anticipate an appropriate yield range in the order of 7.25% to 7.75%. This yield however assumes that the rental levels being sought for the Myer Centre are achieved without divergence in aggregate from the schedules provided to us and that the rentals are achieved without undue inducement to tenants. This range of yields also assumes that potential purchasers consider that achieved rentals represent fair market value at the date of completion and that the rentals can be sustained by the tenants with the prospect of ongoing long term growth.” (p 7)

[365] The report commented that a vacancy allowance of 5 per cent was appropriate for the specialty shops and food court area while noting a firm property market, provision for a shortfall in the total recovery of operating expenses should be made and the capitalisation of the profit from the sale of electricity should be discounted for the greater risks associated with this source of income.

[366] The report concluded: “In complying with the instructions, we are conscious of the above considerations, particularly the size of the property and the need to establish the levels of rents proposed. We do not believe that it is possible to be precise as to the effect parcel size might have on the ultimate price achieved, and for this reason, we consider it prudent to express a range of possible values.

Having regard to the context of our report, and the yield range previously expressed, we believe a possible range of values could be in the order of $425,000,000 (Four Hundred and Twenty Five Million Dollars) to $440,000,000 (Four Hundred and Forty Million Dollars), in April 1988.

This report is not to be construed as a formal valuation, but rather an estimate of possible values at a nominated date in the future, should all the criteria be achieved.” (p 9)

[367] Mr Willington’s approach to this task suggests that he was a valuer who exercised independent and realistic judgment in respect of his brief and did not hesitate to express his opinion even though aware of the target figure. His opinion as to value 113

before making the assumptions insisted upon as to the sustainability of the rents should be given some weight. Needless to say there were changes between February 1987 and May 1988. The marketing of The Myer Centre by Remm had been particularly successful in securing specialty shop tenants and the Beaumont interests at the high rents targeted. Nonetheless the question of the sustainability and potential for growth of those rents was a matter for a valuer to weigh very carefully. It was suggested that the property market had become more buoyed in that period. It was recognised that the stock market crash in October 1987 had the effect of freeing more money for investment and the property market for a period was the beneficiary. That may have meant a greater likelihood of a purchaser but may have had little or no affect on the sustainability of the rents.

Mr Richardson’s valuations

[368] Mr Richardson became a registered valuer in 1972 and from 1980 until towards the end of 1988 he was the state partner in charge of valuations at Hillier Parker. The evidence suggested that he then operated on his own account through various companies (exhibit 275). No evidence was sought from him as to any skill or experience which he might have had in the valuation of large shopping centres (t/s 1803).

[369] As I have earlier observed, I did not find Mr Richardson an impressive witness. The events leading up to Mr Richardson’s various valuations have been dealt with above. It is hard to escape the conclusion that Mr Richardson approached his task, even the hypothetical one in 1986, of valuing The Myer Centre with a figure desired by the client in mind. This is supported by the advice from Remm to Mr Richardson at the outset that a capitalisation rate of 7 per cent and valuation of $450 to $470m was what it had in mind. The proposed development was described as a $470m development well before Mr Richardson had prepared his draft valuation. The way in which Mr Richardson achieved a per square metre per annum rental of $920 from that of $877 supports this conclusion. Initially Mr Richardson had produced valuations of $383.5m to $409.3m at capitalisation rates of 8.7 per cent to 8.42 per cent. He carried out this valuation task at about the same time as Mr Willington.

Mr Tidbold’s valuation

[370] The third and fourth defendants rely upon the valuation carried out by Mr Tidbold for Colliers as supporting Mr Waghorn’s valuation. Interchase settled with the first and second defendants and Mr Tidbold was called to support Mr Waghorn’s valuation. Mr Tidbold was not asked to defend his valuation. Mr Hampson asked him whether the valuation represented his opinion at the time (t/s 1785). Mr Cox in his forensic report (exhibit 188 pages 35 and following) analysed and commented upon that valuation. Mr Cox was not cross-examined that his criticisms of Mr Tidbold’s valuations were ill-founded. Mr Tidbold had much less familiarity with The Myer Centre Brisbane than Mr Waghorn and no familiarity with The Myer Centre Adelaide. In particular Mr Tidbold was unaware of any particulars of the Beaumonts apart from the general knowledge that they were involved in hotels. He accepted the agreement to lease rentals and capitalised them all at 6.25 per cent. He said that if he were in possession of facts of which Mr Waghorn was aware his approach to that aspect of his valuation would have been different (t/s 1797) and 114

had he known of the trading difficulties in the early stages of the operation of The Myer Centre that too would have affected his opinion (t/s 1785).

[371] He agreed that it was good valuation practice when valuing shopping centres to make enquiries of centre management about any problems or arrears in rental (t/s 1797). He would also as a general practice seek out turnover information about the traders in the centre, would find a feasibility study relating to predicted turnovers of assistance, and would take it into account, ibid. He agreed that there were rules of thumb in 1988 dealing with the ratio of occupancy cost to turnover that were generally applied in the industry, ibid. The admission that the valuation for Colliers was carried out negligently and the failure to suggest to Mr Cox that his criticisms could not be sustained suggests that little or no weight should be given to this valuation.

Mr Alistair Weir’s valuation

[372] In March 1989 Mr Alistair Weir who was employed as a valuer with Richard Ellis in its Brisbane office was asked to assist in the preparation of a report for a client for the Sydney office which was known as “Operation Oxford”. Although a number of properties were to be the subject of a report Mr Weir was asked to consider The Myer Centre Brisbane. It could not be characterised as a valuation because his instructions were to contact no one associated with The Myer Centre such as centre management or the tenants for information. It was, in effect, an appraisal using whatever resources were available internally within Richard Ellis and by walking through the Centre. Mr Weir had been able to find an old tenancy schedule relating to The Myer Centre which gave him its rental structures. He was unable to produce that tenancy schedule at the time of giving evidence and had not seen it for 10 years and was unable therefore to say anything very much about it. He had no access to the leasing documentation, trading figures, feasibility studies or anything else that would assist him in considering the value of the property.

[373] He made several physical inspections of the property and noted 20 vacancies, that the Beaumont interests were trading poorly, particularly Tops and the taverns. He noted that the rents were high by Brisbane retailing standards and thought that traders who did not perform satisfactorily would struggle and that there was no potential for above market rental growth in the foreseeable future. When assessing the net achievable income on an ongoing basis of $31.5m per annum this was done without the benefit of a current tenancy schedule, details of outgoings or current trading figures. He noted that the mall had been very successful and that “The Myer Centre has further enhanced the drawing power of the city and should ensure that it remains the dominant retailing location in Brisbane in the foreseeable future” (exhibit 286 p 3).

[374] Notwithstanding the negative features of high rentals which gave no immediate capacity for growth, the vacancies and the apparently poor performance of most of the Beaumont tenancies Mr Weir was prepared to suggest a 7 per cent yield on an achievable net market income of $31.5m and arrived at a valuation of $449.924m which he adopted at $450m. Mr Weir was adamant this was not a valuation so called. Of his own work he said 115

“At the end of the day there was no way that you [himself] would put your name to a valuation without having access to information that you could verify to sustain itself of the trade.” (t/s 1880) Because of the limitations on the exercise the final valuation figure cannot be accorded a great deal of weight but what is significant is a preparedness to adopt a 7 per cent yield.

The “correct” valuation of The Myer Centre

[375] It is now necessary to consider the valuation of The Myer Centre had it been carried out with all due skill and care and to say something of the three principal experts who gave evidence. Mr Brian Cox has had extensive experience as a valuer over 36 years in Queensland (exhibit 188). He has not engaged in a great deal of forensic legal work unlike Mr Brett who appears regularly in the courts but that is not a factor to hold against him – perhaps to the contrary. Mr Cox has for many years focused upon the valuation of large investment properties and by 1986 he was in charge of valuations at Richard Ellis in Queensland supervising the work of some 20 valuers engaged in similar valuations. He was often engaged to comment upon valuations prepared by other valuers. He has been strongly criticised by the third and fourth defendants for his lack of objectivity (a criticism levelled, it must be said, by Interchase at Mr Brett and Mr Kernke). There are some communications to Interchase’s solicitors which might suggest that Mr Cox had become rather more involved in the pursuit of Mr Waghorn’s negligence than was desirable. I am not persuaded however that that has clouded his professional judgment unduly.

[376] Mr Cox was also criticised for taking into account facts and circumstances occurring after the date of practical completion (being the date from which the valuation should operate). He adopted the instructions in the letter of retainer at (3) that after completion date “deals” and other “sales evidence” should be taken into account. He took 30 June 1988 as his cut-off date. That was a reasonable construction to put on the instruction. It was not adopting a double standard, as the third and fourth defendants contend, of criticising Mr Brett and Mr Kernke for taking after valuation report date comparable sales evidence into account whilst doing so himself.

[377] I am unable accept in every case in which he has done so the severe reduction in the passing/asking rents and the raising of the segmented capitalisation rate. My conclusion is that he has emphasised too greatly the risks of aspects of the rental streams whilst not reflecting the buoyant times. No witness said that in mid-1988 there was any hint of the severe downturn in property values which occurred a year later. The mood was one of buoyancy and optimism and aspects of Mr Cox’s valuation failed to reflect this. However overall I gained more assistance from Mr Cox than Mr Brett due in large part to his far more extensive experience in the field at the relevant time.

[378] Mr Cox’s valuation figure was $380m with an overall capitalisation rate of 7.43 per cent.

[379] Mr Rodney Brett is a sole practitioner with many years’ experience as a valuer (exhibit 331). His competence as a valuer was not challenged. His practice did not include valuing large shopping centres and although exhibit 331 lists significant 116

retail centres as projects “for which valuation and consultancy work has been undertaken” it became apparent in cross-examination that this related largely to valuing the unimproved value of land in property resumptions and the like. It was clear that he did not have experience and therefore necessarily the advantage of Mr Cox in carrying out a retrospective valuation of a large shopping centre in Brisbane. He took some unduly optimistic views of what on any perspective were troubled spots in the Centre. His assumptions about the Beaumonts as sound tenants did not take into account Mr Waghorn’s own knowledge. He also set out from the third and fourth defendants’ pleadings other assumption from those contained in the letters of instruction which he treated as instructions to Mr Waghorn from Mr Burgess. There was little post the letters of instruction which varied those instructions. To suggest otherwise is to confuse information or even directions from the client which must be subject to the scrutiny of an expert valuer retained to do an open market valuation.

[380] Mr Brett produced a valuation of $441.5m with a capitalisation rate of 7.32 per cent. After making some calculation corrections at the end of his evidence his valuation was $438,782,609 at the same capitalisation rate (exhibit 333).

[381] Mr David Kernke was called by the third and fourth defendants. He had not considered the Hillier Parker valuation as he had been retained by the first and second defendants. He prepared a retrospective valuation of $450m with capitalisation rate of 6.8 per cent (exhibit 288). He had produced a valuation two months earlier of $420m (exhibit 289). He had proceeded on the assumption that the Beaumont rents were secure and said that had he had Mr Waghorn’s knowledge he would have reassessed his figures.

[382] He qualified as a valuer in 1985 and had limited experience of valuing shopping centres. He worked under Mr Cox at Richard Ellis for about five years. He was rightly criticised for taking into account after valuation comparable sales and information. He of all the valuers seemed to have difficulty in confining himself to the discipline of a retrospective valuation.

[383] The two particulars of negligence not relied upon which related to the terms of the Hewsea management agreement and the “false” leases for vacancies did not find their way into Mr Cox’s calculations as reduced (or otherwise) figures. He was not asked what effect, if any, the withdrawal of these particulars might have had on his valuation (no doubt because the abandonment occurred after he gave evidence at the beginning of the trial) and the third and fourth defendants accordingly submit that his whole valuation exercise is of no assistance. These two factors may have had some slight influence on his judgment, but that is not apparent and against the extensive nature of the valuation exercise I merely note this fact.

[384] The areas of difference between Mr Cox and Mr Brett are set out in their joint report of 19 April 1999 (exhibit 189) and, as they noted, there was a significant degree of consensus between them. As a general proposition Mr Brett considered that the rental guarantee of $32.9m for the first year of trading would cover any losses associated with the settling-in period and accordingly he set his rents and yields by considering what was likely once the Centre was established. 117

[385] Mr Brett’s additional assumptions were not reflected in the Hillier Parker report. In order for a valuation to have context the assumptions must be set out. I have concluded that there was nothing in the exchanges between Mr Burgess and Mr Waghorn and/or Hillier Parker between the letter of retainer of 14 April and the date of the letter of valuation of 17 May 1988 which were more than the provision of information or opinion about which Mr Waghorn was to exercise his expert judgment.

[386] Mr Cox considered that the early trading figures could be extrapolated to give some guide to weak areas and I have commented on that. Particular areas of disagreement were analysed in oral evidence with the valuers and canvassed in a great deal of detail. The comparable sales evidence occupied a great deal of this part of the evidence but it would not be fruitful to dwell on it again except to comment that Mr Cox’s greater experience and understanding of the market at the time would lead me to prefer his opinion as to the use which those sales analysed by the valuers could be put. As mentioned earlier, after valuation date comparable sales may not be resorted to on a retrospective valuation. The novelty of The Myer Centre concept, particularly its size and variety should not have obscured the fact that it was essentially a collection of retail tenants and the capitalisation rate should be modified as appropriate a development of that kind to reflect the customary risks associated with such tenants.

[387] Mr Cox’s total sustainable rent is $27,877,110 and that of Mr Brett, $32,292,665. The differences are due to differences regarding potential income for tenants as they have particularised, the exclusion of a florist kiosk by Mr Cox and the inclusion of additional kiosks by Mr Brett. There were some differences in floor areas in some tenancies between the valuers because of different source documents either the agreements for lease or the tenancy information form. Mr Burgess had told Mr Waghorn to use the TIF forms where there were differences. Some of these differences had an impact on the assessment of gross rental and of outgoings but I have not attempted to resolve the differences and it has had little effect on the final figure.

[388] Mr Cox conceded that he ought to have made an allowance for outgoings recovery from Best & Less of $28,000 calculated by Mr Brett but suggests that it makes no material difference to the valuation figure.

[389] I consider that there are a number of areas where Mr Cox’s approach needs adjustment. Notwithstanding the identification in all the contemporaneous valuers’ reports of the high rate per bay rental for the car park, the evidence showed that the city was in short supply for car parking and operators tended to hold for many years before expecting a profit. Mr Cox adjusted the rent from $4,250,000 to $3,335,000 with a capitalisation rate of 7.75 per cent. Mr Brett accepted the passing rental and applied a capitalisation rate of 7.5 per cent. I would accept the passing rent which adds an amount of $915,000 to Mr Cox’s net rent.

[390] Mr Cox reduced the rent for Butlers, the Albert Street specialties and Berties Tavern significantly to what he considered a sustainable level and then imposed a capitalisation rate which was still higher than that of Mr Brett’s where he had made no adjustment to the rent or a smaller allowance for each stream of income. I have concluded that on a long term basis this was a pessimistic view by Mr Cox of these 118

rent streams and that the adjustment is best made by adjusting the overall capitalisation rate. The capitalisation rate of 7 per cent which I would apply reflects a view which was held in Mr Cox’s own office at the time as the appropriate capitalisation rate.

[391] On a net rental of $28,792,110 (adding $915,000) an adjusted value of $411,315,850 is obtained which I would round to $410m.

[392] In my view $410m reflects the correct value of The Myer Centre Brisbane which a competent valuer would have ascertained had he been carrying out the same valuation as Mr Waghorn and Hillier Parker and Colliers at the time.

Contributory negligence

[393] The third and fourth defendants make a number of allegations of contributory negligence. They allege that Interchase should have warned them prior to the valuation being prepared of each of the matters about which Interchase now complains as particulars of negligence since those matters were within its knowledge, for example, the level of complaints from tenants. They also argue that Mr Burgess was Interchase’s agent in the supply of information and in his conduct. He did provide information to Colliers at the request of Mr Garmston but that did not make him Interchase’s agent and he was not with respect to Hillier Parker.

[394] So far as the evidence reveals Mr Waghorn was never refused any request for information. He was not denied access to Centre Management and agreed that he spoke to Mr Clare. Had he sought more confidential information such as tenant debtors and turnover information Mr Ryan would have authorised it. Mr Garmston made material available to Colliers and it is clear from the March minutes of the Interchase board meeting that a co-operative approach was being taken to the valuation. Mr Waghorn said that he was content with his valuation. It was not limited in any way and he did not say that he would have approached it differently had he been given information which he and Hillier Parker allege ought to have been given.

[395] Finally the third and fourth defendants contend that Interchase paid the money pursuant to the Development Agreement when it knew or ought to have known that the third and fourth defendants were acting upon a number of incorrect factual assumptions. Interchase contends that upon delivery of the valuations it came under a legal obligation to pay the balance of the Completion Sum pursuant to the Development Agreement to PEQ and, in that circumstance, it could not be liable for contributory negligence. It is unclear what were the incorrect factual assumptions held by the third and fourth defendants. In most cases it was a failure properly to investigate (or at all) the market, carry out correct calculations and to employ the care, skill and judgment of a competent valuer in undertaking such a complex task which constituted the negligence.

[396] In my view the third and fourth defendants have not in their pleadings, evidence or submissions raised material sufficient to make a finding of contributory negligence by Interchase. 119

Damages – no loss

[397] The third and fourth defendants have argued that since Interchase paid a total of $377.5m to PEQ under the Development Agreement for The Myer Centre and since on Interchase’s own case the true value of The Myer Centre was $380m it has suffered no loss because what it complains of is no more than unrealised gain which is not recoverable in tort. They rely upon the orthodox view that the measure of damages is the difference between the price paid or payable and the value of the property. That misconceives Interchase’s case. Damages are restitutionary and if there is an obligation to carry out the task with reasonable skill and care the fact that Interchase would thereby gain a financial benefit by operation of a clause in the contract is irrelevant. The loss is measured by reference to the position that Interchase would have been in had the valuation been carried out competently. The purpose of the valuation was known to the third and fourth defendants and accordingly there was no question but that the nature and extent of the damage was reasonably foreseeable, Hill v Van Erp, 169, 179, 232.

Damages - recoverability

Preliminary

[398] Interchase paid $377.45m for The Myer Centre Brisbane plus $249,976 in interest on the Development Bonus. Sums which would become due as bonus payments if the completion valuation was greater than $425m were paid by Interchase prior to the receipt of the valuations in the expectation that the completion valuation amount would be no less than $470m. Once the Completion Valuation Amount was formally identified Interchase made further payments.

[399] Interchase’s case is that it would not have made those further payments and would have sought to recover the pre-payments made had a completion valuation of $380m been made or any other valuation of $425m or less. Interchase was entitled itself to a refund under the Development Agreement on a completion valuation of $380m or less than $425m and would have pursued PEQ and its guarantors PEL and CCL.

[400] As has been discussed the third and fourth defendants deny that payments were made by Interchase pursuant to the Development Agreement, that is, they contend that Interchase was not legally liable to pay those moneys and therefore they are not recoverable as damages. As has been indicated I have concluded that the disconformity between cl 14 of the Development Agreement and the retainers of the valuers did not have the consequence that Interchase was not bound by the terms of the Development Agreement as varied so as to avoid payment of the Development Sum.

[401] Interchase carries the onus of demonstrating that the loss of the chance to recover the sums from the Chase companies had some value, that is, that the chance was not worthless. It argues that payments made after 18 May which total $10.45m plus $249,976 in interest would not have been made had the completion valuation been $380m or some other figure up to $425m and may therefore be recovered without any consideration of reduction because of the risk that the Chase companies could not pay. Interchase contends that even if its chance of recovering anything from the 120

Chase Group is assessed as having no value, nonetheless as a creditor of each of PEQ, PEL and CCA it would have been entitled to participate in the scheme of arrangement agreed to by the administrator with the creditors and would have received in the vicinity of 16 cents in the dollar.

[402] Since I have assessed the “correct” value for The Myer Centre at $410m the assessment of the chance falls to be considered by reference to that figure and the application of cl 10A of the Development Agreement rather than a valuation of $380m as contended for by Interchase. What I propose to do is to proceed on the basis of a $380m valuation (a worst case scenario in terms of recoverability) since if I am found to be wrong in my assessment of the correct value of The Myer Centre and it should have been $380m my approach on that figure will be available. I have not attempted and could not carry out the calculations performed by the expert accountants on the figure of $410m and it seems to me to be unnecessary in light of the conclusion to which I have come. In any event it would tend to suggest certainty where there can be none, Mansini v Martin (CA No 10560 of 1997 unreported decision of 7 August 1998).

Payments made by Interchase

[403] Interchase particularises the following amounts as having been pre-paid and/or paid pursuant to cl 10A.2 of the Development Agreement. Date Amount ($) To Whom Paid

07.04.88 $7,000,000 PEL 27.06.88 $5,500,000 PEL 15.07.88 $100,000 PEL 19.07.88 $200,000 CCA 22.07.88 $150,000 CCA 26.07.88 $100,000 CCA 02.08.88 $300,000 CCA 03.08.88 $200,000 CCA 05.08.88 $200,000 CCA 08.08.88 $200,000 CCA 09.08.88 $100,000 CCA 11.08.88 $100,000 CCA 02.09.88 $550,000 CCA 06.09.88 $250,000 CCA 07.09.88 $400,000 CCA 20.09.88 $500,000 CCA 23.09.88 $1,000,000 CCA 28.09.88 $500,000 CCA 10.10.88 $100,000 CCA No date particularised $50,000 No entity particularised

The particulars recite that the payments were made by Interchase to PEL or CCA at the direction of PEQ and/or by PEL as agent for PEQ.

[404] The third and fourth defendants maintain that even if the existence of a liability to pay PEQ be assumed, the payment to these other companies within the Chase 121

Group of companies is not evidence of payment to PEQ and that no evidence was called to show that PEQ directed Interchase to make payments to other entities. PEQ was a wholly owned subsidiary of PEL without, it would appear, any other function apart from being the vehicle for the Development Agreement with Interchase in respect of The Myer Centre development. Indeed no letterhead seems to have been generated for it and, at least so far as the evidence in the trial is concerned, PEL operated as its agent as pleaded and PEL was a wholly owned subsidiary of CCA. As Mr Barlow for Interchase pointed out in submissions in reply (t/s 2870) PEQ and PEL shared common directors in Mr Schutz who was also a director of CCA, Mr Reynolds, Mr Glew and Mr Hoog Antink. Mr Garmston and all of the relevant witnesses for Interchase assumed that these payments were made in discharge of Interchase’s liability to PEQ under the Development Agreement (exhibits 71 and 91).

[405] Mr Hadwen, an expert accountant who gave evidence in Interchase’s case, in his first report of 1 March 1996 (exhibit 207 pages 8 and 9) analysed these payments and their treatment in the books and ledgers of the various Chase companies. An examination of PEQ’s ledgers suggested that it did not have an operational bank account at the relevant time. Mr Hadwen concluded that Interchase paid $17.45m by cheques on account of the bonus payable under the Development Agreement and by two separate entries, one by cheque and one by a set-off against CCA’s liability to Interchase upon rental guarantees, paid $249,976 for interest on these payments. The Chase companies to whom the sums were paid accounted to PEL in the accounts who in turn accounted to PEQ.

[406] Mr Duus, an expert accountant who gave evidence in the third and fourth defendants’ case, in his second report (exhibit 217) did not dispute the fact of the payments and agreed that it was not unusual for a large group to have one or two bank accounts to support numerous companies (t/s 2415). I am satisfied to the requisite standard that instructions were given to Interchase to make the payments to the entities within the Chase Group who received them and for all relevant purposes Interchase paid the sums particularised pursuant to its obligations under the Development Agreement.

Ability to pay

[407] Interchase contends, correctly in my view, that the question of the capacity of any of the Chase companies (PEQ, PEL, CCA or CCL) to repay the prepayment and the reduction in the Development Sum pursuant to cl 10A.1 of the Development Agreement does not affect the $10.45m paid by Interchase pursuant to cl 10A.2 after 18 May 1988 since it would not have made those payments had there been a valuation less than $425m (whether or not the letter or the report constituted the Completion Date Valuation).

[408] A considerable body of evidence both written and oral was received on the question of the Chase companies’ capacity to pay from accountants, stockbrokers, financial analysts and bankers and included many volumes of retrospective accounting analysis. The task involved analysing the Chase companies’ capacity to pay at any time from 18 May 1988 until the Australian Chase companies went into administration at the end of June 1989, assessing whether funds could be found and if so, whether the payments would have been made. 122

[409] The third and fourth defendants seemed to have instructed some of their experts, particularly Mr Duus and Mr Welsh, another accountant, to approach the exercise as insolvency practitioners with the emphasis on promoting the worst possible case. They thereby failed, as a consequence, adequately to consider the situation a year prior to the collapse of the Chase companies in June 1989. Even so, their concerns as to where the money would or could be sourced to pay Interchase were far from unfounded. But on the whole, I found Mr Hadwen’s approach of greater assistance as he seemed more attuned to the task. The evidence of witnesses who were employed by the bankers to the Chase companies, supported by contemporaneous documents, were of considerable assistance. They gave, it seemed to me, entirely independent evidence, irrespective of which side called them. This was no doubt due in part to having no close involvement in the preparation and conduct of the trial which had necessarily been the role of Mr Welsh, Mr Duus and Mr Hadwen.

[410] As in the case of the retrospective valuations it was and is a difficult task to be uninfluenced by post-June 1989 events. As with all financial “crashes” the signs were there well in advance of disaster but could only be read clearly after the event, and that is the major criticism of Mr Duus’ and Mr Welsh’s approaches. The other important witness in this aspect of the case was Mr John Clarke. He was the financial controller of CCL responsible, subject to the board, for all major decisions about loan facilities and worked closely with the Bank of New Zealand, CCL’s principal banker. He still retained a good working knowledge of the details of transactions in which he was involved 10 to 12 years later. He remained on to assist Mr Macintosh after he was appointed administrator in 1989. I had no reason to doubt the probity of his evidence and thought that his manner of giving it indicated a willingness to assist the court in this complex and difficult area. If he became a little testy after days of evidence, being asked to analyse figures out of court at the request of the parties and being recalled to the witness box, that is hardly surprising and did not suggest to me any lack of care in his evidence. The contemporaneous file notes and memoranda made by the bankers show that he was well regarded as a professional and, in a period of financial crisis, regarded by them as straight-forward in his dealings with them.

[411] Numerous issues were raised by the particulars of the Chase companies’ capacity to pay. There is no particular advantage in dealing with any topic in advance of another but a useful starting point is to consider the financial position of the CCL group as at the middle of May 1988.

[412] Interchase concedes that at no relevant time did PEQ have sufficient funds to make any payment to Interchase either as repayments of early payments by Interchase or as a reduction in the Development Sum. But Interchase does contend that CCA, if necessary assisted by its parent company CCL, could have paid the whole of the amount when the obligation arose to pay it.

[413] The indicative letters of value were delivered on 17 and 18 May 1988 respectively. Interchase has submitted that had the Completion Valuation Amount been $380m (or under $425m) it is more than likely that PEQ would have insisted that the full valuations be delivered before conceding that the Valuation Receipt Date had arrived. This would have allowed it to organise the cash or to arrange the finance to pay Interchase. Interchase submits that any announcement to the market would state that the refund would be payable to Interchase within seven days of the receipt 123

of the completion valuations which were expected within a month and would be paid. None of Mr Ryan, Mr Curran or Mr Berkovic were asked what Interchase’s reaction would have been. Neither was Mr Clarke asked if PEQ (or PEL or CCA) would have proceeded in this way. He was not involved in The Myer Centre project and no other Chase directors gave evidence. It is not fatal to the submission that there was no direct evidence on the point. For example, the Interchase minutes reveal cooperation with Chase over the early payment. There were two Chase directors on the Interchase board and it is reasonable to infer that there would have been this degree of cooperation.

[414] Interchase contends that even if CCA had to call on CCL for assistance to meet the debt to Interchase there were sound commercial reasons for CCL to provide that assistance. The central treasury system of the CCL companies meant that surplus cash in one wholly owned subsidiary would be remitted to a treasury company for deployment wherever the group could take best advantage of it. Transactions as between the various wholly owned subsidiaries were recorded as loans to or from the treasury companies such as IEML, Datacrest and Falcington.

[415] Further, CCL was the guarantor of most if not all of its subsidiaries’ major lending facilities (anything over $5m) and cross-default clauses provided that if one company in the group went into default that would affect all other facilities across the whole group. Mr Clarke said that this cross –default applied to all debts by subsidiary companies (t/s 417). Less compelling but still an important factor was CCL’s majority shareholding in Interchase. A default in payment of the debt to Interchase would affect its net tangible assets and may have had an adverse effect on the price of Interchase’s shares. The third and fourth defendants seek to analyse what PEQ’s parent companies might have done in response to its obligation to Interchase in terms of strict legal obligation citing, for example, ANZ Executors and Trustee Company Limited v Quintex Australia Limited [1991] 2 Qd R 360 at 365. Whilst it would be inappropriate for a court to lend its aid to unlawful conduct, the exercise here does not involve a nice analysis in each case of directors’ duties vis-à-vis companies in a group situation but to predict as much as possible what the response might have been.

[416] The experts prepared their reports and gave their evidence on a valuation of The Myer Centre of $380m and that needs to be kept in mind when they make reference to paying Interchase, for example, $62.5m (or $52m). I have concluded that a competent valuer would have arrived at a valuation figure of $410m. Under the terms of the Development Agreement this meant that $15m was to be paid to Interchase as a refund of the Development Sum. Interchase would seek to recover the $7m made as advance payments. It would not have made the post Completion Valuations payments to PEQ of $10.45m or the interest payment so that Interchase needs to show that it would have received $22m from the Chase companies or some part of it.

Cash available to CCA as at 30 June 1988

[417] Mr Hadwen’s opinion in March 1996 (exhibit 207) as to the capacity of CCA was summarised at page 21 “I am of the opinion that PEL had sufficient net assets and access to cash to discharge PEQ’s obligations under the Development Contract 124

through repayment of $52,000,000 to Interchase. In addition, CCA had access to the funds available on acquisition of Jonray to meet any obligation which may have arisen under the guarantee should PEQ or PEL not meet their obligations.

In addition to these facilities, CCL, who had significant reserves at 30 June 1988, was in a position to support CCA in discharging PEQ’s obligation.

The combination of cash facilities and support by CCA and CCL enables me to be of the opinion that PEQ’s obligations under the Development Contract were able to be adequately discharged.”

[418] In his report of 13 February 1996 (exhibit 307) Mr Duus concluded “It is my opinion that, bearing in mind CCA’s other commitments, it was unable to satisfy a debt totalling $62.5M at any time after April 1988.” This first report of Mr Duus had been rather a cursory overview of the CCA accounts based on the group’s financial statements and by making a number of assumptions. After Mr Hadwen had prepared his report of 1 March 1996 Mr Duus prepared a detailed critique of that report dated 28 August 1996 (exhibit 217) in which he concluded at page 35 “Based upon the above, I do not believe that Mr Hadwen’s report demonstrates that CCA, PEL or PEQ would have access to sufficient funds to enable payment of the amount allegedly owed to Interchase and CCL was not in a position to assist with funding such payment.”

[419] Mr Duus came to this conclusion because he thought in respect of

(i) CCL

· Mr Hadwen had concluded that $147,976,000 was available to the CCL Group. At least $149,553,911 was committed for other purposes and unavailable to fund the payment of any moneys to Interchase;

· CCL had financial problems of its own in New Zealand and as a publicly listed company it may have been unable to provide any additional funds;

· The directors’ practice of “balance sheet dressing” and manipulation of asset valuations, raised serious concerns about the financial position of the group;

· CCL would have been unable to obtain funds from partly owned publicly listed subsidiaries as they were required to account to shareholders other than CCL. 125

(ii) PEQ

Mr Duus noted that Mr Hadwen had acknowledged that PEQ would have been unable to satisfy any debt owed to Interchase.

(iii) PEL

· Had PEL accounted for the debt owed to Interchase it had at best a net deficiency of assets of $56,975,000;

· The true financial position of this company was unknown due to the directors’ practice of “balance sheet dressing” and due to the questionable valuation of the company’s properties.

(iv) CCA

· The major assets of CCA were loans from related companies totalling $423,107,000 although those companies had available funds of only $5,936,000 with which to repay the debts;

· After accounting for non-realisable assets in the short term, and the liability owed in respect of the Airtide preference share redemption, CCA had a net deficiency of $411,809,000. This did not include the debt owned to Interchase;

· CCA would have been unable to obtain further funding from financiers without providing fresh unencumbered assets as security;

· The cash and other assets of Jonray were unavailable to CCA since the shares in this company were fully encumbered.

[420] Mr Duus observed that all of these companies were showing a number of the classic signs of insolvency or impending insolvency such as the manipulation of financial reports through “balance sheet dressing”; incurring losses for the sake of gaining control of cash in the short term, for example, the Jonray takeover; the implementation of an asset divestment program; the upwards revaluation of assets artificially to improve the financial position of the group; failure to disclose the true financial position of a company to its financiers; and undertaking measures to alter the default covenants relating to their securities.

[421] He considered the position of each of the companies as at 30 June 1988 since he was of the opinion that thereafter their financial position deteriorated further.

[422] Mr Hadwen in his second report of 4 March 1999 (exhibit 208) having reviewed further material including Mr Duus’ second report concluded that “PEL and CCA would have been able to meet their obligation to Interchase in the amount of $62.5m during the relevant period for the reasons set out below in paragraphs 3.5 to 3.10. This most likely would have been achieved by PEL utilising the $30.3m available to 126

it and CCA providing sufficient cash to PEL to meet the balance of the obligation to Interchase.”

Cash resources available to pay debt

[423] There was much evidence given at the trial by examination and cross-examination of Mr Hadwen and Mr Welsh concerning Mr Hadwen’s statement that cash at bank disclosed in the CCA 1988 statutory accounts (exhibit 110) was $64.5m. It is unnecessary to traverse the detail of that analysis but if the cash from non-wholly owned subsidiaries and the funds received by PEL from the settlement of a property, Flagstaff, were deducted then the cash at bank available for CCA was $4.65m. Mr Hadwen had stated in his first report that the amount of cash available was $5.4m. Both Mr Hadwen and Mr Welsh agreed that CCA and the wholly owned subsidiaries had in the vicinity of $5m cash available (t/s 919; exhibit 306 page 2).

CCL available cash

[424] The balance sheet for the CCL group accounts at 30 June 1988 disclosed cash and short term deposits of $NZ174,295,000 ($A147,976,000) (exhibit 116 page 3 of Financial Statements). Mr Clarke said that in order to be included as cash or short term deposits the funds needed to have been available for immediate use by the group (t/s 994). When that figure was broken down Mr Hadwen concluded that the funds held by IEML of $NZ38,491,000 and the amount held by CCFNZNV of $NZ54,073,000 (see also exhibit 149) would have been available to meet the debt to Interchase. (The amount of $US35,335,100 was held in Hong Kong on deposit with Bancorp in the name of Chase Corporation Finance New Zealand NV). Mr Clarke confirmed that these funds were available. Mr Hadwen was unable to say whether the funds held by other offshore subsidiaries in the amount of $NZ13.508m would have been available for use to pay the Interchase debt. He said that he was unable to identify the specific subsidiaries and was unaware whether they were 100 per cent owned (t/s 849). The CCA consolidated balance sheet of August 1988 (Appendix 23 to Mr Hadwen’s second report (exhibit 208) and exhibit 148) shows that funds available on deposit in offshore subsidiaries were $2.715m in the United Kingdom, $7.139m in the United States and $3.654m in Hong Kong. Mr Clarke said that as at August 1988 when the accounts were prepared the United Kingdom and the United States companies were all wholly owned subsidiaries, but was unable to recall if the Hong Kong subsidiary was 100 per cent owned by CCL. The tenor of his evidence was that he thought that it was but he had not been able to look at it in detail and could not be certain (t/s 533). Neither Mr Welsh nor Mr Duus provided any evidence to suggest that those funds were encumbered (t/s 2274; t/s 2424). Neither is there any persuasive evidence that it was needed to pay some unidentified margin call.

[425] The third and fourth defendants suggest that Mr Clarke’s evidence is unreliable on this point on the ground that he was vague about the availability of the $US35m and the offshore subsidiaries’ cash. On the issues that were important, namely identifying the UK and USA subsidiaries as 100 per cent owned by CCL and that the cash and short term deposits would not have been shown in the financial statements were they not readily available for use his evidence leads to the inference that the sums more likely than not were available. The third and fourth 127

defendants make the further point that the cashflow projections made for CCL’s bankers (exhibit 228) must have brought into account all of the available cash. However, as Mr Clarke observed, these cashflow projections were being done on a very regular basis for the benefit both of CCL and its bankers and changed constantly. It is not unreasonable to conclude that these sums were available within the group and might have been disbursed to assist CCA to pay the debt to Interchase.

IEML Cash – $NZ38.49m

[426] This amount of $NZ38.49m appears in IEML’s balance sheet (exhibit 117) under current assets at bank and deposits and makes up part of the cash and short term deposits shown in CCL’s balance sheet (exhibit 116). The amount of $NZ37.5m together with accrued interest is shown in a Bank of New Zealand document sent from the bank to Coopers & Lybrand, the CCL accountants, on 10 August 1988 as being held on behalf of IEML. Mr McCredie, a senior officer with the Bank of New Zealand at the time, who gave evidence, said that he expected the information to be accurate (t/s 2120). The information was not challenged by Mr Duus and appears as Appendix 24 to Mr Hadwen’s report. There was no evidence that those funds were encumbered. There was some suggestion in cross-examination of Mr Clarke by Mr Fraser QC that it may have been used as security for the advance of $23m in Australia. Even if that were so, those funds became available after 1 July 1988 when the loan was repaid. That sum which is the equivalent of $A32.679m was available in the pool of funds to satisfy the debt to Interchase.

Flagstaff funds - $30.178m

[427] The cash at bank shown in the CCA statutory accounts of $64.5m (exhibit 110) included $30.178m being the proceeds from the sale of the Flagstaff property in Victoria owned by PEL. Those funds as became apparent in the course of trial were not received by PEL and banked until 1 July 1988 (exhibits 176 and 235). This was one of the events condemned by the third and fourth defendants’ expert witnesses as “balance date dressing”, a sign of financial stress. Flagstaff was sold during the accounting period with settlement deferred until 1 July 1988. CCA’s auditor’s commented that they should accept this treatment in view of the settlement on 1 July (exhibit 217/11). Undesirable as Mr Hadwen, Mr Duus and Mr Welsh regarded such a practice, it was something which was not condemned out of hand at the time by the auditors. It is not disputed that the treatment of those funds as cash rather than receivables did not affect the net assets of the company nor any relevant financial ratios (Clarke t/s 546; Hadwen t/s 885). There was no evidence to suggest that those funds were encumbered in any way (Clarke t/s 412). Under the terms of the contract the settlement was to be on 1 July 1988. Had those funds been required for payments to Interchase they may not have been transferred to IEML.

Summary of cash potentially available

[428] Interchase submits that in the period between about 30 June and mid-August 1988 the following cash was available to the CCL group and may have been utilised to pay any debt to Interchase. 128

[429]

Source $A CFNZNV $45,908,000 (Bancorp and other deposits) ($US35,524,000)

IEML Cash $32,679,000

CCA Cash $5,000,000

Funds from sale of Flagstaff $30,177,669

UK and USA subsidiaries $8,366,000

TOTAL: $122,130,669

[430] I accept that from a calculation point of view those sums may have been available.

[431] It was contended by the third and fourth defendants that on a valuation of $380m for The Myer Centre the value of the shares in Interchase would fall and it would be necessary for CCA to provide cash security to top up the security for the Interchase share purchase facility. Taking the pessimistic case of the share price proposed by Mr Burrell of $1.25 after payment of the call the amount of top-up would be $15,362,500 calculated (without disagreement):

52,390 shares x $1.25 = $65,487,500

Outstanding Loan ($57.75m) x 140% = $80,850,000

Difference = $15,362,500

Interchase contends that that would leave substantial funds available to pay the debt and for whatever other day-to-day demands there were upon the cash resources within the group.

[432] Mr Duus maintained in exhibit 217 at page 28 that CCA would have been unable to discharge its obligation to pay the balance call at 30 June 1988 on its shareholding in Interchase because the call was paid by CCA in part from the funds received by it from Interchase under the Development Agreement in what he described as a “round robin” of funds between the two companies. The call was paid by the release of $24,566,000 held on deposit on behalf of CCA for the purpose of meeting the 30 June 1988 call on shares (exhibit 208 Annexure A, Appendix 2 page 62 and exhibit 171).

Other sources of funds

[433] Interchase contends that in addition to the cash resources available to the Chase companies they had a significant number of existing finance facilities which allowed access to working capital. 129

[434] Mr Hadwen set out the borrowing facilities to which the CCA companies had access as at 30 June 1988 together with the assets against which further facilities might have been granted (exhibit 208, ss 9 and 10 and supporting documentation in Appendix 9/7). Mr Duus maintained that even were these facilities or some of them available there was no real likelihood that CCA could have provided sufficient security to maintain the relevant ratios on the facilities.

[435] Mr Hadwen concluded that the CCA group had the ability to borrow an extra $60.506m under its existing facilities (exhibit 179; exhibit 208 Appendix 9/7). That capacity included $13.639m under the Interchase syndicated facility. He did his calculations on the basis of the banker’s security value and a share price of Interchase as at 30 June 1988 of $1.75 (exhibit 169). This facility was for the purpose only of acquiring shares and convertible notes in Interchase and for such other purposes as might be approved by the Bank of New Zealand acting on instructions from the majority of the participating financiers (exhibit 135 cl 3). What Mr Hadwen did not take into account when making reference to the availability of the funds was the real possibility that the market price of Interchase shares would drop on a valuation of $380m (or any lower valuation of The Myer Centre than $470m) and accordingly the security would be insufficient for the facility.

[436] There were available three working capital facilities with Tricontinental for $25.2m, Standard Chartered Bank for $10m and Citibank for $11.9m which had been temporarily reduced to nil for the purpose of the CCA group balance sheet by CCA depositing funds with those lenders as at 30 June 1988. The deposits in respect of those three facilities were additional to the securities held against the loans and the value of the securities covered the loan balance outstanding. The temporary deposit of $25.2m with Tricontinental was recognised by the lender as a balance date dressing exercise (exhibit 208 Appendix 9/7(a)(ii)). Mr Hadwen demonstrated that deposits amounting to $47.1m on 24 hour call would have been available to meet the obligation to Interchase (exhibit 208, Appendix 9/7, 9/7(a)(i)(iii), 9/7(b)(i), 9/7(d)(vii)). Mr Hadwen has noted that these deposits were included in the CCL group financial report at 30 June 1988 in the amount disclosed for cash and facilities available of $NZ463m for Tricontinental and Standard Charter Bank in the amount of $NZ41,460,542 ($A35,2m). The Citibank deposit of $11.9m was included in the amount of $NZ50,058,893 for Australian properties. Mr Hadwen concluded that it was most likely that those funds were free from any encumbrance or obligation at or about 30 June 1988, (exhibit 207 page 10). Interchase has submitted that if CCA had known by 30 June 1988 that PEQ was obliged to make payments to Interchase it may well have retained the cash which was used to reduce those facilities.

[437] Interchase also contends that the CCA group owned shares with a banker security value of approximately $14m (exhibit 179; exhibit 208 Appendix 9/7). The larger parcels of shares in well known companies such as Pangea, Barrier Reef Holdings, De Laurentis Entertainment, Reil Corporation and Wormald amounted to approximately $11.5m at 70 per cent of the security value. Those shares could have been used as further security to draw down against existing facilities. This seems more likely than for CCA to have raised new facilities. The Sanwa facility was a working capital facility with a limit of $10m of which $3.1m had been drawn. As at 30 June 1988 the facility had 18 months to run and provided adequate first 130

mortgage security was provided to Sanwa the balance was available. Interchase therefore contends that under the existing Tricontinental, Standard Chartered Bank, Citibank and Sanwa facilities CCA had the capacity to drawn down $54m in cash. About $5m would have been available as a loan against the security of the additional shares available in the major companies such as Barrier Reef Holdings and Reil Corporation (t/s 2273).

[438] CCA owned over 58m shares in Hanimex Limited which had a market value at 30 June 1988 of $2.60 each. In the first quarter of 1989 their value had increased to $3.75 (exhibit 309). The banker’s security value was $101m securing borrowings of $60m. Interchase contends that even if the balance $40m was considerably discounted to take account of the increased risk under a second mortgage there would nonetheless have been sufficient security value to have borrowed at least $20m. As late as 17 May 1989 even after Chase had received a reduced credit rating in February 1989 Tricontinental was prepared to assist in a $70m syndicated facility to cover possible short term working capital for CCA on the security inter alia of a second mortgage over 60m shares in Hanimex (exhibit 140). On 20 March 1989 Mr McCredie writing for the Bank of New Zealand offered a standby facility of $25m with second mortgage security over the 60m Hanimex shares (exhibit 145).

[439] Even though there was capacity to provide security for borrowings on the existing facilities the important question was whether the bankers would be prepared to lend further funds to the group. They would only do so if in their assessment the loans could be serviced and the principal ultimately repaid. The other question is whether the bankers would have been prepared to lend in the context of a $380m valuation for The Myer Centre in Brisbane. It was, of course, a significant investment for CCA via its shareholding in Interchase but attention should not be deflected from CCA’s significant property holdings throughout Australia. As mentioned as late as March and May 1989 the Bank of New Zealand and Tricontinental were prepared to lend further funds for working capital on the security of a second mortgage over the Hanimex shares (the taskforce report on CCA dated 23 February 1989 for the Bank of New Zealand (exhibit 303 “MJM5”). The property market was much more fragile by then and the value of CCA’s assets had reduced ibid.

[440] The evidence of the stockbrokers and some of the bankers was that through 1988 and into 1989 Australian and New Zealand banks supported the large entrepreneurial companies and gave them ongoing financial facilities to assist with liquidity problems which arose as a consequence of the share market crash in October 1987. Mr McCredie agreed that his bank (BNZ) would only put in receivers or call in loans with a large entrepreneurial company, of which the Chase group was one, as a very last resort. It would have been very reluctant to see Chase collapse in 1988 since it would have had major financial ramifications for the bank (t/s 2117).

[441] Mr Aird, a stockbroker, in the year after he ceased work with Johnson Taylor worked for a merchant bank, and his conclusion was that a merchant bank would look reasonably favourably at continuing the operations of a company with large assets and large exposure rather than liquidating it (t/s 1752). This was the view of Mr Crommelin (t/s 112) and Mr Burrell (t/s 2050). The impression that I obtained from the bankers was that more likely than not they would have supported the Chase companies in mid 1988. Accordingly had there been a valuation of The 131

Myer Centre at $380m, between the middle of May and for some months following it is likely that CCA would have had the support of its bankers, particularly the Bank of New Zealand, to assist it to find the funds to settle with Interchase.

Other assets realisable for cash

[442] As has been mentioned the Hanimex shares owned by CCA were worth approximately $151m as at 30 June 1988. Those shares were then security for loans of $60m. Although it is unlikely that the sale of a large parcel would have netted the market value of the shares nonetheless Mr Hadwen was of the view that cash of about $90m would be available after repaying the debt of $60m for which they were held as security (t/s 2168-9). Mr Clarke said that CCA had attempted to sell the shares at $3.75, above the current market value at the time, but eventually it was decided not to proceed with the sale. It is possible the share price on the sale of such a large parcel might have been as low as $2 per share which even so would have realised more than $50m (t/s 430).

Dividend

[443] In September 1988 CCL paid an interim dividend of approximately $A16.8m (exhibit 116 page 3), $8.8m of which was paid in cash. Mr Clarke said that if there had been an obligation to repay Interchase and to make further payments to Interchase under the Development Agreement then the amount of the dividend for that year may well have been lower or there may have been no dividend paid (t/s 424-6). It was a matter for the directors to make a decision as to whether a dividend was paid.

Jonray

[444] Mr Duus maintained in his report that there was no benefit gained by CCA in acquiring Jonray Holdings Limited (exhibit 217 page 30). Mr Hadwen concluded that there was a net benefit of $13.162m in 1988. CCA gained access to Jonray cash in August 1988. The Bank of New Zealand was repaid and other financiers had the securities then held against loans varied prior to 31 December 1988. Mr Duus was prepared to concede that there was a net benefit to CCA because although it already owned 52 per cent of Jonray Holdings Limited it was unable to access the assets for group purposes (t/s 2466). He calculated the benefit at $8.6m (exhibit 323). Mr Duus was not confident in his evidence on this and was unable to source some of the figures in his calculations. He admitted that the allocation of the figure of $3.1m as a security to be paid out by reference to the Jonray shares was an assumption that the Sanwa facility was secured by those shares. It seems clear that 1.25m Jonray shares only were secured to Sanwa and they were released in exchange for a cash deposit of $900,000. There can be no doubt that the acquisition of the balance of the shares in Jonray in August 1988 gave a net benefit to CCA of no less than $8.6m but it may have been close to about $12m. Although the benefit was not available in June/July 1988 nonetheless it was something which could have been taken into account in considering the capacity to repay Interchase. 132

Pangea Resources Limited

[445] Bargenos Pty Limited, a wholly owned subsidiary of CCA, sought to acquire all the shares in Pangea Resources Limited. Kleinwort Benson proposed providing $12.75m for the takeover offer (exhibit 152) and making up the balance of some $22m from cash deposits with the Bank of New Zealand (exhibit 217/12). As with Jonray Holdings Limited it was anticipated that the acquisition of Pangea Resources would bring about a net benefit to the group but CCA may have concluded that if the debt was owed to Interchase those resources could have been utilised in that way. There were no other identified purposes for the use of that money.

BNZ guarantee

[446] The Development Agreement required that PEQ have in place a guarantee provided by the Bank of New Zealand in favour of Interchase. Interchase was unable to plead particulars of the guarantee and indeed it was not a settled question until part-way through the trial when it became clear that CCA had not requested the Bank of New Zealand to issue the guarantee and it was never issued although the bank had agreed to put in place the guarantee for $10m in favour of PEL (exhibit 208/21). The letter of offer of 25 May 1987 was signed by Mr Jones, State Manager, Corporate and Commercial Banking New South Wales for the Bank of New Zealand and addressed to Mr L Shutes as a director of PEL and appears to have been signed by him in acknowledgment of the offer and dated 28 May 1987. The minutes of the meeting of the directors of PEL on 28 May 1987 resolved to accept the letter of offer on its terms and conditions, and Mr Shutes was authorised to sign the documents and to accept the offer on behalf of the company. It is therefore difficult to understand why the guarantee was never issued. I do not infer PEQ was unable to do so.

[447] Because of the group nature of the companies involved, PEQ and in turn PEL and CCA could have expected that CCL and its wholly owned subsidiary companies would have sought to find the necessary cash to pay any debt to Interchase. The way in which the whole group operated was by way of a central treasury and I accept that it would be artificial to resort to insolvency concepts within the group for the purpose of assessing Chase’s capacity and likelihood of paying Interchase in the third quarter of 1988.

Solvency of CCL and CCA

[448] The third and fourth defendants contend that from 8 April 1988 none of PEL, PEQ or CCA (or CCL) had any capacity to meet a debt to Interchase arising from a valuation of $380m. Mr Duus’ opinion was that the companies involved in the whole Chase group “were completely insolvent as at 30 June 1988 based on the definition of insolvency defined in the [Corporations] Act and by the Court … that a company or a business which cannot meet its debts as and when they fall due from its own funds, and that’s where a lot of auditors forget the last words of the definition, as determined by the Court” (t/s 2410-1). In cross-examination he expanded upon the concept of a company’s own funds “Its own assets not borrowing that are going to come in in the future from another party. Its own funds. Two types of insolvencies, the main one being where you get to a deficiency of working capital 133

which are going to be converted into cash funds at a quick time with current assets less current liabilities and if that’s a negative, it’s a working capital deficiency. That’s when there is a problem with the cash funds to be used for the payment of those current liabilities.

You exclude, do you, the ability – any ability to borrow funds on the security of assets?-- It doesn’t alter the equation. If you are going to borrow funds to pay out creditors, all you are doing is shifting chairs on the Titanic sort of thing. Creditors don’t change in value. You are just changing the name from creditor A to the person that you borrowed the funds off.

But you may also be changing the nature of the debt from a short-term to a long-term debt, may you not?-- Yes, if you could change to a long-term fixed it or it could be equity, more shares being issued, you would solve the problem of working capital deficiency.” (t/s 2485-6)

[449] Mr Hadwen took the view that it was irrelevant to the question whether the group could pay the debt to Interchase from its resources in June or July 1988 as to whether it was insolvent in a strict sense or not. In his opinion whether or not it was insolvent, it may have had and indeed he concluded that it did have, sufficient funds (exhibit 208 page 14). There was no evidence that the companies in the Chase group were not paying their debts as they fell due in the period from June to December 1988 even though it was the support of their bankers during that time which enabled them to do so. I accept Mr Hadwen’s opinion that insolvency judged by an analysis of the balance sheets does not answer the question posed.

[450] Until at least the end of the first quarter of 1989 CCL and CCA together with their various subsidiary companies continued to trade and be a going concern. The relevant question is the effect of a valuation of $380m upon the rather delicately poised finances of the group. Mr Duus did not undertake a detailed review of the individual assets owned by the various companies in the group or their ability to raise further capital and sources of capital as well as a breakdown of all the loans as the High Court Sandell v Porter (1966) 115 CLR 66 at 660-1 suggested should be done. Neither did he undertake the detailed analysis of Mr Hadwen of all the credit sources available within the group and from the various bankers and facilities and the servicing of further loans, Calzaturificio Zenith Pty Ltd (in liquidation) v NSW Leather and Trading Pty Ltd [1970] VR 605 at 608-9, but as observed that does not answer the question.

[451] Mr Welsh’s opinion against the cashflow projections which Chase had prepared as shown in exhibit 228 was that CCL would have no ability to service any additional borrowings if additional liabilities were imposed to pay Interchase, would default in its payment obligations by September 1988 and would be advised to appoint an insolvency expert to assist in an orderly winding up of its affairs. Mr Welsh believed that the winding up of the Chase group’s activities would have occurred a year earlier had a valuation of $380m been made for The Myer Centre which, additionally, would have deprived it of the money received from Interchase (exhibit 306 paras 27 and 28). 134

[452] Exhibit 228 was a balance sheet projection to 30 June 1988 prepared and updated on 17 June 1988. Interchase was critical of Mr Welsh using only one cashflow projection for his calculations. Exhibit 228 was a composite document. It had come to the third and fourth defendants on discovery from the Bank of New Zealand but there were internal inconsistencies within the document which suggested that at one stage it was not one document. Mr Clarke said that it was one of many cashflow projections which it engaged in after the stockmarket crash in 1987 and was produced on a monthly basis. These were strategies which were posed for a particular set of circumstances and varied as things changed. Mr Welsh conceded that if there was debt of $57.5m payable to Interchase then he would expect the group to change its strategies in its cashflow management to cater for the additional debt but even so, he was unable to say where the cash would come from (t/s 2264).

[453] Mr Fraser suggested to Mr Clarke in cross-examination that if there was a requirement to pay a debt to Interchase of $62.5m that would impact upon any cashflow predictions such as that shown in exhibit 228 (prepared on 17 June 1988) in the consequence that there would have been a negative cashflow by November 1988. A further consequence would be the need to top-up the shareholding security for the Interchase facility in the vicinity of a further $20m. Mr Fraser suggested that in those circumstances it would be necessary for Mr Clarke as finance director, to advise the other board members that CCL (and associated companies) should not continue trading (t/s 1044). Mr Clarke did not agree because one source of funds he contended would have come from the sale of the company’s shares in Hanimex. At about that time there had been a proposal to sell the shares for which an underwriter had been appointed but the company, against Mr Clarke’s advice, decided not to proceed. Mr Clarke further denied that a valuation of The Myer Centre at $380m would have been a catastrophe which would have led to the immediate demise of the Chase group (t/s 1045). Were there a default in the security ratios because of the effect of the reduced valuation of The Myer Centre on the price of the Interchase shares, if it were a small facility which had not been greatly used, Mr Clarke suggested that it would have been paid out. If it were a larger facility he postulated that CCL would have discussed the matter with its bankers and sought some form of waiver while the issue was sorted out (t/s 1061).

[454] There were other steps suggested that could have been taken in order to deal with the unforeseen obligation to pay Interchase. The further access to borrowings has been discussed: it may not have acquired further shares in Pangea, Reil Corporation or Wormald or it may not have paid a dividend in cash. If $90m were cleared from the sale of Hanimex shares (if sold at market value) CCL would have been cashflow positive until March 1989 using Mr Welsh’s cashflow projection as adjusted after Mr Hadwen’s evidence on the deferred Interchase refinancing (exhibit 306A). Mr Welsh accepted in cross-examination that the CCL group was cashflow positive until September 1988 even if it had paid the debt to Interchase on a share price of Interchase as posited by all of the stockbrokers (save for Mr Burrell’s estimate of a share value of 75 cents), although he did not take into account that the 75 cents was calculated without including the 50 cent call payable on 30 June 1988 (t/s 2263). He accepted that if the debt were paid to Interchase, CCL would continue cashflow positive between May and July 1988 as reflected on his cashflow projection calculations. 135

[455] Mr Welsh and Mr Duus both contended that a company which sells assets to pay current liabilities is a company in financial trouble. There is no doubt that following the stockmarket crash in October 1987 CCL embarked on an asset realisation program to service margin calls and maintain security ratios. When it sold the United Kingdom company Chase Property Holdings PLC it freed substantial amounts of cash. Mr McCredie of the Bank of New Zealand who was involved in the Chase taskforce review in the first quarter of 1988 concluded that “the pressure was off Chase, so to speak, and then I don’t recall having anything to do or anything particular to do with the company probably until the end of, say, December ’88, January 1989 when their cashflow problems re-emerged” (t/s 2114).

Proprietorship Ratios

[456] Much effort was expended in the trial on the question whether a reduced valuation of The Myer Centre would have an effect on proprietorship ratios. The third and fourth defendants maintained that the ratios would have been breached with a valuation as low as $380m with the consequence that the lenders would issue notices of default. This would have the further consequence that the debt could not be paid to Interchase. The important facilities were the PNC facility and the Swiss Bond facility. There seems no real argument but that the respective proprietorship ratios would have been breached had Interchase been valued at $380m. These would have been non-monetary defaults and the weight of the bankers’ evidence was that it would be quite unusual in that situation for the lender to issue a notice of default. Mr Hadwen in cross-examination said that the major purpose of the ratios was to act as “a warning light” for the parties to be alerted that, for example, the company was too heavily geared (t/s 2144-5). Mr Welsh had a similar view.

[457] Mr Malcolm Harvey, the General Manager of Corporate Financial Services of the National Australia Bank, gave evidence about his involvement with CCL and CCA in 1988. He was then employed as State Corporate Manager for the NAB and in that position considered the PNC facility conducted by the Pittsburgh National Bank as agent and pursuant to which CCL had a loan facility of $US45m. The NAB’s participation was limited to $US7.5m. This facility had been entered into for the acquisition of property in New Zealand. Mr Harvey said this was a segment of the market which traditionally the NAB did not entertain and it was unusual for the bank to be directly involved in large property development. Mr Harvey said the NAB did not wish to be involved in the facility because the exposure was to a $US facility against property located in New Zealand, a market with which the bank was not familiar, but which it understood was under some pressure (t/s 2076). On 21 July 1988 he had a meeting with Mr Clarke and Mr Shutes of which a note was retained (exhibit 301 “MAH1”). The meeting arose because there was non-compliance with the requirement for auditors’ compliance certificates. It appears that compliance certificates had not been required by the agent to the facility in the past. Although CCL’s representatives conceded that a breach had occurred they asked that the definition be expanded to include minority interests and convertible notes and bonds as “capital funds”. Initially the bank was not prepared to agree but subsequently the Pittsburgh National Bank determined that it was reasonable to include minority interests and subordinated debt in the newly defined ratio. All other participants in the facility agreed to those amendments including the NAB. 136

[458] Mr Harvey agreed in cross-examination that in the event of a non-monetary default such as a breach of ratio covenants the bank would not expect either itself or the manager or other participants in the facility to take default action and was unaware of the bank having pressed for default action to be taken in respect of a facility where there was such a default. The usual practice would be to discuss the matter with the customer, look at cashflows and capacity to service the interest component and to make repayments. Even in the case of non-payment of interest he said it was unlikely that immediate action would be taken (t/s 2081-2).

[459] Mr Brian Jones, head of Wholesale Origination BNZA, was manager of the NSW Corporate and Commercial Banking Unit of the Bank of New Zealand in 1987 and in 1988 was its assistant general manager in Sydney. He interviewed Mr Reynolds and Mr Bill Wavish on the financial position of CCL’s interests in Australia at the end of November 1987 (exhibit 302 “BJ1”). He was briefed with the full financial position of CCA and considered every asset on their books in Australia looking at funding, contingencies and servicing capability. The memorandum noted that the information provided by CCA was comprehensive and would “be very difficult to falsify given the extent of it and the short notice given to Bill Wavish that the information is required by the Bank” ibid page 2. In 1988 CCA and CCL were major clients of the Bank of New Zealand. It would have been most reluctant because of its extensive exposure of over $100m to see the group collapse. Mr Jones agreed that the bank would be unlikely to call up loans unless it was clear that the company was virtually insolvent and that there was no point in continuing and it would be in their mutual interest to assist Chase to survive if it were having difficulties (t/s 2096). Mr Jones agreed that if the price of Interchase shares fell following a reduced value in The Myer Centre, its principal asset, causing the Chase companies to be in breach of their security ratios, that would not cause the Bank of New Zealand to put the Chase group immediately into default. The bank would look at other options in terms of providing further security and review the position with Chase to see if it could be remedied (t/s 2098).

[460] Mr McCredie agreed with this likely outcome (t/s 118). That the PNC facility was renegotiated so far as the proprietorship ratios were concerned over a number of months following July 1988 when first taken up by the National Australia Bank and finalised in March 1989 in a redefinition requested by Chase makes it clear that even against a significantly worsening property market in New Zealand the lenders preferred not to put the borrower into default. Mr Aird who had worked as a merchant banker in the late 1980s said in his experience banks such as Tricontinental, the State Bank of South Australia, the Bank of New Zealand and ANA as well as a number of Japanese banks would lend more money to get a client “out of a hole” and assist in ensuring that the client did not breach its covenants or the lending requirements (t/s 1736).

[461] Mr Clarke, Mr Hadwen and Mr Welsh prepared calculations about the proprietorship ratios particularly under the PNC and the Swiss Franc facilities to ascertain whether they would have been breached if The Myer Centre was valued at $380m (Clarke exhibit 237; Hadwen exhibit 216 and 305; Welsh exhibit 306 SBW2 and SBW3). Neither Mr Clarke nor Mr Hadwen thought that the facilities were breached although Mr Hadwen agreed that if the Interchase convertible notes were excluded then there was probably non-compliance by approximately 2 per cent in respect of the Swiss Franc facility. Mr Welsh thought that the ratios would have 137

been exceeded. The ratios were derived from CCL’s accounts for 1988 and the difference between the witnesses related to the treatment of certain items in those accounts:

· the appropriate deduction to be made for the decrease in The Myer Centre valuation;

· the treatment of intangible assets and the deferred tax benefit;

· the amount of cash offset;

· the amount of property offset;

· the treatment of the Airtide offset; and

· the inclusion of Interchase convertible notes in shareholders’ funds.

Intangible assets and deferred tax benefit

[462] Interchase concedes that Mr Welsh’s exercise deducting intangible assets from total shareholders’ fund for the purpose of the PNC was correct, but the deferred taxation benefit was included in the definition of “tangible shareholders funds” (exhibit 236) and ought not to have been deducted (exhibit 306 “SBW2”).

[463] Mr Welsh deducted intangible assets and deferred tax benefits from the total amount of shareholders’ funds when he calculated the covenant ratios in respect of the Swiss Bond facility (exhibit 306 “SBW3”). Clause 10.3 of the prospectus (exhibit 115) provided that “(iii) total shareholders’ funds (including minority and outside interests) plus provision for investment fluctuations and miscellaneous provisions of the Chase Corporation Group will exceed 35% of total tangible assets”. The definition of “total tangible assets” and “total shareholders’ funds” in cl 10.5 provides that they have the same meaning as was applied in the most recent annual audited accounts of the Chase Corporation Group”. Both intangible assets and deferred tax were included in the total shareholders’ funds in the CCL annual audited accounts for 1988 and there was therefore no basis for excluding those items when doing the Swiss Bond calculation (t/s 2238).

Myer Centre valuation

[464] Interchase contends that account should have been taken of the taxation effect on CCL of a reduction in The Myer Centre valuation from $495m to $380m in the 1988 accounts. Mr Hadwen did so but Mr Welsh did not. CCL had taken up in its 1988 accounts any deferred taxation liability arising from the increase in value of The Myer Centre to $495m and it may be assumed that when revalued downwards that it would reduce the deferred taxation by an appropriate amount. Mr Welsh agreed with this process in the course of his cross-examination but suggested that it was not the breaking point in the calculation of the ratios and did not seek to amend his calculations (t/s 2234).

[465] It seems appropriate that the adjustment which should be made for the reduction in The Myer Centre value where it appears in Mr Welsh’s calculations (exhibit 306 138

SBW2 and SBW3) is as calculated by Mr Hadwen taking the tax into account (exhibit 305 Schedule 1 Note 2) in the sum of $NZ100.680m.

Cash offsets

[466] Mr Welsh maintained that $NZ150m were offset against outstanding loans as a means of improving the ratio between shareholders’ funds and total assets. He said that this was demonstrated by CCL’s letter to the National Australia Bank of 16 December 1988 (exhibit 233) signed by Mr M Gilmore concerning Chase’s 1987/88 annual accounts. Cash deposits were said to be $150m offset against short term borrowing. In cross-examination Mr Clarke had said that he saw no reason to dispute the information contained in exhibit 233. However Mr Hadwen proceeded on the basis that the actual amount which was offset was $NZ125.814m. Mr Clarke had included the figure of $NZ150m in exhibit 228 which, as will be recalled, were cashflow predictions being canvassed as at 17 June 1988. This was before the finalisation of the 1988 accounts which were not signed off until September.

[467] Mr Hadwen used an auditor’s working paper (exhibit 208/22) printed on 26 August 1988 together with an analysis of the CCL 1988 annual report particularly the chairman’s review at page 6, to concluded that the total cash offsets excluded from the CCL 1988 accounts were $NZ125.814m. The reference to the cash offsets of $NZ150m in Mr Gilmore’s letter to the National Australia Bank in December 1988 would suggest that they would be taken into account in that figure. Mr Gilmore worked in the treasury department under Mr Clarke. The breakdown of the cash offsets did not appear in the CCL accounts but the working papers and the figures in the accounts lead to the figure mentioned by Mr Hadwen. Since there is no explanation for the $NZ150m apart from its appearance in the letter to the NAB whereas the $NZ125.814 can be reconciled with other figures that figure should be preferred. Mr Welsh remained essentially unpersuaded (t/s 2208).

Property offsets

[468] Mr Welsh has added to the net assets of CCL an amount of $NZ70.67m made up from the value of property assets which he says were excluded from the CCL 1988 annual accounts (exhibit 306 page 7 “SBW2”, “SBW3”). He suggested that this was done to improve the proprietorship ratio by treating properties as having been sold and the liabilities discharged when completion of the sale had not actually occurred. The property which was treated in this way which excited the most interest in the trial was the Latrobe Street Flagstaff property with a value of $38.5m ($NZ45.347m). The properties and their values which may cover the $NZ70.67m were those referred to in the Coopers and Lybrand (auditors of CCL) working paper (exhibit 217/11). They were Liverpool Metro $18m ($NZ21.201m); Gladesville $2.2m ($NZ2.591m); Aarque $1.3m (NZ1.531m); and Flagstaff $38.5m ($NZ45.347m).

[469] Mr Welsh was unable to demonstrate that each of those amounts representing those properties was set off against the liability in the company’s final account (t/s 2213; 2242). The auditors’ comments in respect of these properties might suggest that at least Liverpool Metro was not set off. They said “this item should not be netted CCL Auckland to note” (exhibit 217/11). The auditors agreed that Flagstaff could be set off since that property settled on 1 July. With respect to Gladesville and 139

Aarque the comment was “incorrect but immaterial”. Interchase submits that since the auditors did not qualify the report with respect to Liverpool Metro, although something with which they clearly disagreed, it is not unreasonable to assume that the accounts were altered before the final accounts were signed off and that that transaction was not set off. This seems to me to be a reasonable assumption to make. This then would reduce by $18m the total property set-offs which have been added to the balance sheet by Mr Welsh in his working papers.

Airtide

[470] In paragraph 11 of his statement (exhibit 306) Mr Welsh had maintained that in its group accounts CCA has set off assets against redeemable preference shares particularly with respect to Airtide Pty Ltd. He accepted that the Airtide transaction was a back-to-back transaction in which it was appropriate to set off the assets against the liability and to exclude them from the 1988 CCL accounts as was explained by Mr Hadwen. It is unnecessary to discuss this further. He agreed that it should not be added back into the balance sheet for the purpose of calculating financial ratios and sheets 2 and 4 of SBW2 were to be disregarded in the calculation. This also applies to the Swiss Bond ratio covenant and to the PNC covenant.

Convertible notes

[471] A matter of considerable agitation was whether Interchase’s convertible notes ought to have been treated as equity in the 30 June 1988 accounts and particularly whether they would have been so characterised had there been a valuation of The Myer Centre of $380m (exhibit 306 para 13).

[472] The PNC facility required that “tangible shareholders’ funds shall not be less than 35% of total tangible assets” (exhibit 301 MAH4). Convertible notes were not included in shareholders’ funds. Mr Harvey of the National Australia Bank noted that Chase was in breach of cl 18f(i) in that it had not provided audited certificates of compliance with the proprietorship ratios. As at December 1987 the ratio stood at 19.7 per cent. Chase sought to include inter alia convertible notes in the definition of total shareholders’ funds. The negotiations continued with Pittsburgh National Bank the agent to the Chase syndicate, for a number of months in the latter half of 1988. It was not until early 1989 that the new definition was agreed by the participating banks including the National Australia Bank.

[473] Interchase submits that since the definition was changed to include convertible notes there was no reason for excluding them in the calculations seeking to ascertain whether the proprietorship ratios would be breached on a reduced valuation of The Myer Centre. Strictly this ought not to occur but it does serve to demonstrate that even with the significant breach of the 35 per cent ratio for a period of over a year the lenders were not moved to take default action.

[474] Interchase submits that there is no basis for excluding the convertible notes from the calculation of the ratio under the Swiss Bond facility because it contends that the definition in cl 10.3(2) provides that “the amount of convertible bonds, notes, warrants, preferred shares or any other class of securities only convertible into capital of a company shall be regarded as capital of such company”. That 140

definition, one would have thought, does not include the Interchase convertible notes. Accordingly it was appropriate that Mr Welsh deducted their value from his calculation. When they are deducted but otherwise using his calculations adjusted as above there were breaches of the proprietorship ratio but in a relatively minor way. Those breaches were unlikely to have brought CCL into default with the syndicated lenders.

Effect on Interchase’s share price of a valuation of $380m

[475] The third and fourth defendants contend that when an announcement was made to the market of a valuation of $380m pursuant to the Development Agreement for The Myer Centre the result would have been a significant fall in the price of Interchase shares and this would have had a flow-on effect to the price of the CCL shares. Interchase, on the other hand, contends that since the market had already discounted, it suggests, the value of Interchase shares prior to the announcement against an expectation that there would be a valuation in the vicinity of $470m for The Myer Centre, little if any reduction would occur after any announcement because the market had already factored in its scepticism at a valuation of $470m. Evidence was given on behalf of Interchase by Mr T Crommelin the managing director of Morgan Stockbroking Limited who had by far the most extensive formal qualifications in the field of stockbroking and commerce. The third and fourth defendants’ witnesses were Mr G Aird a stock market analyst with Intersuisse Limited, stockbrokers in Melbourne, and Mr G Burrell a partner in the firm of Burrell & Co, stockbrokers and investment advisers in Brisbane.

[476] The Stock Exchange listing rules in operation in May 1988 required a corporation on the official list to notify its home exchange immediately of any information concerning the company which would be likely materially to affect the price of its securities (exhibit 292 GRB5). Mr Curran was the only former director of Interchase who was asked about the content and timing of any announcement of a $380m valuation for The Myer Centre. He said that he would expect the announcement to be made promptly, to state that a refund was required from the developer as a result of the valuation but did not think that the failure to provide the bank guarantee would have been material and did not say whether it would be necessary to announce that some sums had been paid in advance of the due date. The announcement to the Stock Exchange of the valuation of $495m was made on 26 May some eight days after the receipt of the valuation letters. This would seem to be accepted as sufficiently prompt. Neither of the other directors who gave evidence, Mr Ryan or Mr Berkovic were asked about this matter.

[477] Mr Crommelin, Mr Aird and Mr Burrell were not essentially in dispute about how such an event would have been handled by the two companies involved. It was accepted that the boards would meet with their respective accountants, perhaps lawyers and public relations consultants and put a positive slant on what would be regarded as bad news. It was thought that an announcement would be made by both boards at the same time. Mr Crommelin thought that the market would not attach any significance to the failure to provide a guarantee and that if the advance payment had been announced it could have been readily explained (t/s 1139). Mr Aird thought that the directors would make a statement as to how they saw the valuation affecting Interchase’s prospects and details of what the Chase group was going to do about repaying the money. Mr Burrell thought it unlikely that the early 141

prepayment would be in the statement and the failure to have a bank guarantee in place would not be material (t/s 2058).

[478] Mr Clarke was firm that Chase would meet its obligations under the Development Agreement and commonsense would dictate that in order to mitigate any damage which might be seen as flowing from a much lower than expected valuation of its sole asset that Interchase would insist that Chase provide an acceptable proposal for payment of the money in the public announcement. This would be to Chase’s advantage because of its 52 per cent interest in Interchase.

[479] Mr Crommelin thought that a lower valuation of $380m would have caused Interchase’s share price to drop. He also thought that the market had already discounted the Interchase share price because of an appreciation that The Myer Centre was not actually worth $470m and, by reference to a net tangible asset backing per share had given it a valuation in the range of approximately $309m to $394m between January and June 1988. Whilst Mr Crommelin was not prepared to express a view as to the exact price which might have been paid for Interchase shares following an announcement of a valuation of $380m he did not agree that it would fall as low as the 88 cents suggested by Mr Aird before the final call on 30 June 1988 or the $1.38 after that call. Mr Aird had reached this conclusion because the shares of Interchase had traded at approximately a 35 per cent discount to its net tangible assets prior to the valuation of $495m (t/s 1724 and following).

[480] Mr Burrell took an even bleaker view than Mr Aird considering that the price of Interchase shares would fall to approximately 70 to 75 per cent before payment of the final call, (in his calculations (exhibit 292 GRB4) the net assets of Interchase did not include the debt owed to it by PEQ on a valuation of $380m). He applied a 30 per cent depreciation to arrive at a post-call market value of the shares of $1.23. He selected the 30 per cent discount because the North’s report of March 1988 (exhibit 294) stated that the shares were trading at a 33 per cent discount to their paid up value of $1.50. If it be assumed that PEQ would pay and would be perceived to pay the $57.5m to Interchase under the Development Agreement then the calculations carried out by Mr Burrell would increase the share value to $2.28. A 30 per cent discount applied to that value would give a share price of $1.60 after call (t/s 2069).

[481] Of some assistance are two contemporaneous documents. The North’s report mentioned above had standing at the time. It recommended to its clients to buy shares in Interchase in March 1988. The preferred entry was said to be via the convertible notes but the shares were recommended as representing good value for medium term investors. The Myer Centre was said to be a relatively low risk development since the first year had a rental guarantee, that costs overrun were to be borne by the developer, the completion date was guaranteed by a reduction in the price if there were overruns, and, finally, the effect of the valuation via the Development Agreement was set out on the basis of a range of values. North’s forecast a likely valuation of $485m. There was no recorded anxiety about the capacity of Chase as a major shareholder, non-completion of the development, or that should the valuation come in lower that the bonus payments would not be made. The valuation of The Myer Centre had been consistently advanced as $470m for some years, so that the writer of the report may well not have turned his mind to this possibility. 142

[482] Mr Aird, as a relatively new employee with the stockbroking firm of Johnson Taylor in Melbourne in early 1988, was asked analyse the Interchase float (exhibit 270 GA1). He recommended that shares in Interchase be purchased for long term property growth. He wrote “Interchase has been severely discounted by the share market downturn in October 1987 [it was floated in August 1987]. The Company has managers with good credentials and an exceptional property development is under way. Withstanding the recent downturn in the share market we believe that the share price is a severe valuation of the Company’s investments and management. We recommend purchase of the contributing shares around the present level. For more conservative investors Convertible Notes should be purchased under $2.” He suggested that a possible reason for discounting Interchase’s shares could be attributed to a belief in the marketplace that Chase might sell its shares or that it may not have been able or was not desirous of paying the calls because Chase had rationalised its corporate holdings under what Mr Aird described as a “continuing housekeeping policy”. He did note that Chase had paid the first call in December 1987. It seems a somewhat surprising comment to have made since CCA owned more than 50 per cent of the shares and would default if it failed to pay. He suggested that Interchase was under-valued at its then share price.

[483] Mr Aird included a recession scenario in his analysis of The Myer Centre suggesting that the downturn in the share market might possibly lead to an economic recession leading to a fall in property prices. He set out a worst case scenario if The Myer Centre were valued at $313m. A share price of $2.30 would, he wrote, “still reflect a large premium at the present market price for the contributing shares”. He noted that Chase had recently sold its United Kingdom company for $A300m to reduce its gearing levels and to maintain wholly owned subsidiaries. He concluded that Chase would “appear to have the ability to cover the call on contributing shares due at 30 June 1988” and that the fall in Interchase’s share price was due to influences of pessimistic economic factors. He noted that Interchase had been fully subscribed and that the major shareholders were institutional (exhibit 270 GA1 Annexure 1).

[484] It is possible that a substantial amount of cash coming into Interchase from PEQ might have countered the unfavourable effect of a decreased valuation. However, it is likely that an announcement to the market of a valuation of $380m would have had the effect of lowering the price of Interchase shares perhaps to the levels predicted by Mr Burrell. There was only a brief period during which the share price increased after the announcement of a $495m valuation after which it steadied for some months before declining.

[485] If there was a fall in the share price of Interchase CCA would need to top up the security for its $100m syndicated Interchase facility. After the payment of the 30 June 1988 50 cent call the security ratio was $80.85m. If the shares traded at $1.55 after the call then the ratio would be met. If they were trading at $1.38 as Mr Aird thought that they might be, then the top-up would be $8.55m (Mr Duus’ calculations exhibit 326) If the shares traded at $1.23 which was Mr Burrell’s opinion, the amount required would be $16.4m. Interchase contends that if this were the case then CCA would have made the relevant payment assisted by 143

payments if necessary from CCL. As has been discussed above there was a real prospect that in mid-1988 CCA and CCL’s bankers would have assisted.

[486] CCL’s proprietorship ratio covenants were based upon net tangible assets although Interchase’s asset (The Myer Centre) was taken into CCL’s consolidated accounts at the value of the asset rather than the value of the shares and would have been unlikely, at the time, to have had such a catastrophic effect on CCL’s share value it would have ceased to trade.

Interchase’s convertible notes

[487] As mentioned, a matter which occupied considerable debate at the trial was the question of the appropriate treatment of Interchase’s convertible notes in its 1988 accounts (exhibit 181). Interchase had issued 53.4m 12 per cent notes on 22 July 1987 at $2.25 each. The notes were convertible into one ordinary 50 cent share issued at a premium of $1.75. The notes were convertible up to 31 December 1992. The notes not converted on that date would be redeemed by Interchase at the issue price of $2.25 each. The directors of Interchase treated the convertible notes in the 31 December 1987 accounts (exhibit 226) on 6 May 1988 as debt. In the 1988 annual report signed off by the directors and auditors on 5 September 1988 the convertible notes were treated as a separate class of capital with a separate note after describing the convertible notes to the following effect “The likelihood of conversion will depend on the market price of the shares up to the date of redemption. The Directors are of the opinion that it is likely conversion will take place and therefore consider that the convertible notes should be shown separately in the balance sheets in order that the accounts show a true and fair view of the state of affairs of the Group and Company as at balance date. Had the Group accounts been prepared in accordance with the prescribed format, the convertible notes would have been classified as non-current liabilities, in which case, total non-current liabilities would have become $199,156,000 and net assets $196,321,000.” (exhibit 181 Note 16(2))

This treatment was translated into the 1988 accounts for CCA and CCL.

[488] All of the relevant witnesses agreed that the matters specified in the note were material to directors deciding whether to treat convertible notes as debt or capital. Mr Welsh and Mr Duus were firm that the treatment of the convertible notes in this way was inappropriate. Mr Welsh said that the fact that the convertible notes were treated as debt in the 1989 financial statements of Interchase suggested that they ought to have been so treated in the 1988 accounts. By 1989 when those accounts were signed off CCA and CCL were in some form of insolvency administration, the New Zealand property market into which Interchase had ventured with other purchases after the completion of The Myer Centre had declined significantly, so that the directors could not then have thought it likely that conversion would occur. Mr Hadwen, a very experienced auditor who had audited large groups of companies as at 1988, was of the view that by the accounting standards in 1988 it was quite common to show convertible notes in the way in which Interchase had presented them in its 1988 accounts. 144

[489] A rather nice point was made in cross-examining Mr Welsh about the difficulty of divorcing present practices and standards with those prevailing at another time. Mr Welsh said that according to generally accepted accounting principles the convertible notes would have been treated as debt rather than equity but he did concede that the treatment of the convertible notes appeared in accounts which had been audited (t/s 2222-3). If the company was performing well and the share price was sufficiently high he agreed that it would be reasonable for the directors to treat the convertible notes as a form of capital (t/s 2224). When Mr Welsh gave evidence he was an accountant with MIM Holdings Limited. He was shown its 1988 annual report (exhibit 311) and in Note 21 concerning subordinated convertible bonds the following appeared “Subordinated convertible bonds have been included in the balance sheet under the heading “Shareholders’ Equity and Subordinated Convertible Bonds”. This treatment represents a departure from the prescribed format required by Schedule 7 of the Companies Regulations but has been made in accordance with cl 2(2) thereof. The ordinary shares of the company are currently trading below the conversion price. However, redemption of the bonds will not take place for some years and conversion will depend on the market price up to redemption. The bonds have therefore been shown separately in the balance sheet as the directors consider that this treatment is appropriate for the accounts to show a true and fair view of the state of affairs of the Group as at the balance date.”

[490] Although Mr Duus was an experienced accountant he had not been an auditor and when questioned about appropriate accounting standards with respect to the treatment of convertible notes in 1988 he said that he would not have done it and “I imagine most of the major firms would not have done it. It’s international accounting policy not to do it” (t/s 2464). When it was suggested to him that there was no accounting standard or policy at that time which prevented a company from treating convertible notes and convertible bonds as a form of capital in balance sheets provided there were appropriate notes he read from a letter sent by Coopers & Lybrand to Mr Clarke at Chase on 12 July 1988. That firm had been asked by Mr Clarke to set out its views on the generally accepted international practice of accounting for subordinated debt in a company’s balance sheet. Coopers & Lybrand had carried out a detailed review of all available information and discussed the matter with the Sydney and London offices and concluded “that in accordance with generally accepted international accounting practice subordinated debt in its simplest form should be accounted for as a liability in the company’s balance sheet.” However Mr Duus had apparently not read further into the document because at page 4 paragraph 11 the following appears “11. Whilst there are varying schools of thought concerning the appropriateness of including convertible notes/bonds as debt or equity, most accounting guidelines would acknowledge that convertible debt possesses characteristics of both debt and equity. For this reason, whilst generally accepted international accounting practice favours the treatment of convertible notes/bonds as debt and disclosed as a liability in the balance sheet, a view supported by our firm, an alternative 145

treatment has been adopted by some companies in New Zealand and Australia in recent years.

12. This alternative treatment has been to disclose convertible notes/bonds within “other capital funds” or “shareholders’ funds and convertible notes/bonds” classification in a manner similar to that used for subordinated perpetual debt. …

15. Our firm is prepared to accept this alternative treatment if we are satisfied that there is reasonable probability that the notes/bonds will convert. …

16. With respect to the 30 June 1988, Group accounts of Chase Corporation we believe, after carefully considering the above criteria [matters set out in Note 16] that there still exists a reasonable probability that Chase Corporation’s convertible notes/bonds on hand at 30 June 1988 will convert to equity in the future and therefore your proposed treatment of including convertible notes/bonds within an “Other Capital Funds” classification is acceptable.” The advice stated that as the conversion date drew closer if it was probable that the holder would not choose to convert due to the unattractiveness of the company’s share price and it was unlikely that the share price will recover sufficiently then it would be necessary to reclassify the convertible notes as liabilities.

[491] Mr Hadwen was of the view that even with a valuation of $380m it would not be inappropriate to show the convertible notes as a class of capital bearing in mind that an additional $62.5m cash would have been generated into the company, that The Myer Centre had opened to great acclaim and there would have been considerable optimism for the company. He thought it was too early for directors to have made a firm decision that there was at that time a permanent downturn in the stock market and that provided there was full disclosure there would be no objection to this form of treatment (t/s 912-3).

[492] Mr Ryan a director of Interchase said that he would rely on financial advice as to how the convertible notes should be treated in the accounts. Mr Curran thought that on a valuation of $380m the notes should not be treated as deferred equity. Interchase submitted this answer was in the context that he was not asked to take into account the decreased cost to Interchase of the development of The Myer Centre at a valuation of $380m and that it would receive a substantial sum of money as a consequence. Mr Jones of the Bank of New Zealand said that whether convertible notes were to be treated as part of a company’s capital for the purposes of calculating financial ratios under lending facilities was usually negotiated at the outset of the facility or might be renegotiated during the course of the facility and it was not unusual to include convertible notes as equity (t/s 2103-4).

[493] The conclusion I would draw from this evidence is that had there been a valuation of The Myer Centre at $380m it is likely that Interchase would have nonetheless included its convertible notes as a form of capital in its annual accounts and that this would not have been so inappropriate that its auditors would have declined to approve the accounts provided an appropriate note was included. 146

Treatment of the PEQ debt of $57.5m

[494] Mr Hadwen and Mr Welsh performed calculations to show the impact of the valuation of The Myer Centre in Interchase’s accounts and into the CCA consolidated company accounts of a valuation of The Myer Centre at $380m.

CCA accounts adjusted for a $380m valuation

[495] There was some difference of opinion between Mr Hadwen and Mr Welsh as to how the debt owed by PEQ to Interchase should be dealt with in the CCA accounts and what effect a reduced valuation would have on the Interchase, CCA and CCL accounts. Mr Hadwen took up none of the debt in the adjusted CCA accounts since the debt was PEQ’s and not that of CCA. Until CCA as guarantor was called upon he thought it was inappropriate to include it in CCA’s account. Mr Duus agreed (t/s 2460). CCL treated The Myer Centre in its accounts at valuation due to different accounting standards applying in New Zealand according to Mr Hadwen (t/s 872). As a result of the reduced valuation of The Myer Centre the property value would be reduced in the notional accounts as at 30 June 1988 by $A51.43m or $NZ60.57m.

Revaluation of subsidiaries

[496] At page 3 of his first report (exhibit 307, 13 February 1996) Mr Duus stated that CCA’s records disclosed that from 30 June 1988 the financial position of CCA and its subsidiaries deteriorated. He compared the figures in CCA’s annual return for the year ended 30 June 1990 (exhibit 159) which showed the figures for 1989. CCA’s interests in subsidiaries was increased to $152.468m at director’s valuation, an increase of $141.7m. The 1989 CCA accounts show the shares in subsidiaries to be valued at nil. Mr Duus thought that this was most significant for the deterioration in the position of CCA between 1988 and 1989 and suggested that the valuation of the subsidiaries was not sustainable. By the time the 1989 accounts were prepared CCA was in the hands of Mr Macintosh. As set out between pages 13-16 of the 1990 annual returns a number of the subsidiaries had lodged applications for cancellation of registration with no assets, a number had been sold during the year ended 30 June 1990 and some subsidiaries had been liquidated during the year ended 30 June 1989.

[497] AURNL was an Australian-listed gold mining company. Its cost was $42.524m but its recoverable value in 1989 was $4.762m (exhibit 159 page 13). Its share price had dropped from $1.05 to 18 cents between December 1988 and July 1989. The price of shares in Reil Corporation fell from $3.51 to $2.50 over the same period (exhibit 304). During the 1988 financial year several subsidiaries were acquired either partly or wholly from the previous year including Botena Investments Limited (from $68.3m to $93.5m), AURNL (from nil to $42.5m) and Jonray Holdings Limited (from nil to $44.4m) (exhibit 110). Both Mr Clarke and Mr Hadwen were of the view that a detailed analysis of each subsidiary would be necessary to do a reconciliation between each year’s accounts (t/s 998; 948). The revaluation of the subsidiaries only affected the balance sheet of CCA and had no effect on the group accounts or on CCL’s accounts. They were reversed in the group accounts and the subsidiaries brought in at cost (t/s 1098). Accordingly it 147

seems that these revaluations would have had no effect on the proprietorship ratios in the financing facilities (ibid).

Deconsolidation of Interchase from CCA

[498] Mr Welsh deconsolidated Interchase from the CCA 1988 group accounts and made certain adjustments for a reduction in the value of Interchase shares on a valuation of $380m and eliminated the future income tax benefit which was included in the accounts but which was excluded by the audit qualifications. The result was to show that CCA without Interchase would have been balance sheet insolvent. There were a number of errors in the calculations acknowledged by Mr Welsh but on the whole those errors made little difference to the outcome. Mr Hadwen had excluded Interchase when he analysed the cash resources available to CCA for the payment of the debt to Interchase since it was not a wholly subsidiary of CCA. Nonetheless this is a negative factor.

Conclusion

[499] I would conclude that on a valuation of $380m for The Myer Centre there is some likelihood that the Chase companies would have made every endeavour to find $52m to pay Interchase because failure to do so would have been catastrophic for the group. Although it owned 52 per cent of the Interchase shares the balance were in the hands of institutional investors who would not have stood by. Interchase had respected independent directors who would have pressed for payment even if that payment was to be staged. I would conclude that there would have been cooperation between the respective boards over this. However sourcing the funds would have involved careful organisation. I am confident that Mr Clarke as finance controller would have proceeded prudently but with a lively awareness of the implications of failing to pay. At that stage Chase would have been most concerned that the financial world would continue to support it.

[500] It is also necessary to consider the bleak view advanced by the third and fourth defendants that the Chase edifice might well have tumbled with something as apparently small as a reduced value for The Myer Centre. All of the negative factors identified by Mr Welsh and Mr Duus demonstrate that it was under financial difficulties. I assess the chance of Interchase recovering the whole of the money to which it would have been entitled on a valuation of $380m at 35 per cent. There would then be something of a sliding scale upwards to virtually 100 per cent likelihood of recovery the closer the valuation got to $470m and recalling that the reduction only operated on a valuation to $425m.

[501] On a valuation of $410m Interchase would have been entitled to a reduction of $15m which it would have pursued. It would also have sought the recovery of $7m paid as a prepayment. It would, as has been mentioned, not have made the $10.45m post valuation payment nor the interest payment of $249,976,000 therefore these two figures do not attract a discount. It is likely that the $7m would have been found and paid quite promptly as indemnities had been given. I would not discount that payment on a valuation of $410m. The $15m reduction sum would, I believe, have been much slower in coming and there would have been no better than a 50 per cent chance which calculates to a figure of $7.5m. The total loss Interchase 148

should recover as damages is $25,199,976. To that should be added the interest on the reduction sum from 25 April 1988 to 21 July 1988.

[502] For completion the scheme of arrangement will be considered.

Scheme of arrangement

[503] Interchase was given leave to amend its amended statement of claim to include particulars of recoverability of funds under the Scheme of Arrangement for CCA on the eleventh day of the trial. The particulars were tendered the following day and were exhibit 220. This course was objected to by the third and fourth defendants but because of the extended period over which the trial was heard and that several of the witnesses were required to return for further cross-examination there was not any discernible prejudice to the third and fourth defendants in allowing this amendment. A disadvantage which third and fourth defendants said they experienced was the inability at this stage to search out and take statements from the relevant controllers of the major creditors of CCA and CCL to ascertain their attitude to the inclusion of this Interchase debt in the scheme of arrangement for unsecured creditors. There was apparently no attempt to seek out any such witnesses during the lengthy adjournment of the hearing of the evidence in the trial and the matter proceeded on the basis of the analysis by the two principal accountants for the parties and by approaching it on the basis of the assessment of a chance. Interchase claims that if PEQ, PEL and/or CCA had not repaid to Interchase the sum of $62.5m and interest before CCA was placed into a scheme of arrangement, Interchase would have proved in the Scheme for the amount plus interest at the rates provided for in the Development Agreement and would have received a dividend from the administrator calculated in the amount of approximately 18.1 cents to the dollar or, alternatively, as a related party, at 16 cents in the dollar.

[504] Details of the scheme were put in evidence (exhibit 324). Mr Hadwen prepared a report about it in the light of the particulars (exhibit 211) and Mr Duus prepared a report in response to Mr Hadwen’s report (exhibit 304). Interchase has made submissions based on its participation in the scheme of arrangement which actually occurred but with a claim for $62.5m plus interest. The third and fourth defendants have argued that if there was a valuation of $380m then there was a real possibility that CCA (and CCL) would have failed long before the end of June 1989 and that had there been a scheme of arrangement put in place it would have been quite different from that which actually occurred. In that circumstance the third and fourth defendants contend it is entirely speculative as to what might have happened and Interchase has thus been unable to discharge its onus.

[505] Clause 6.1(2) of the Explanatory Statement (exhibit 324 page 44) provided “The expected dividend to Participating Creditors under each of the Chase Schemes (apart from the Lenders) is: 33 cents in the dollar in respect of CCL (including its non-Australian subsidiaries) and Interchase; and 40 cents in the dollar for all other Participating Creditors.”

[506] CCA was placed under a scheme of arrangement on 23 July 1990. Mr Macintosh’s Explanatory Memorandum sets out the benefits to unsecured creditors of a scheme 149

of arrangement rather than a winding up of all of the Chase companies. That is accepted by both Mr Hadwen and Mr Duus and there is no need to refer further to Mr Macintosh’s reasons. Payments to secured lenders under the scheme were determined separately and incorporated in separate agreements which form part of the scheme.

[507] Pursuant to cl 10(1)(g) of the capital scheme document (a) CCL and its non-Australian subsidiaries and Interchase were to obtain up to 33 cents in the dollar; (b) All other common participatory creditors were to receive up to 40 cents in the dollar; (c) If funds were available after paying 40 cents in the dollar under 2 above, a further dividend would be payable to the parties in 1 above up to a maximum of 40 cents in the dollar (exhibit 211 para 1.4). Mr Macintosh advised Interchase’s liquidator by letter dated 4 February 1999 (exhibit 211/3) that · the amount available to all creditors should be considered to be $50.7m;

· the amount paid to related party creditors was $30,005,222.20;

· approximately 40 cents in the dollar was actually paid to CCL and Interchase;

· the allocation of moneys to the various classes of creditors was arrived at after individual negotiations with secured creditors, unsecured creditors and the administrators of CCL. For certain lenders the approval of the CCA and CCL schemes were interdependent and consequently a significant reduction in the CCL distribution which would necessarily occur should the Interchase debt of $62.5m be taken into account may not have met with the agreement of the CCL administrators and creditors;

· if Interchase had established a claim against CCL the distribution to all creditors would have been reduced to accommodate a settlement with Interchase (exhibit 211 para 1.8).

[508] Interchase’s dividend of $1m received in the Scheme related to the rental guarantee in respect of The Myer Centre (exhibit 214).

[509] Related party creditors under the scheme amounted to $75,815,448 (exhibit 222/5). Interchase’s claim would have been made under cl 10B.3 of the Development Agreement for the bonus sum together with interest at the bill rate plus 1.5 per cent. Interest would have been due up until 31 May 1990 (exhibit 211 par 2.1). Mr Hadwen calculated the likely return for Interchase participating with a debt of $62.5m which would have given a dividend of approximately 16 cents in the dollar as being a conservative estimation of a reasonable commercial compromise with the other creditors. He suggested that Interchase would have been in a strong negotiating position since its full debts would have exceeded 25 per cent of the debts owed to unsecured creditors (exhibit 211 paras 2 and 3). 150

[510] Mr Duus disagreed with both the principal and the calculations prepared by Mr Hadwen. Mr Duus said in his report that the claim by Interchase would have been viewed unsympathetically by the creditors of CCA and CCL because Interchase would be viewed and treated as being a Chase group company controlled by Chase directors and executives (exhibit 304 para 1.3). In cross-examination he agreed that Interchase had a majority of independent directors and large institutional noteholders and that it would not have been treated as part of the CCA group in any scheme of arrangement (t/s 2479-8). In paragraph 2.1 he said that Interchase being a related corporation may have been required to compromise a substantial amount of its debt. It was only wholly owned companies of the CCA group which wrote down their debts in the scheme (exhibit 324 page 30). Interchase was not treated as a related company in the scheme of arrangement.

[511] Mr Duus suggested “in the unlikely event that Interchase’s prima facie claim was accepted” suggesting that the administrator would be unlikely to recognise the debt owed. However in cross-examination he agreed that the terms of the Development Agreement were clear and if there was a valuation of $380m there was no real basis to doubt the claim. Given Mr Duus’ extensive experience as an insolvency practitioner this must be given weight (t/s 2,500). He also accepted that Interchase would have capacity to derail the scheme and would be in a strong bargaining position (t/s 2510). Accordingly there is no persuasive basis advanced as to why Interchase would have been treated other than an independent unsecured creditor or as a related company external to the CCA group as it was in Mr Macintosh’s scheme particularly as the shares owned by CCL became the property of the banks under the syndicated facilities.

[512] There were a number of calculation errors in Mr Duus’ report which he accepted in cross-examination. He stated that had The Myer Centre been valued at $380m and if that valuation had had a negative impact on Interchase’s share price a margin call on the BNZ syndicated facility would have resulted. He noted that at the date of Mr Macintosh’s appointment on 5 July 1989 the share price of Interchase was $1.40. He proposed that if the share price had remained at 80 cents the Bank of New Zealand would have required a cash security deposit of $31.4m based on 52,390 shares. He concluded that the result of such a margin call would have resulted in the pool of funds available to creditors being some $31.4m less than the $50.7m which was available under the actual scheme. Mr Duus was challenged on these figures. He had selected 80 cents per share virtually at random and had not taken into account the evidence of Mr Burrell and Mr Aird that the price may have fallen to $1.38 after the payment of 30 June 1988 call. Even if he had used $1.30 being the 80 cents plus the 50 cent call that would have substantially affected the top-up required under the facility. If the formula set out in the Interchase facility were used at a share price of $1.38 Mr Duus agreed with the calculation that the top-up would be $8.5m (t/s 2505) and on the formula that he had employed the top-up would have been $1m (ibid; exhibit 326).

[513] Interchase accepts that a scheme of arrangement which included the full Interchase claim would more likely have been for $57.5m rather than $62.5m as calculated by Mr Hadwen. Accepting that concession, a number of calculations have been advanced by Interchase as indicating the range of amounts which might have been available to Interchase using various margin calls and applying it to Mr Duus’ formula. 151

[514] At paragraph 2.2.2 Mr Duus claimed that creditors with large claims are often required to compromise more in dollar terms in respect of their debts compared to smaller creditors which is the nature of the scheme of arrangement. Mr Duus set out a table at pages 5 and 6 of his report to show five different creditors who received different amounts in the scheme of arrangement. It contained errors - the Hong Kong Bank debt was fully secured; the Bank of New Zealand received 40 cents in the dollar and not 18.6 as Mr Duus had shown and Mr Duus was unable to say how he had calculated the 5.3 cents dividend to Marubeni Developments; he had failed to take into account recoveries pursuant to the Deed of Covenant (exhibit 327).

[515] At paragraph 2.3 Mr Duus set out a table showing a possible scenario of the maximum which Interchase might have received should it participate in a scheme of arrangement. He agreed in cross-examination that since the margin call would result in the repayment of the entire debt to the Bank of New Zealand and Sanwa then $4.457m extra would be available for related entities (t/s 2523-4). He agreed that the split between secured and related companies would be approximately 50/50. A number of different sheets of calculations was put to Mr Duus using various share price values or distribution based on 50/50 or 50/40 splits (exhibits 328; 329). On the basis of a share price value of $1.38 on a 50/50 split the amount of money available for Interchase had it participated with a $57.5m debt in the actual scheme of arrangement would have been $11.171m (exhibit 239 Duus’ margin 4a). That is the “worst case scenario in calculation terms”.

[516] The third and fourth defendants have argued that there is insufficient material available to come to any conclusion about Interchase’s success or otherwise in such a structured scheme of arrangement and that Interchase has accordingly failed to prove its claim. When Mr Hadwen was cross-examined that his report of participation by Interchase in the scheme of arrangement was too speculative to be of assistance he said that the number of unsecured creditors would not have differed in a hypothetical scheme of arrangement because there were few unsecured creditors under the original scheme because most had been paid out. It was the bankers who had carried the burden after their securities were realised. He had not had access to the CCL scheme documentation (the CCL papers had been destroyed) which would have been of assistance but he did not think that it would have been useful to speak to the major creditors in the scheme after the lapse of time. He preferred to rely upon the administrator’s understandings of the weaknesses and strengths of the respective claims (t/s 2134). He agreed that there was overlap between the New Zealand and the CCA schemes which was minimised by Mr Macintosh endeavouring to have lenders clear their Australian position. Mr Hadwen had been encouraged in what he described as his conservative position by the letter from Mr Macintosh of 4 February 1999 exhibited to his report. Mr Macintosh had written “The amount [available for distribution] is more properly viewed as one derived following individual negotiations with secured creditors and agreement on their security values, the claims of Unsecured Creditors and the claims by the administrators of CCL and the claims of CCL’s Creditors. In this regard it is important to note that many Australian creditors were also lenders to CCL and their agreement to the CCA and CCL Schemes were both required in order for the 152

Schemes to be implemented and thus were interdependent. A significant reduction in the CCL distribution may have not met with the approval of the CCL Scheme Administrators and CCL Secured/Unsecured Creditors.”

[517] Interchase points to a number of matters set out in the Explanatory Statement to the CCL Scheme. The secured creditors could only prove in the scheme for the deficiency on security but could still vote to the full extent of their debt (cll 3(e), 8 and 26);

· cash was held in the CCA administration of $48m and the terms of the CCA Scheme were being negotiated between the creditors and CCA to enable prompt distribution of the remaining assets from which CCL was expected to receive approximately $A25m (cl 19(a);

· CCL and the financial adviser were of the view that the adoption of the Scheme was in the best interests of CCL and its creditors (cl 22);

· since the Chase Group had complex debt and inter-company structures one of the major benefits of the Scheme would be to simplify the debt structures (cl 22(c);

· the costs of the Scheme would be less than the liquidation of the numerous Chase companies in various countries (cl 22(f)).

Mr Macintosh mentioned the benefits to CCL of having the CCA position stabilised under the Schemes (exhibit 324 page 31). Many of the Australian debts of CCA were guaranteed by CCL and there were advantages in having this aspect of CCL’s overseas debts settled. It is of course a factor to be taken into account when settling the amount which might have been recovered under such a scheme to bear in mind that the significantly reduced dividend which CCL would obtain in the CCA Scheme might have caused the scheme to be so unattractive to the CCL administrators that it would not have gone ahead.

[518] Bearing in mind the difficulties in restructuring the scheme of arrangement which actually was entered into against the many imponderables is not an impossible task but cannot be more than an estimation of Interchase’s chances of recovering had it participated on a valuation of $380m with a debt of $57.5m. Based then on the calculations advanced by Interchase which in turn were based on Mr Duus’ calculations and taking into account other matters which would lead to a conservative figure which had been discussed above I would suggest that an amount of $10m would have been available for distribution to Interchase in the scheme of arrangement as restructured. On a debt of $32m based on a valuation of $410m it would have recovered approximately $6m.

Limitation of Actions Act 1974

[519] The third and fourth defendants allege that any moneys paid by Interchase more than six years before the date of the issue of the writ was barred pursuant to s 10(1) of the Limitation of Actions Act 1974. The writ was issued on 13 April 1994. Interchase had paid certain pre-completion date valuation bonus moneys to PEL 153

prior to 13 April 1988 on the indication that the valuation would be at least $470m. However it was not until the letters of valuation were received in May or the valuation reports in July that the cause of action crystallised against the third and fourth defendants. Accordingly the Limitation of Actions Act defence must fail.

Recovery against the separate defendants

[520] Counsel have agreed, and I accept, that the loss suffered by Interchase is divisible and there is no basis for any contribution based on joint damage. Each valuation was performed negligently resulting in loss to Interchase which I have assessed at $25,199,976 after assessing the chance of recovery. The approach to the mathematical calculations for the damage for which each of Colliers and Hillier Parker is responsible before discounting is as follows

· The correct valuation is $410m

· The loss caused by Colliers is one-half of $425m - $410m = $7.5m

· To this should be added one-eighth (because the bonus was 25 per cent of the difference) of the excess of Colliers figure beyond $425m, that is, $500m - $425m divided by 8 = $9.375m.

The total then for which Colliers is responsible is $16.875m before discounting.

[521] The same approach may be taken to Hillier Parker.

· To one-half of $15m, namely, $7m should be added to $490m - $425m divided by 8 is $8.125m.

The total for which Hillier Parker is responsible is $15.625m before discounting.

[522] The total amount is $32,699,976 (subject to the addition interest). Interchase’s loss has been discounted and that amount is approximately 77 per cent of the total loss. Accordingly each of Colliers’ and Hillier Parker’s amounts should be reduced accordingly which produce figures of $12.994m for Colliers and $12.031m for Hillier Parker.

[523] The consequence of a finding that the damage is not the same damage is that the contribution proceedings brought by the third and fourth defendants against the first and second defendants should be dismissed.

Interest

[524] The principles to be applied on the question of interest are not disputed, s 74 Supreme Court Act 1995. In effect Interchase contends for 12 per cent to 30 June 1995 and 10 per cent thereafter or a flat rate of 12 per cent for the entire period.

[525] The third and fourth defendants submit that delay and other considerations such as changes in the pleadings should modify the approach to be taken to this question and that interest should operate from 30 June 1993 at an overall rate of 5 per cent for that period in view of changed commercial rates. 154

[526] There has been lengthy delay. The writ was issued almost six years after the cause of action arose and not served immediately. The difficulties of the liquidator in pursuing many issues associated with the liquidation and the litigation has meant that the action has been slow to be heard. As mentioned there have been changes in Interchase’s pleadings. These delays were not caused by the third and fourth defendants (the first and second defendants did have difficulties with their insurers but that was not significant in terms of progress). This litigation has been a huge burden for the individual defendants in particular. Its toll on Mr Waghorn was apparent during the trial. Delays not to be counted as more than a factor, Duke Group (in liq) v Pilmer (1999) 31 ACSR 213, 315, but in this case the delay dictates that interest should not run until 30 June 1993.

[527] A discussion of appropriate rates of interest is to be found in Serisier Investments Pty Ltd v English [1989] 1 Qd R 678 particularly at 680 per Thomas J and more recently in Ausminco Mining Equipment Suppliers Pty Ltd v Liwood Pty Ltd Butterworths Judgments BC 9707431 of 19 December 1997.

[528] There has been evidence tendered in exhibits 209 and 320 relating to commercial rates of interest. I consider that the changes which have occurred in commercial rates over the period suggest a rate of 6 per cent from 30 June 1993.

Orders I propose to make the following:

1. There be judgment for the plaintiff against the first defendant in the sum of $12.994 million plus an interest component to be calculated and interest from 30 June 1993 to judgment at 6 per cent per annum.

2. There be judgment for the plaintiff against the third defendant in the sum of $12.031 million plus an interest component to be calculated for damages and interest from 30 June 1993 to judgment at 6 per cent per annum.

3. The plaintiff’s action against the fourth defendant be dismissed.

4. The third and fourth defendants’ cross-claim against the first and second defendants be dismissed.

[529] I will hear submissions as to costs. 155

Organisational Chart

International Exposure Chase Management Corporation Limited Limited (CCL) (Treasury) N.Z. 100% (IEML) N.Z.

100%

Chase Corporation (Australia) Pty Ltd (CCA) (CCA)

52% 100% 100% Chase Chase Corporation Corporation Interchase Australia Australia Corporation Equities Pty Ltd Property Limited Limited Group (CCAEG) Limited [Formerly Property Estates Limited] (PEL)

52% 100%

Property Estates Jonray (Queensland) Holdings Pty Ltd Limited (PEQ)