SC1002

PAPUA NEW GUINEA
[IN THE SUPREME COURT OF JUSTICE]

SCA 4 of 1997

BETWEEN

PNG AVIATION SERVICES PTY LIMITED
Appellant

AND:

GEOB KARRI,
ACTING DEPUTY SECRETARY FOR DEPARTMENT OF CIVIL AVIATION
First Respondent

TO’ORO AIHI,
SECRETARY FOR DEPARTMENT OF CIVIL AVIATION
Second Respondent

MICHAEL NALI
MINISTER FOR CIVIL AVIATION
Third Respondent

LINDSAY GIDEON,
REGISTRAR OF LAND TITLES
Fourth Respondent

THE INDEPENDENT STATE OF PAPUA NEW GUINEA
Fifth Respondent

Waigani: Cannings J, Gabi J and Ellis J
2009: 29 October, 4 December

JUDGMENT

ASSESSMENT OF DAMAGES – breach of contract – object is to put the plaintiff in the same position as if the contract was performed

CLAIM FOR LOSS OF PROFITS – use of present value method with reduction for contingencies

EXEMPLARY DAMAGES – whether recoverable in action for breach of contract – whether recoverable by company

COSTS – conduct warranting order on solicitor-client basis – solicitor-client basis not sought at first instance – costs of appeal awarded on solicitor-client basis

Cases cited:
Papua New Guinea Cases

Alotau Enterprises Pty Limited and Allen Enterprises Pty Limited v Zurich Pacific Insurance Pty Limited (1999) N1969
Blackwood Hodge Hire (Australia) Pty Ltd v Sandaun Provincial Government and Jacob Talus, Pratt J, 6 March 1085
Cybula v Nings Agencies Pty Ltd [1981] PNGLR 120
Koimi v The State [1995] PNGLR 535
Pinzer v Bougainville Copper Limited [1985] PNGLR 160

Overseas Cases

Air Caledonie v General Estates Corporation Pty Ltd, Sup Court of Qld, No 3869 of 1987, Vasta J (31 August 1997)
Fogg v McKnight [1968] NZLR 330
Hadley v Baxendale (1854) 9 Exch 341; 156 ER 145
Robinson v Harman (1848) 1 Exch 850 at 855, 154 ER 363
Rookes v Barnard [1964] AC 1129
The Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64
Uren v John Fairfax & Sons Pty Ltd (1966) 117 CLR 118
Vorvis v Insurance Corporation of British Columbia [1989] 1 SCR 1085

Counsel:

Mr J Shepherd, for the Appellant
Mr M Wilson, for the Respondents

1. BY THE COURT: The appellant obtained a judgment on liability against the respondents on 10 August 1995 which is reported at [1995] PNGLR 103. Subsequently, orders were obtained for the payment of K1,127,994.00 damages plus interest of K121,143.46 (a total of K1,249,137.46) and costs as a result of a judgment delivered on 13 December 1996. 

Introduction

2. An appeal against damages was heard by Hinchliffe J, Sakora J and Batari J on 30-31 August 2001. On 28 November 2007 leave was granted to lead further evidence in relation to rates of interest. The further evidence that was led is considered below, under Ground (k). There was a further hearing on 1 May 2008. Following the death of Hinchliffe J, the State exercised its entitlement under section 3 of the Supreme Court Act to have the appeal re-heard.

3. Hence, this is a re-hearing of the appeal against some of the components of the damages awarded by the trial judge almost 13 years ago. A Notice of Appeal dated 22 January 1997 was superseded by a Supplementary Notice of Appeal (ie Amended Notice of Appeal) dated 7 June 2001 in which fourteen grounds of appeal were raised. Ground (i), raising the issue of general damages, Ground (l), raising the question of what was the proper date for the conversion of foreign currency obligations to Kina, and Ground (n), which alleged the total destruction of the appellant’s business, were not pursued. Ground (k), described as "no allowance for inflation of currency between the date of the wrong and the date of the judgment", was pursued via a claim for a variation in the rate used for the calculation of interest. 

4. The components of the damages awarded may be summarised, together with the grounds of appeal, as follows:

Ground	Component	Amount	
			
	Rental credit	3,515.00	
	Loss of work in progress	25,000.00	
(a)	Loss on sale of buildings and improvements	20,621.00	
(b)	Loss on sale of stock, plant and equipment	66,666.00	
	Estimated loss on sale of aircraft	229,500.00	
			
	Additional labour costs	20,741.00	
(c)	Claim for Mr Mendoza’s time	4,000.00	
	Close down costs	54,702.00	
(d)	Loss of past LSL for Mr Valentine		
	Accounting expenses	33,145.00	
			
	Expert witness costs	21,376.00	
(e)	Loss of employment claim: Mr Mendoza		
(f)	Loss of employment claim: Mr Valentine		
(g)	Loss of collectable debtor		
(h)	Loss of company profits	748,728.00	
			
(i)	General damages		
(j)	Exemplary damages		
	Less amount previously paid	(100,000.00)	
			
	Sub-total	1,127,994.00	
(k)	Interest	 121,143.46	
			
	Total	K1,249,137.46	
			
(l)	Proper date for the conversion of foreign currency obligations to Kina		
(m)	Plus costs (on a party and party basis)		
(n)	Total destruction of the appellant’s business		

5. Before considering each of the grounds argued in the appeal, it is necessary to first summarise the factual background in order to understand not only the judgment on liability but also the particular circumstances relevant to the assessment of damages.

Factual background

6. For 20 years or more, the appellant carried on an engineering business which provided maintenance for small aircraft from a site at Jackson’s Airport which it leased from the State. The term of that lease was three years with options to renew. Needing to give possession of that part of the airport site to a construction company for the purpose of redevelopment, the State gave the appellant notice to vacate.

7. When the State offered an alternative site, which the appellant claimed was unsuitable, the appellant sought allowances for relocation expenses and the cost of enabling the continuation of its business at that site. However, the State then withdrew its offer of that alternative site in a letter from the then Minister for Civil Aviation dated 21 July 1995, the day after the hearing on liability commenced, using the unfettered discretion he had under section 4 of the Aerodrome (Business Concessions) Act Chapter 354.

8. By reason of the State’s insistence that the plaintiff vacate by 18 August 1995 so that it could avoid substantial damages under the redevelopment contract, the hearing on liability was concluded as quickly as possible. Of course, it must be observed that the State should have taken into consideration its obligations under existing contracts when entering into the contract for the redevelopment of the airport.

9. The trial judge, Brown J, found that the State had breached the express covenant in the lease for quiet enjoyment, rejecting the State’s misconceived claim of frustration (misconceived since the situation was due to the conduct of the State and not without the fault of either party). His Honour is honurHobserved that the most the State offered in respect of the appellant’s relocation expenses, which were shown to exceed K600,000, was K100,000. He also noted that the proposed new lease, which was offered but later withdrawn, which carried an annual rental of K67,659 compared with the existing lease carried which an initial annual rent of K6,281, subject to CPI increases. The rent at the time the proposed new lease was offered was K8,075.

10. The orders made, when judgment was delivered on 10 August 1995, included declarations that the appellant was entitled to five further consecutive renewals of the three year term of the lease from 13 March 1996, which options would have enabled the appellant to remain on the site until 12 March 2011, and that, upon vacation of the site, the appellant was entitled to damages for the State’s breach of the lease.

11. On 23 August 1995 Doherty J extended the deadline for the appellant to vacate the site from 17 August 1995 to midnight on 15 September 1995.

Outline chronology

12. It is convenient to summarise the relevant dates and events as follows:

18 Jun 75	Appellant incorporated	
02 May 83	Date of execution of lease	
13 May 83	State lease registered	
11 Aug 92	Department purported to terminate lease	
08 Sep 92	Appellant commenced proceedings	
		
11 Sep 92	Interim injunction granted, by consent	
20 Jul 95	Hearing on liability commenced	
21 Jul 95	Letter from Minister refusing a new lease	
01-04 Aug 95	Hearing on liability continued	
10 Aug 95	National Court judgment on liability	
		
11 Aug 95	Lease terminated	
23 Aug 95	Time to vacate extended from 17 Aug to 15 Sep	
14 & 18 Dec 95	Hearing of damages claim	
13 Dec 96	National Court judgment on damages claim	
30-31 Aug 01	Hearing of appeal (Hinchliffe J, Sakora J, Batari J)	
		
28 Nov 07	Leave to adduce further evidence granted	
01 May 08	Further hearing of appeal (Hinchliffe J, Sakora J, Batari J)	
12 Mar 11	Date lease would expire if all options exercised	

Legal background

13. This appeal does not turn on the legal principles in relation to the assessment of damages but on the application of those principles to the circumstances of this case.

14. When assessing damages in contract, the court seeks to put the injured party in the position that party would have been in but for the breach of contract. In other words, the object is to put the plaintiff in the same position as if the contract was performed. That statement of general principle for the assessment of damages for breach of contract is usually based on the decision in Robinson v Harman (1848) 1 Exch 850 at 855, 154 ER 363 at 365, approved by the High Court of Australia in The Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 80, as set out by the trial judge who noted that both counsel agreed with that statement.

Remission to the National Court considered

15. Section 16(d) of the Supreme Court Act would permit this court to remit this matter for further hearing in the National Court. However, given the lengthy history of this litigation and the fact that the challenged items have been fully argued by the parties on appeal, the court has decided to proceed pursuant to sections 6(2) and 16(c) of the Supreme Court Act. Accordingly, the court has considered the grounds of appeal and, where it considered a ground of appeal should be allowed, the court has re-assessed that component of the damages. 

Ground (a) – Loss on sale of buildings and improvements

16. At first instance the appellant tendered a two page schedule, headed "Buildings & Improvements" which became Exhibit 137. That schedule itemised a claim of K272,151 for the replacement cost of portable buildings which the company had erected on the site plus improvements. The book value of those items was K43,121. As the sale proceeds were K22,500 the competing views are the loss by reference to replacement cost of K249,651, for which the appellant contends, and the loss by reference to book value (ie cost less accumulated depreciation) of K20,621, as awarded by the trial judge.

17. Replacement cost would be appropriate if the items were in fact replaced but is difficult to justify here as the business was not continued. On the other hand, book value is artificial in that it is usually the result of accounting conventions rather than market forces. Book value for buildings and improvements is the figure which traditionally results from historical cost less accumulated depreciation. Historical cost may well be out of date unless the asset was recently purchased and accumulated depreciation is a summation of annual allowance whereby the cost of that building is treated as an expense over its estimated life. However, book value does provide some evidence of market value and it was and is the only available evidence in this instance once the view is taken that replacement cost is not appropriate.

18. In this instance it is difficult to apply the general rule, that the injured party should be put in the position that party would have been in but for the breach of contract, since that general rule would involve a continuation of the appellant’s business in the absence of a breach of the covenant for quiet enjoyment while the reality is that the appellant’s business was discontinued because of the breach.

19. The trial judge described the buildings, did not cite any authority and then adopted the defendants’ suggestion. There was no reference to the evidence on the question of what was the appropriate basis and, for that reason, the appellant is entitled to have this court consider the evidence and make an assessment of this component of the damages claim.

20. In his evidence in chief, Mr Birch, who gave expert evidence as an accountant, was asked why the proper basis for the assessment of this claim was replacement cost and not the depreciated value. His answer was that replacement value was in accordance with the International Accounting Standards he had previously mentioned. 

21. A consideration of the earlier transcript of the evidence of Mr Birch reveals that he sent a letter to the appellant dated 30 August 1995 to which he attached an extract of the page of the International Accounting Standards headed "Inventory valuation" which indicated: "The final valuation used should be the lesser of the cost and net realisable value." (emphasis added) That reflects the usual approach to ascertain the amount which should be shown in the annual accounts of a company for inventory since showing inventory at its cost of acquisition would be an inflated figure if that inventory could only be sold for less.

22. In cross-examination Mr Birch said that net realisable value would have been the appropriate method under normal circumstances, contrary to the words of the International Accounting Standard he had placed before the court which specified the lesser of cost and net realisable value. Mr Birch went on to suggest that replacement cost was appropriate in the case of the appellant because the appellant was closed down and that situation was similar to when a business is closed down because its premises have been burnt to the ground. That comparison was inappropriate since the latter situation would involve the incurrence of replacement cost if the business re-opened whereas the present situation involves a business which was discontinued.

23. It is convenient to here note that the assessment of those damages for breach of contract should not be taken to coincide with situations involving policies of insurance and judgments in the latter situation will not necessarily be applicable in the former situation.

24. Hence, the evidence established that the appropriate method of valuation was the lesser of cost and net realisable value. Evidence of replacement cost is not evidence of the net realisable value of what was there at the date the contract was breached. It is also worth noting that cost is not book value since book value is a term used to denote cost less accumulated depreciation. 

25. There was no evidence of the net realisable value of these buildings and improvements under normal circumstances, only that they realised K22,500 on a forced sale. To say that a greater amount would have been received had the sale not been forced is not to prove a higher value. What was the cost? The accounts of the appellant which were in evidence included a balance sheet showing the position as at 10 August 1995. The notes to those accounts show an item called "Leasehold improvements" which suggests cost of K59,762, less accumulated depreciation of K16,641, giving a book value of K43,121. The trial judge allowed the latter figure. However, in the absence of evidence of the net realisable value, the appropriate figure, in accordance with the evidence of International Accounting Standards, is the cost of K59,762.

26. Allowing for the fact that the appellant received K22,500 when these buildings and improvements were sold gives K37,262 and we would allow the appeal in respect of this item and substitute an amount of K37,262 for the amount of K20,621 in order to allow cost rather than book value.

Ground (b) – Loss on sale of stock, plant and equipment

27. The replacement cost in this instance was said to be K5,645,264 plus K277,803 for sourcing costs, a total of K5,923,067. Deducting the amount received of K303,500 gave the appellant’s claim of K5,619,567. The trial judge allowed K66,666 which was calculated as follows:

Book value of stock	K355,000	
Plus book value of plant and equipment	K 11,666	
	K366,666	
Less amount actually received	K300,000 (sic)	
	K 66,666	

28. The trial judge arrived at a figure of K66,666 after using an incorrect figure of K300,000 for the amount actually received. The correct figure was K303,500. No reasons were given for awarding the amount of K66,666 other than to indicate that it was the result of adopting the respondent’s suggestion.

29. If it be suggested that the sale of stock, ie spare parts, was a profitable activity then the answer is that such a benefit would have been reflected in the appellant’s profits and will be covered under the claim for loss of profits, considered later.

30. The submission that the stock was sold at a distressed value does not serve to indicate what it could have been sold for in a normal situation and no reference was made in the appellant’s submissions to any evidence which would provide a valid basis for awarding a higher figure.

31. At first instance, the trial judge was referred to an unreported decision of the Supreme Court of Queensland in Air Caledonie v General Estates Corporation Pty Ltd even though he was neither provided nor able to locate a copy of that judgment. A copy of that decision (No 3969 of 1987, 31 August 1997) was provided during hearing of the appeal by counsel for the respondents. It was submitted for the appellant that the parties in that case agreed to use the written down value. Page 11 of that judgment reveals that it was a case where the plaintiff claimed the depreciated value of its fixtures and fittings. That decision does not provide any assistance in this case.

32. The absence of reasons and the arithmetic error, however, warrant a reconsideration of this claim. 

33. The amount the trial judge awarded for stock was the figure of K355,000 appearing in the appellant’s balance sheet as at 10 August 1995. The submission that the amount awarded for stock was "calculated on the basis of depreciated book value" is incorrect since note 1(d) to the financial statements indicated that stock was valued on the same basis as set out in the International Accounting Standard Mr Birch placed before the court, considered earlier under Ground (a).

34. The figure of K11,666 for plant and equipment used by the trial judge is obviously the total of the written down values for Plant and Equipment (K3,815), Furniture and Fittings (K5,851) plus Loose Tools valued at K2,000. For the reasons indicated in relation to Ground (a) above, the figure which should have been awarded is the total of the figures shown for those items under the heading "Cost or Valuation" which are K61,404, K11,193 and K2,000 respectively, a total of K74,597.

35. Adding K355,000 for stock and K74,597 gives K429,597. Deducting the correct figure for sale proceeds of K303,500 gives K126,097 as the amount to which the appellant is entitled under this heading.

Ground (c) - Claim for Mr Mendoza’s time

36. The trial judge used an hourly rate of K75 for Mr Mendoza’s time and held that the claim was both within the principle of Robinson v Harman and "as supported by the evidence" and awarded K4,000, a figure which is not a multiple of K75. As the unchallenged evidence was that Mr Mendoza worked 640 hours, which amounts to K48,000 if an hourly rate of K75 is used, it would appear that the amount awarded under this heading was the result of a typographical error. For that reason, the award under this heading should be increased from K4,000 to K48,000.

Ground (d) - Loss of past long service leave (LSL) for Mr Valentine

37. Clause 12 of the employment agreement of Mr Valentine entitled him to 6 months’ paid long service leave after 15 years with a pro rata entitlement after three (3) years. For Mr Valentine to receive that benefit two things had to happen: he had to continue in his employment and the appellant had to be able to pay it. The ability of the appellant to pay that benefit depended upon the financial resources of the appellant at the date of the breach of contract and the future profits of the appellant. To the extent that the financial resources of the appellant as at the date of that breach were damaged, they are addressed by the various claims for damages in these proceedings and the future profits which the appellant may reasonably be expected to have made are covered by the assessment of the claim for loss of profits.

38. This claim is a claim which Mr Valentine has against the appellant. It is not a claim that the appellant can pass on to the respondents. It is correct to say that this claim did not abate when the company’s operations terminated and the payment of this claim to Mr Valentine may well be facilitated by the amount awarded in these proceedings. However, to allow such a claim and to award damages which include an amount in respect of loss of profits, would be to permit the appellant to recover twice in respect of the same item. Accordingly, this claim for K6,233 was correctly rejected by the trial judge. 

Ground (e) - Loss of employment claim: Mr Mendoza

39. The damages sought at first instance included a claim for K4,287,252 for Mr Mendoza’s loss of employment. That claim, calculated by reference to his contract of employment with the appellant dated 7 September 1992, included amounts for Mr Mendoza’s salary, with an allowance for inflation, to 12 March 2011, school fees, gratuity, rental benefit, annual leave fares, future long service leave entitlement, removal expenses and utility expenses. 

40. If the breach of contract had not occurred, and if the appellant had continued its business, then Mr Mendoza would have worked for the appellant, his entitlements would have been governed by his contract of employment and he would have received those entitlements if the company was able to pay them. However, those benefits are a matter between Mr Mendoza and the appellant. 

41. It cannot be sensibly suggested that Mr Mendoza can claim all his entitlements for the period from 10 August 1995, the date of the breach of contract, through to the last day of the maximum possible term under the lease, 12 March 2011, via a claim by the appellant which, once recovered from the respondents, will enable Mr Mendoza to not work for the appellant for more than 15 years but still be paid as if he was working. The claim also suffers from the defect that, as the trial judge observed, the quantum of the claim went far beyond the appellant’s capacity to pay as revealed by its financial statements.

42. In relation to its claims for damages against the respondents, the appellant is obliged to mitigate its loss and that would have required the appellant to exercise its right to terminate under clause 2.2 of Mr Mendoza’s contract of employment which would have entitled him to two months’ salary under clause 2.2.1. It is that expense which can properly be said to have been caused by the breach of contract since that is a cost that would not have arisen but for the breach of contract.

43. The financial statements reveal that the company paid total salaries of K17,329 in the year ended 31 December 1993, K20,214 in the year ended 31 December 1994 and K48,500 in the period ended 10 August 1995. It is necessary to extrapolate that figure for a full year. Since 1 January 1995 to 10 August 1995 is 222 days, a figure of K48,500 for that period represents a daily amount of K48,500/222 which is K218.47 per day. Multiplying that daily rate by 365 gives K79,741 for a full year. Since the claims for Mr Mendoza and Mr Valentine are equal, it is reasonable to proceed on the basis that their salaries were equal. Halving K79,741 gives K39,870 as the annual salary for Mr Mendoza. 

44. Using the figure of K39,870 per annum so calculated, rather than the K57,200 per annum set out in the appellant’s claim, the amount recoverable under this heading is an amount equal to two months of that annual salary which is K6,645. Accordingly, the appeal in relation to this claim will be allowed and an amount of K6,645 will be awarded under this heading.

Ground (f) - Loss of employment claim: Mr Valentine

45. The position is the same in relation to this claim since it is the corresponding claim provisions for Mr Valentine. Since Mr Valentine’s contract of employment contained identically worded clauses 2.2 and 2.2.1 and since the claims were for the same amount it follows that the salaries were the same and so the damages should be the same. Hence, the appeal will be allowed in so far as it relates to this claim and an amount of K6,645 will be awarded under this heading.

Ground (g) - Loss of collectable debtor

46. A consideration of the oral evidence led during the trial reveals that in 1993 an Islander aircraft hired by Wantok Aviation Pty Ltd (Wantok) from the appellant crash-landed and there was a shortfall when the insurance proceeds were received. Following the filing of a Writ of Summons by the appellant on 29 November 1993 that shortfall became a judgment debt of K194,593, inclusive of costs, on 3 February 1994. Repayments totalling K43,100 were made between 24 May 1994 and 23 August 1995, as revealed by a credit control card. The outstanding balance at the time when damages were being assessed was thus K194,593 less K43,100 which is K151,493.

47. The evidence established that, in order to facilitate the repayment of that judgment debt by instalments, the appellant assisted the continued operation of the business of the judgment debtor, Wantok, by taking over its management. Wantok hired the appellant’s aircraft and also used the appellant’s portable buildings as its office to the knowledge of the Department of Civil Aviation. When the appellant was required to vacate its premises and ceased operations, Wantok suffered the same fate.

48. In the respondents’ written submissions there appears a sentence which reads: "My recollection opt (sic) this matter was that Wantok Aviation the debtor had ceased to function with the chief pilot losing his licence". That recollection is faulty as the evidence revealed that Wantok’s chief pilot had his licence suspended early in 1993 but that suspension was lifted by the Review Board. 

49. Although it might be said that Wantok could have moved its operations to another location when the appellant’s lease was terminated, the fact that it was being provided with a rent-free office by the appellant would mean that, if it relocated, it would be less able to keep reducing the judgment debt by paying further instalments.

50. The long-recognised test for whether or not a claim for damages is too remote was set out more than 150 years ago, in Hadley v Baxendale (1854) 9 Exch 341 at 344; 156 ER 145 at 151:

"Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such a breach of contract should be such as may fairly and reasonably be considered either arising naturally, ie according to the usual course of things, from such a breach of contract itself, or such as may reasonably be supposed to have been within the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it."

51. In these unusual circumstances, where the appellant was effectively running the operations of Wantok, the claim for the loss of a collectable debtor is not too remote in that it satisfies the first of the two limbs in what has become known as the rule in Hadley v Baxendale. However, the question of quantification of the loss remains.

52. But for the breach of contract upon which this assessment of damages is founded, even assuming the continued operation of the appellant’s business, there is the contingency of whether the business of Wantok would have continued and in a manner which enabled the payment of further instalments to reduce the judgment debt. It must also be borne in mind that while it might be said that the appellant lost a judgment debtor when the business of Wantok ceased, it did not lose a judgment debt in that two directors and shareholders of Wantok Pty Ltd were also judgment debtors as a result of each having provided the appellant with a guarantee which covered the appellant’s claim against Wantok. Such matters warrant a substantial reduction for those contingencies and, in view of those matters, an amount of K50,000 is allowed in respect of this claim, being roughly one third of the outstanding balance of the judgment debt.

Ground (h) - Loss of company profits

53. The trial judge allowed an amount of K748,728 for lost profits, which was calculated on the assumption that the appellant’s profit was K144,077 per annum. The amount of profit per annum was not challenged on appeal. After considering some case law and setting out six matters which he considered to be relevant, the trial judge then adopted the respondents’ concession that five years was an appropriate period and added a pro rata amount for the period up to the next anniversary of the lease. Thus, his Honour’s calculation was: K144,077 x 5 years, ie K720,385, plus a pro rata amount of K28,343, giving the amount allowed of K748,728.

54. There are three reasons why the appeal in relation to this component should be allowed and the damages assessed again. First, there was a failure to give reasons beyond describing the respondents’ concession as important and not unreasonable. Secondly, the calculation made no allowance for the time value of money. In other words, the appellant was only entitled to the present value of its lost profits. Thirdly, the preceding analysis included a finding that "the Civil Aviation Authority may have validly terminated the lease pursuant to its common law right not to proceed with a 3 year extension, by giving at least 3 years’ notice". That finding conflicts with the finding which the trial judge made in his earlier judgment on liability which led to Order 1 which was in the following terms:

"A declaration in respect of lease No. 005, registered in volume 1 folio 29 in the Register of Aerodrome (Business Concessions) Leases, that the plaintiff as lessee is entitled to five further consecutive renewals of the three-year term, as provided for by para. 4, Schedule 3, the next such renewal to commence on 13 March 1996 and the last such renewal to commence on 13 March 2008 and to expire on 12 March 2001, at such rent as is therein provided." 

55. The option to renew was not merely an offer made by the State that was open for acceptance by the appellant but was a contractual right which the appellant was entitled to exercise unfettered by any requirements beyond compliance with the terms of the lease. There was no mention in the lease of any right to early termination of the lease by State absent a breach by the appellant.

56. This claim for loss of profits is similar to a claim for future economic loss in a personal injuries case. The accepted practice in such cases is to assess the relevant amount, decide the appropriate term and then use a discount factor (sometimes referred to as a multiplier) to obtain a present value amount which is then reduced by an allowance for contingencies which, in the case of an individual, are called the vicissitudes of life. While that method has been referred to as an actuarial method, it involves no more than a compound interest calculation which excludes any consideration of mortality. There is no reason why that method should not be followed in this instance. Indeed, the adoption of that method is appropriate since it is not uncommon now for people to work as independent contractors, by setting up their own company, rather than as employees. In this case, the appellant is a company which would appear to have been created for the purpose of facilitating the work of Mr Mendoza and Mr Valentine.

57. It is convenient to here explain the concept of present value. If a person is offered K1,000 now or K1,000 in a year from now they would choose K1,000 now because they can earn interest on that money over the next year. If an interest rate of 3% per annum is used then K1,000 is equivalent to K1,000 x 1.03 or K1,030 one year from now. In like manner K1,000 received one year from now is worth K1,000/1.03 or K971 now. The use of 3% per annum in that case is said to be a discount rate because it is discounting the value of a sum received in future to ascertain its present day value. The same approach can be adopted for a series of payments made weekly over a period so that the current value of a series of weekly payments can be obtained from the amount of those payments, the term over which those payments will be made and the discount rate. Tables have been prepared which set out the present value of an amount, using a discount rate of 3% per annum for various terms. Using such tables makes it easy to calculate the present value of any sum for a given term at a discount rate of 3% per annum.

58. The relevant amount here is the unchallenged amount of K144,077 per annum. Since the present value tables are expressed in terms of an amount per week, that amount should be expressed as K144,077/52 which is K2,770 per week. The relevant term is 15 years and 214 days. In Pinzer v Bougainville Copper Limited [1985] PNGLR 160 the Supreme Court considered the appropriate discount rate to be 3% per annum. Using the present value tables set out in the 3rd edition of Assessment of Damages for Personal Injury and Death by Luntz (1990), the multiplier for K1 per week for 15 years at a discount rate of 3% per annum is 632. For 16 years the figure is 665. The interpolated figure for 15 years and 214 days is 650, ie 632 plus the difference between those two multipliers, which is 32, multiplied by 214/365. Adding the result of 18 to 632 gives a multiplier of 650. Multiplying K2,770 by 650 gives K1,800,500. It remains to consider what reduction should be made for contingencies.

59. There are a number of matters mentioned by the trial judge which are relevant to a consideration of the loss of profits claim. They include that the appellant’s net profit varied, the almost total reliance on Mr Mendoza, generally aging piston engined aircraft and aging buildings which increased the likelihood that the airport would be redeveloped at some stage. The reduction usually made for the vicissitudes of life in personal injuries cases, in the absence of special circumstances warranting a different figure, is 15%. Taking such matters into consideration the usual 15% reduction for contingencies should be increased to 30% in the circumstances of this case. Reducing K1,800,500 by 30% gives an amount of K1,260,350.

60. The amount sought on appeal was K2,245,633. However, that amount was not a present value amount and no allowance was made for any contingencies. For the amount of K748,728 awarded by the trial judge in respect of the loss of profits claim there will be substituted an amount of K1,260,350.

Ground (i) – General damages

61. This ground was not pursued.

Ground (j) – Exemplary damages

62. The claim for exemplary damages raises two questions: Can exemplary damages be awarded in the present case? If so, did the circumstances here warrant such an award of damages? At first instance, the trial judge decided both those questions against the appellant.

63. It is worth noting that the Claims By and Against the State Act 1996 provides, in section 12(1) that "No exemplary damages may be awarded against the State unless it appears to the court that, regardless of the nature of the claim, there has been a breach of Constitutional rights so severe or continuous as to warrant an award of exemplary damages." However, that statute did not come into effect until 20 February 1997, after the appellant’s cause of action accrued, and there is nothing in that 1996 Act to suggest it operates retrospectively. The earlier statute, being the Claims By and Against the State Act Ch 30, did not contain any provision in relation to exemplary damages. Hence the first question has to be determined by reference to case law rather than to statute law.

64. Outside Papua New Guinea, there is no uniformity as to when exemplary damages may be awarded. In England, the leading case is Rookes v Barnard [1964] AC 1129 where the House of Lords held that exemplary damages should not be awarded except in specific situations which may be summarised as conduct by servants of the government, conduct by a defendant designed to make a profit greater than the compensation payable to the plaintiff, and where expressly authorised by statute. It is also necessary to state that exemplary damages are not normally available where the cause of action is breach of contract.

65. The restrictions set out in Rookes v Barnard have not been followed in Australia (Uren v John Fairfax & Sons Pty Ltd (1966) 117 CLR 118), in New Zealand (Fogg v McKnight [1968] NZLR 330) or Canada (Vorvis v Insurance Corporation of British Columbia [1989] 1 SCR 1085). In Papua New Guinea, Injia J (as he then was) held that exemplary damages are not confined to the Rookes v Barnard categories in Koimi v The State [1995] PNGLR 535 and we agree that is the better view.

66. On the question of whether exemplary damages may be claimed where the cause of action is breach of contract, we note the following concession of the appellant’s counsel, recorded in his submissions on exemplary damages at first instance:

"To date there appear to be no reported cases in Papua New Guinea which deal directly with exemplary damages awarded against the State for breach of contract alone or for oppressive or arbitrary conduct against a corporation. Those instances where the National Court and the Supreme Court have awarded exemplary damages relate to claims in tort or for breach of constitutional rights: (citations omitted)"

67. No cases were brought to the court’s attention which suggested that submission was not correct. The trial judge observed that "exemplary damages are not normally available for breach of contract". We agree with that general rule and note that no claim based on tort, breach of statute or the breach of any Constitutional right was pleaded.

68. The adjective "contumelious" has been commonly used in the case law to describe the kind of conduct that will warrant an award of exemplary damages. As that is not a word commonly used in Papua New Guinea, other words such as spiteful and disgraceful provide sufficient indication of the test which must be satisfied. Counsel for the respondents, in oral submissions, properly conceded that the conduct in this instance could be said to be unreasonable but said it was not sufficient to warrant an award of exemplary damages. It is to be regretted that the conduct of the State, its servants and agents in this case was such as to warrant a concession that it was unreasonable. 

69. Having rejected the claim for exemplary damages, it is not necessary to here summarise the conduct of the respondents on which the appellant’s claim for exemplary damages was based. However, it will be necessary to consider such conduct when assessing the claim for indemnity costs.

Ground (k) - Interest

70. As a result of a grant of leave to lead further evidence, the affidavit of Stuart Smith sworn 23 October 2009 was read. In charge of the Credit and Risk Department in Westpac Bank’s head office in Papua New Guinea, Mr Smith set out that bank’s "indicator lending rates" for the period from August 1995, when the lease was terminated and the cause of action arose, to October 2009, when the appeal was reheard: a period of 14 years and 2 months. The average of that interest rate for that period was 13.38% per annum. Mr Smith went on to say that loan facilities were made available to corporate customers at the prevailing "indicator lending rate" plus 2% or more which is obviously a risk premium. Thus, Mr Smith’s evidence was to the effect that a corporation such as the appellant, which banks with Westpac, would have been charged an average of 15.38% per annum during the period since the appellant’s cause of action accrued. In cross-examination, Mr Smith agreed that the interest rate which Westpac paid to depositors was lower than that which it charged to borrowers but he was unable to indicate how much lower.

71. At the re-hearing of the appeal, both lawyers suggested that the damages should be assessed as at 10 August 1995, the date of the judgment on liability in favour of the appellant. The questions are what rate of interest should be used for the period from that date up to the date of judgment and what amount results from the use of such a rate of interest.

72. It must be observed that the Judicial Proceedings (Interest on Debts and Damages) Act Ch 52 was amended by Act No 44 of 1996 with effect from 20 February 1997. The amendments included limiting the rate of interest which could be awarded against the State to 8% per annum for both pre-judgment and post-judgment interest. However, since those amendments were not made retrospective, these proceedings are to be determined by reference to the pre-amendment provisions. For that reason, it is not necessary to consider the appellant’s argument based on section 53 of the Constitution. 

73. In relation to pre-judgment interest, the trial judge awarded interest at a rate of 8% but said: "I would if I had power order a greater rate of interest". In fact, section 1 of the then applicable Act (Ch 52) permitted the court to award pre-judgment interest "at such rate as it thinks proper". The trial judge also considered himself bound to award 8% per annum by Order 12 rule 6(2) of the National Court Rules. In fact, that rate does not apply if the court provides for some other rate of interest to be used.

74. The claim for a higher interest rate to be used in the award of interest is not novel. Such claims have been made and granted in such cases as Blackwood Hodge Hire (Australia) Pty Ltd v Sandaun Provincial Government and Jacob Talus, Pratt J, 6 March 1985, where a commercial interest rate of 12.5% per annum was awarded, and Cybula v Nings Agencies Pty Ltd [1981] PNGLR 120, where a then commercial rate of 8% was applied. In addition to those decisions, which pre-dated the judgment on damages in this case, this court was referred to Alotau Enterprises Pty Limited and Allen Enterprises Pty Limited v Zurich Pacific Insurance Pty Limited, (1999) N1969 where the average Westpac indicator lending rate of 13.50% was awarded for pre-judgment interest. 

75. An award of interest is plainly compensatory and reflects the loss which a successful plaintiff suffers from not having and being able to make use of the money to which the court finds the plaintiff to be entitled. Interest cannot be said to be punitive so far as a defendant is concerned because the defendant has the use of the money until it is paid to the plaintiff.

76. In response to the evidence of the indicator lending rate, it was submitted, on behalf of the respondents, that the appellant would not have been a borrower but a depositor and, for that reason, a lower rate should be applied. In reply, for the appellant, it was submitted that if the appellant had been paid the damages to which it was considered entitled then it could have lent money at the indicator lending rate plus the risk premium, ie 15.38% per annum in this instance. Of course, if the appellant’s bank account was in overdraft then it would have been paying the indicator lending rate plus the risk premium. Further, it is an answer to the respondents’ submission that the indicator lending rate is higher than the rate paid to depositors that the interest awarded is only simple interest, not compound interest, by reason of section 2(a) of the Judicial Proceedings (Interest on Debts and Damages) Act Ch 52.

77. For the reasons given by the trial judge, namely that an interest rate of 8% per annum is out of touch with commercial interest rates, and in conformity with the decision in Alotau Enterprises Pty Limited and Allen Enterprises Pty Limited v Zurich Pacific Insurance Pty Limited, interest is awarded at the average indicator lending rate of 13.38% for the period from the date when the cause of action arose, 10 August 1995, to the date of judgment, 27 November 2009, which is a period of 14 years and 109 days. 

78. Multiplying the term (14.2986 years) by the interest rate (0.1338) gives a factor of 1.913157. It is necessary to multiply that factor by the revised damages, as awarded on appeal, which totals K1,822,978, as set out in the table below. Multiplying K1,822,978 by 1.913157 gives an amount for interest of K3,487,643. When that award of interest is added to the damages of K1,822,978, the amount payable to the appellant becomes K5,310,621.

Ground (l) - Conversion of foreign currency obligations to Kina 

79. This ground was not pursued.

Ground (m) - Costs

80. The respondents’ written submission that "The rejection of the claim for exemplary damages pre-empts any claim for party-party costs" is rejected. Despite the appellant’s submission that costs on an indemnity basis were sought in the court below, a consideration of both the initial submissions and the submissions in reply does not reveal any such submission. Given the failure to seek an order for solicitor-client costs in the court below, there is no valid basis for disturbing the order of the trial judge for the respondents to pay the appellant’s costs on a party-party basis.

Ground (n) – Total destruction of the appellant’s business

81. This ground was included in paragraph 3 of the Supplementary Notice of Appeal but was not argued.

Costs of the appeal

82. However, it remains to consider what should be the order for the costs of this appeal. The situations in which it may be appropriate to award costs on a solicitor-client basis cannot be confined by any definition. What can be said, however, is that it may be appropriate to make such a costs order (1) when there has been a rejection of a settlement which would, if accepted, have resulted in a better outcome than that which was obtained; (2) where the conduct of a party, either before or during the proceedings, can be said to warrant such an order; or (3) where there are special or unusual circumstances. The discretion in relation to an order for costs must be exercised judicially: having regard to the principles of natural justice by providing an opportunity for the party against whom the order has been sought to be heard and by making a decision which is supported by reasons.

83. The 4th Respondent does not appear to have been an active participant in the events the subject of these proceedings. In this case the order for the costs of the appeal shall be on a solicitor-client basis due to the conduct of the remaining respondents which may be summarised as follows:

(1) The Department of Civil Aviation (DCA) failed to comply with an order made by the National Court on 7 March 1995 that the appellant be permitted to inspect and be furnished with copies of certain documents which required a further order to be obtained on 16 June 1995.

(2) The more than 700% increase in annual rent from K8,075 to K67,659 to which the appellant would be subject if its operations were moved to the alternative site.

(3) The letter to the appellant from the Minister for Civil Aviation & Tourism, withdrawing the alternative site, being a letter sent on 21 July 1995, the second day of the hearing on liability.

(4) The surprise application made to the court on that day for the proceedings to be struck out on the basis that no cause of action was disclosed.

(5) The 30 August 1995 letter from the DCA denying the appellant access to the route it needed to use in order to remove its portable buildings.

(6) The DCA’s refusal to grant the appellant an extension or variation of its certificate of approval, or grant a temporary certificate of approval, so as to facilitate the sale of stock when the appellant lost its certificate of approval following its vacation of the leased site.

(7) The 6 December 1995 letter from the Solicitor-General to the appellant’s lawyers suggesting the possibility of a lease being offered to the appellant, being a letter sent almost four months after the appellant’s lease had been terminated, almost three months after the appellant had been required to vacate the site it previously leased and just over a week before the commencement of the hearing on damages: a letter that was clearly sent in a last minute attempt to reduce the appellant’s claim for damages.

(8) The disregard of the appellant’s rights of protection from unjust deprivation of property under section 53 of the Constitution. 

(9) The failure, since 13 December 1995, to make any payment of damages to the appellant (beyond the initial amount of K100,000 for which credit was given by the trial judge) despite a copy of the Certificate of Judgment being served.

(10) The destruction of the appellant’s business.

Conclusion

84. This is yet another case where the State has become liable to pay a substantial sum by way of damages because the contractual rights of those who have existing agreements with the State are either not considered or not adequately considered when decisions are made. It is to be hoped that, sooner or later, the lesson will be learned.

85. The following table summarises the effect of the findings of this court, highlighting amounts which have been revised by the court:

Component	Amount awarded at trial	Amount awarded on appeal	
			
Rental credit	3,515.00	3,515.00	
Loss of work in progress	25,000.00	25,000.00	
Loss on sale of buildings & improvements	20,621.00	37,262.00	
Loss on sale of stock, plant & equipment	66,666.00	126,097.00	
Estimated loss on sale of aircraft	229,500.00	229,500.00	
			
Additional labour costs	20,741.00	20,741.00	
Claim for Mr Mendoza’s time	4,000.00	48,000.00	
Close down costs	54,702.00	54,702.00	
Loss of past LSL for Mr Valentine	0.00	0.00	
Accounting expenses	33,145.00	33,145.00	
			
Expert witness costs	21,376.00	21,376.00	
Loss of employment claim: Mr Mendoza	0.00	6,645.00	
Loss of employment claim: Mr Valentine	0.00	6,645.00	
Loss of collectable debtor	0.0	50,000.00	
Loss of company profits	748,728.00	1,260,350.00	
			
General damages	0.00	0.00	
Exemplary damages	0.00	0.00	
Less amount previously paid	(100,000.00)	(100,000.00)	
			
Total award of damages	1,127,994.00	1,822,978.00	
Interest	 121,143.46	 3,487,643.00	
			
Total judgment sum (damages & interest)	K1,249,137.46	K5,310,621.00	
Plus costs of trial (liability and quantum)	party-party basis	party-party basis	
Plus costs of the appeal		Solicitor-client basis	

86. For the sake of completeness, it must be observed that the appeal in relation to the claim for Mr Mendoza’s time, which was Ground (c), did not involve any question of law and thus was a pure question of fact for which leave is required. As that claim appears to have been the result of a typographical error, it would be unjust not to grant leave.

Orders

87. Allowing this appeal involves setting aside the judgment of the trial judge and entering a judgment against the respondents. The 5th respondent, being the State, would appear to be entitled to the benefit of section 12(2) of the Claims By and Against the State Act 1996 which precludes this court from making any order as to the time or method of satisfaction of such a judgment against the State. It appears that the remaining respondents would not have the benefit of section 12(2) but would have a right to be indemnified by the State. Hence, if judgment is entered against each of the respondents, the appellant would be entitled to execute the judgment against the remaining respondents who would then be left to pursue their right of indemnity. In those circumstances, it is desirable for judgment to be entered solely against the State. The same considerations apply in relation to the orders for costs.

88. Accordingly, the orders of the Court are as follows:

1. Grant leave to appeal in relation to what became Ground (c).

2. Appeal on damages and interest allowed.

3. Set aside judgment for the appellant in the sum of K1,127,137.46.

4. Judgment for the appellant against the 5th respondent in the sum of K5,310,621.00.

5. Set aside the order for costs made in the National Court.

6. The 5th respondent is to pay the appellant’s costs of the National Court proceedings on a party-party basis.

7. The 5th respondent is to pay the appellant’s costs of the appeal on a solicitor-client basis.

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Blake Dawson: Lawyers for the Appellant Warner Shand: Lawyers for the Respondents