Australian Business Insurance Advisers (ABIA) P/L ACN 081 402 379 v Craig Hargraves Investments P/L ACN 008 185 117 - [2011] SADC 24

DISTRICT COURT OF SOUTH AUSTRALIA
(Civil)
AUSTRALIAN BUSINESS INSURANCE ADVISERS (ABIA) P/L ACN 081 402 379 v CRAIG HARGRAVES INVESTMENTS P/L ACN 008 185 117
[2011] SADC 24
Judgment of His Honour Judge Nicholson
9 March 2011
CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - CONSTRUCTION AND INTERPRETATION OF CONTRACTS - OTHER MATTERS
CONTRACTS - PARTICULAR PARTIES - VENDOR AND PURCHASER - DISCLOSURE OF MATERIAL FACTS
CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - DISCHARGE, BREACH AND DEFENCES TO ACTION FOR BREACH
TRADE AND COMMERCE - TRADE AND COMMERCE GENERALLY - STATUTES RELATING TO MISLEADING OR DECEPTIVE CONDUCT IN TRADE
The plaintiff vendor, pursuant to a Deed of Sale, sold its client book and entitlement to future trailing commissions to the defendant purchaser. The purchaser took control of the assets, the subject of the sale, on completion but refused to pay the final instalments of the price which fell due after completion. The plaintiff sued for the balance of the price. The defendant claimed a set-off by way of defence and counter claimed alleging an entitlement to damages for breach of contractual warranty, misrepresentaton and statutory misleading or deceptive conduct. The defendant also claimed damages against the directors of the plaintiff for misrepresentation and statutory misleading or deceptive conduct. With respect to its claim for damages, the defendant relied on an expert valuation of the assets acquired in their "impaired" state based on a "rule of thumb" approach. The expert evidence was not accepted essentially because key assumptions were not made out on the evidence and because the "rule of thumb" approach was found to be unsatisfactory in the circumstances.
HELD:- Plaintiff entitled to be paid the balance of the price still unpaid in the amount of $243,000. Defendant's primary claim to damages not made out. However, defendant entitled to have taken reasonable steps in mitigation and to damages by way of consequential loss of $20,000 as against the plaintiff and to set off that amount as against the $243,000 due to the plaintiff. In all other respects the defendant's claims dismissed.
Land and Business (Sale and Conveyancing) Act 1994 s 6; Corporations Act 2001 (Cth) ss 946A, 946C, 947B; Misrepresentation Act 1972 (SA) s 7; Trade Practices Act 1974 (Cth) s 52, referred to.
Williams v Edwards (1827) 2 Sim78; 57 ER 719; Poseidon Ltd v Adelaide Petroleum NL (1991) 105 ALR 25; Lam v Ausintel Investments Australia Pty Ltd (1990) 97 FLR 458; Fraser v NRMA Holdings Ltd (1995) 55 FCR 452; L'Estrange v F Graucob Ltd [1934] 2 KB 394; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; A Roberts & Co Ltd v Leicestershire County Council [1961] Ch 555; Taylor v Ansett Transport Industries Ltd (1987) 18 FCR 342; Somanader v Minister for Immigration and Multicultural Affairs (2000) 178 ALR 677; Administration of the Territory of Papua and New Guinea v Daera Guba (1973) 130 CLR 353; Tedeschi v Legal Services Commissioner (1997) 43 NSWLR 20; Banco De Portugal v Waterlow & Sons [1932] AC 452; British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673, considered.

AUSTRALIAN BUSINESS INSURANCE ADVISERS (ABIA) P/L ACN 081 402 379 v CRAIG HARGRAVES INVESTMENTS P/L ACN 008 185 117
[2011] SADC 24
Introduction

This litigation concerns a claim by the plaintiff company for money alleged due under a contract for the sale of certain business assets and a counterclaim by the defendant company for damages for alleged misrepresentation, misleading or deceptive conduct and breach of contract. The defendant further alleges that the damages due to it are sufficient to give rise to a complete set-off against the plaintiff’s claim. The plaintiff company was without legal representation for the trial and I gave leave for the trial to be conducted, on its behalf, by one of its two directors, Mr Terry Franke, also an unrepresented party to the proceedings in his own right.
For some years until September 2006, the plaintiff company conducted the business of advising clients about the purchase and renewal of insurance products and superannuation products. When a client took out an insurance or superannuation product recommended by the plaintiff, in the ordinary course, the plaintiff would receive from the provider of the product an up-front commission and an annual trailing commission for the period that the client retained the product in question. The nature of the plaintiff’s business was, in effect, to recommend particular products to its clients and once a client purchased such a product to maintain a relationship with that client, that is, ‘service’ that client, with a view to encouraging the client to stay with the product in question and thus maintain the plaintiff’s stream of trailing commissions. From time to time the plaintiff might arrange for a client to obtain additional insurance or superannuation products or to transfer an investment from one product to another. In the latter case, the original trailing commission stream would cease but the plaintiff would obtain a new up-front commission and a new stream of trailing commission appropriate to the new product.
Over time, the plaintiff built up a valuable asset; a list of clients that, if serviced appropriately such that they retained the plaintiff as advisor, would produce an annual income stream. As far as businesses of this type are concerned, at least in South Australia, the plaintiff’s business was a relatively small one comprising, as at September 2006, approximately 900 clients.
Mr Terry Franke and his wife Mrs Wendy Franke, the second and third defendants by counterclaim, were, at all material times, the directors and shareholders of the plaintiff company.
As at September 2006 and thereafter, the defendant conducted a similar type of business. However, the defendant’s operation in Adelaide was significantly larger than that of the plaintiff. At all material times Mr Craig Hargraves was a director of and was authorised to act for and on behalf of the defendant, with respect to all matters material to this litigation.
On or about 25 September 2006, the plaintiff and the defendant entered into a Deed for Sale and Purchase of Assets (‘the Deed”) pursuant to which the plaintiff agreed to sell and the purchaser agreed to buy, inter alia, the plaintiff’s Client Files (not defined) and all of the Renewal Commissions (as defined) thereafter to be received with respect to the plaintiff’s clients. The purchase price under the Deed was $313,000, payable by way of instalments but subject to a contractually defined reconciliation process. The first instalment of $100,000 was payable upon execution of the Deed and has been paid. The second and third instalments were expressed to be payable on 1 March 2007 and 1 October 2007 respectively. On or very shortly after the date of execution of the Deed and the payment of the first instalment, the plaintiff transferred ‘its client base’ to the defendant.[1] Thereafter the defendant treated and ‘worked’ the plaintiff’s client base as its own.
[1] Admitted on the pleadings, Further Amended Statement of Claim, paragraph 8 and Second Further Amended Defence, paragraph 10.
The defendant failed to pay the second and third instalments of the price, as provided for by the Deed, as and when they fell due. By its Second Further Amended Defence it claims that it suffered loss and damage as a result of misrepresentation, statutory misleading or deceptive conduct and breach of contract by the plaintiff which loss and damage exceeds any amount due under the contract such that the defendant is entitled to a complete set-off.
In addition, the defendant has brought a cross-action or counterclaim[2] which essentially re-states the allegations underlying its defence of set-off. The defendants to the cross-action are the plaintiff, Mr Franke (second cross-defendant) and Mrs Franke (third cross-defendant). In essence, the defendant, as cross-claimant, maintains that both Mr and Mrs Franke engaged in misrepresentation as embraced by the Misrepresentation Act 1972 (SA) together with statutory misleading or deceptive conduct at the time of the contractual negotiations and that the plaintiff, as first cross-defendant, also (through the Frankes) engaged in misrepresentation and statutory misleading or deceptive conduct and committed a breach of contract.
[2] Perhaps, strictly, a combined cross-action and third party claim.
By its pleadings the defendant asserted that, after allowing for the balance of the purchase price due under the contract, it had suffered loss in the amount of $53,527 and claimed damages for that amount.[3]
[3] As the case developed, the balance claimed of $53,527 changed.
Matters of fact not seriously contested and readily established on the evidence.
In September 2006, during various face to face meetings, the parties conducted negotiations for the sale by the plaintiff to the defendant of certain assets. In oral discussions a starting price of $600,000 was mentioned. Ultimately, an agreement in principle was reached that the defendant would pay three times the annual renewal commissions expected to flow from the then client base. The Frankes asserted that expected annual renewal commissions would be at least $200,000 (hence their initial starting price of $600,000). However, the records then available[4] disclosed annual renewal commissions totalling $171,000. According to Mr Franke, the documentary record identifying all commissions available, or potentially available, was not complete at the time of the negotiations. However, he was confident that a complete documentary record, once available, would show annual renewal commissions of at least $200,000. In any event, the figure adopted and which ultimately found its way into the executed Deed, was $171,000. It was envisaged that a reconciliation process would take place which, if undertaken appropriately, should have operated to protect both parties on this point.
[4] Essentially the records relied upon for this exercise are the commission statements provided from time to time or on request by the various providers of the insurance and superannuation products that had been sold to members of the client base.
Three times annual renewal commissions of $171,000 gave rise to a starting point of $513,000 as the purchase price for the assets in question. However, for reasons that suited the defendant it was also agreed, in principle, that the starting point for the purchase price would be reduced to $313,000 and that each of Mr and Mrs Franke, simultaneously with the sale of the assets, would enter into a document called a ‘Deed of Settlement’ the effect of which, at least notionally, was to establish a relationship of employment between the Frankes as employees and Poynter Hargraves Financial Consultants Pty Ltd (a company associated in some way with the defendant) as employer. The Deeds of Settlement[5] provided, inter alia, that each of the two employees was to be employed until 30 June 2007 (a period of approximately 9 months) at which time the agreement was to expire and that each was to receive $100,000 upon execution of the Deed of Settlement.
[5] A version of that entered into by Terry Franke is at MFI-D2, p149 and of that entered into by Wendy Franke is at MFI-D2, p153. Early in the trial after some extended discussions with Mr Franke, MFI-D2, three lever arch folders of documents, was placed before me on the basis that as and when the parties deployed a document within MFI-D2 throughout the trial, and subject to arguments as to admissibility and weight etc, documents so identified within MFI-D2 would become exhibits in the trial.
It was then agreed that as far as the actual price of $313,000 was concerned, $100,000 would be paid on execution of the Deed, a second instalment of $106,500 would be paid in March of 2007, that is, some six months or so after execution of the Deed, and a third instalment of $106,500 would be paid in September 2007, that is, some 12 months after execution of the Deed.
The parties agreed that the final price payable would be adjusted in accordance with a formula to be set out in the Deed and referable to the total amount of actual renewal commissions, in fact, received by the defendant during the first year of its operation of the client files.
Finally, the parties agreed in principle that the defendant would pay a further sum of $30,000 to the plaintiff in order to compensate the plaintiff (strictly Mr and Mrs Franke) for any ultimate tax disadvantage to Mr and Mrs Franke caused by the fact that some of the consideration for the sale of the plaintiff company’s assets came in the form of a salary payment direct to each of Mr and Mrs Franke.[6]
[6] Both Mr and Mrs Franke arranged for their $100,000 salary payment to be sacrificed in full and paid into a personal superannuation fund, MFI-D2, p121 and 122. Each such payment in was expected to give rise to a 15% contributions tax.
On or about 25 September 2006 the plaintiff and the defendant executed the Deed.[7] In fact, two forms of written contract for the sale of assets were executed at, it would appear, the same meeting.[8] The two forms of the Deed are not identical. The differences include the following:
(i)the handwritten amendments to clause 5.2 in each document are not congruent and would appear to have been recorded by a different hand.
(ii)Exhibit P1 contains initialling by various persons adjacent to the handwritten amendments to clause 5.2 but there is no initialling at clause 5.2 of MFI-D2, p123 or exhibit D8.
(iii)Mr Franke’s signature adjacent to his execution clause has been witnessed on exhibit P1 but has not been witnessed on MFI-D2, p123 and MFI-D2 p123 appears to be missing a final signing page which presumably contained the signature of Mrs Franke (cf; the last (signing) page of exhibit P1).
[7]    I say on or about 25 September 2006 because no version or copy of the Deed in evidence is dated. Whilst, the parties conducted a number of meetings in September 2006, the date of the meeting when the documents were signed cannot be determined with certainty from the oral evidence of the witnesses. However, it is not contested that at least one, probably two, deeds were signed towards the end of September. Furthermore, Deeds of Settlement (the employment contracts) signed by Mr Franke (MFI‑D2, p149) and Mrs Franke (MFI‑D2, p153) bear the date 25 September 2006 and a cheque for $200,000 made payable to the Franke’s Superannuation Fund (MFI‑D2, p157) and a cheque for $100,000 made payable to the plaintiff (MFI-D2, p158) both bear the date 25 September 2006.
[8]    Exhibit P1 and MFI-D2, p123 (of which exhibit D8 appears to be the original).
The only, potentially material, difference is the inclusion of the words ‘subject to reconciliation’ in the first line of clause 5.2 of exhibit P1 which words do not appear in MFI-D2, p123. However, I am satisfied, for reasons which will become apparent, that the differences between the two written agreements and in particular the difference I have just referred to, are not on their proper construction, material to the parties’ disputes.
Quite some time during the trial was devoted to attempting to ascertain how it came about that two different documents were executed and which one was the final version of the parties’ written agreement. The evidence provided on both sides of the dispute is confusing on this issue. However, I am satisfied that at the final meeting during which the parties executed a written form or forms of their agreement, there were two identical typewritten versions of the contract available. At a late stage in negotiations it was agreed that some handwritten changes would be made to clause 5.2. These were recorded on the two copies by different persons and, in so doing, identical amendments were made apart from the inclusion in one of the documents of the phrase ‘subject to reconciliation’. Further, whilst both copies were executed, only the one containing the phrase ‘subject to reconciliation’ contains the initialling against clause 5.2.
If pressed to decide which of the versions was the final version, I would be inclined to find that exhibit P1 was the version that ultimately represented the parties’ intentions, if only because they have expressly adverted to the phrase ‘subject to reconciliation’ in that document and initialled in the margin adjacent to it. However, given that in my view the differences between the two written agreements are not, on their proper construction, material I am saved the need to form a final view as to which of the two documents is the final and ultimately only binding version.
I mention here, that Mr Franke was clearly very troubled by the fact that there were two, not quite identical, documents that had been executed by the parties. He was also troubled by the fact that the document ultimately executed (both versions) contains a vendor’s warranty provision (clause 4.3 of Schedule 1) in a form different from that which he recalled it to be at the time he executed the document(s). I will come back to this issue later in these reasons. However, Mr Franke was strongly of the view that alterations had been made to the Deed(s) by either a representative of the defendant or the defendant’s then solicitor after the document(s) had been executed by the parties. I reject this contention. There is no direct evidence of this and the concerns that Mr Franke had with the final form of the document(s) are sensibly to be explained in other ways that do not raise the spectre of what, otherwise, would be an unsubstantiated act of fraud.
The various copies and originals of the executed Deed and the copies of the Deeds of Settlement (employment contracts) that are in evidence have not been stamped. I received these documents in evidence only upon receiving, through the defendant’s counsel, an undertaking given by the solicitors for the defendant to have the original documents lodged for stamping.
Save for the issue concerning the proper form of the vendor’s warranty in clause 4.3 of Schedule 1 to the Deed, to which I will return, I am satisfied that the parties agreed that the sale of the plaintiff’s assets was to be governed by and in accordance with the terms of the executed Deed – whichever form of the document, in evidence, were to be applicable.
On 25 September 2006 the defendant paid $100,000 to the plaintiff and $100,000 to each of Mr and Mrs Franke. According to the terms of the Deed the second instalment of $106,500 fell due on 1 March 2007 and the third instalment of $106,500 fell due on 1 October 2007. Neither sum has been paid. Nor has the additional sum of $30,000 been paid.[9] Apart from evidence of commissions received by the defendant during the 12 months following 25 September 2006, adduced during the trial, no reconciliation of renewal commissions during the defendant’s first year, as envisaged by clause 5 of the Deed, has been undertaken.
[9] Whilst this issue was not raised by any party, I have given consideration to the question whether the form of the parties’ contract was such as to render it a contract for the sale of business with part of the price payable by instalments prior to completion so as to be caught by s6 of the Land and Business(Sale and Conveyancing) Act 1994. I am satisfied that it is not to be so characterised.
After the date of the second instalment (1/3/2007) passed, Mr Franke approached Mr Hargraves, who told him that no further monies would be paid. On 6 November 2006 a delegate of the Australian Securities and Investments Commission (ASIC) banned Mr Terry Franke from providing financial services for a period of two years. The delegate found, inter alia, that Mr Franke had contravened the provisions of ss946A, 946C and 947B of the Corporations Act 2001 (Cth). On 1 February 2008, following a review of this decision by the Administrative Appeals Tribunal, the decision of the ASIC delegate was affirmed.[10] Upon becoming aware of the delegate’s decision, soon after 6 November 2006, the defendant took the view that Mr and Mrs Franke and through them, the plaintiff, had engaged in actionable misrepresentation and misleading or deceptive conduct during the negotiations and that the plaintiff had breached certain warranties contained in the Deed.
The Deed
[10] Exhibit D13.
Basic Structure of the Parties’ Sale Arrangement

The Deed is poorly drafted and, in parts, extremely difficult to construe.
By clause 2.1 the vendor (plaintiff) agreed to transfer to the purchaser (defendant) its interests in the ‘Assets at Completion’. The ‘Assets’ are defined in clause 1.1 as the name ‘Australian Business Insurance Advisors’, the ‘client files’ (which term is not defined and which files are not otherwise identified by or listed in the Deed) and the ‘Renewal Commissions’. The term ‘Renewal Commissions’ has its own definition which relies upon or incorporates the definition of ‘Commissions’ which, in turn, relies upon or incorporates the definition of ‘Completion’. The result, is barely, if at all, comprehensible. Further, the requirement under clause 2.1 is for the vendor to transfer to the purchaser the ‘Assets’ at ‘Completion’. This latter term has its own definition in clause 1.1 but it is completely circular. There is also a defined expression ‘Completion Date’. The effect of this definition is to identify an agreed completion date as four business days after the last of the conditions precedent set out in clause 4 of the Deed have been satisfied or such other date as may be mutually agreed in writing between the parties. However, by clause 3.1 of the Deed, the parties have agreed that ‘Completion is to occur at any time or place as agreed by the parties’. If someone had been asked immediately prior to execution of the Deed what is to comprise completion of the transaction and when is it to occur I doubt very much if a sensible answer could have been given.
Nevertheless, I am satisfied (and it is not disputed by either party) that the parties intended that there was to be a ‘transfer’[11] of all commissions, other than up-front commissions, due or to become due in the future, with respect to financial services provided by the vendor for its clients up to the date of completion of the transaction, that is, the date that the defendant took over the clients. Furthermore, it is not disputed that immediately or soon after the execution of the Deed, the plaintiff handed over to the defendant all of it’s client files and that the defendant has been entitled, since 25 September 2006, to receive and has received all renewal commissions, generated by the client files, outstanding as at the date of handover or to be earned thereafter.
[11] I leave aside any discussion of the issues that can arise where a present assignment of future choses in action is contemplated.
It would appear that the name Australian Business Insurance Advisors has not been transferred. Mr Franke, during his evidence, maintained that it was never part of the parties’ agreement that this would occur and that the name needed to be retained because the plaintiff was engaged in ongoing litigation under that name. However, he finally appeared to concede the incorrectness of this position during his cross-examination.[12] In any event, no complaint by the defendant is made in this litigation about any failure to transfer the name.[13]
[12] At T318.
[13] Craig Hargraves in his evidence indicated that he was not much interested in the name per se, only that his control of the name would assist in preventing any wrongful competition under that name contrary to the terms of the Deed.
On the date the Deed was signed the defendant paid over the initial $300,000 and, in effect, took over the plaintiff’s business represented by its clients. I am satisfied that notwithstanding the terms of the Deed the parties intended this date of execution to be also the date of completion of the transaction subject, of course, to any contractual provisions, such as the obligation to pay the second and third instalments and certain of the vendor’s warranties, that were intended by the terms of the contract to remain in force and to operate following completion.
By clause 3.2 of the Deed it is provided that ‘at completion’ the vendor must do certain things. There is no issue between the parties as to the vendor’s compliance with the obligations in 3.2(b), (c) and (d) and I am satisfied, on the evidence before me concerning the parties’ post-contractual conduct, that the vendor either complied with these matters or the purchaser has waived any non-compliance.
However, clause 3.2(a) provides:
‘At completion the vendor must:
(a)establish to the reasonable satisfaction of the Purchaser, that the Conditions Precedent set out in clause 4 hereof have been satisfied …’
Furthermore, clause 3.3 provides, inter alia:
‘Subject to the Vendor satisfying its obligations under clause 3.2 and satisfaction of the Conditions Precedent at Completion to (sic) the Purchaser must:
(a) pay the Purchase Price to the Vendor in the manner set out in clause 5;’
According to clause 4(d) of the Deed (one of the ‘Conditions Precedent’):
‘The obligation of the Purchaser to pay the Purchase Price for the transfer of the Assets is … conditional upon … there being no breach at the Completion Date of any of the Warranties and Representations …’
The warranty in clause 4.3 of Schedule 1 to the Deed falls within the definition provided of ‘Warranties’.
Part of the purchaser’s complaint stems from an alleged failure by the vendor to comply with the warranty in clause 4.3 of Schedule 1 to the Deed as at the date of completion and that therefore the condition precedent in clause 4(d) was not and has not been satisfied. I will need to come back to this issue, at length, later in these reasons. However, for the present, I will assume, in the defendant’s favour, that the vendor breached this warranty.
It may be that, in the ordinary course, the defendant would have been at liberty to refuse to complete. However, the assets were in fact transferred, part payment was in fact made and the plaintiff’s former business taken over and, in effect, inextricably folded into the defendant’s larger operation. Furthermore, following its becoming aware of the ASIC delegate’s decision, the defendant continued to treat the plaintiff’s clients as its own and to enjoy the commission income generated. It affirmed the contract. At no time during this litigation has the defendant argued that, in reliance on clauses 3.3 and 4 of the Deed, completion did not take place and, as such, it must be seen to have waived any conditional nature of its obligation to pay the agreed price.[14]
[14] Such a waiver must operate in these circumstances notwithstanding the existence of contractual provisions requiring any waiver to be in writing. And see also, for example, T12-13, T97-8.
The defendant has pleaded an entitlement to damages for breach of the warranty in clause 4.3 of Schedule 1 and an entitlement to set-off those damages ‘against the contractual obligation to pay the consideration’.[15] In its Amended Cross-Action and during the trial the defendant, at all times, limited its claim to the nett loss allegedly suffered after allowing for the balance of the consideration due, under the Deed, to the plaintiff.
Consideration for the sale
[15] Paragraph 11.3 of the Second Further Amended Defence.
Subject to any set-off to which the defendant may be entitled and given that any failure by the plaintiff to comply with all of the conditions precedent is not an impediment to completion of the transaction, the defendant is obliged to pay the agreed consideration for the assets that it acquired in September 2006. By combination of clause 3.3 and the definition of ‘Purchase Price’ in clause 1.1, the defendant is obliged to pay the plaintiff $313,000 in the manner and at the times set out in clause 5. Clause 5 provides:
5.1Subject to clause 5.3, in consideration for the purchase of the Assets, the Purchaser agrees to pay the Purchase Price … at Completion …;
5.2The parties agree that the purchase price for the Assets [subject to reconciliation][16] is as follows:
[16] The effect of this handwritten emendation included in one version of the executed Deed is discussed further below.
Three hundred and thirteen thousand dollars ($313,000) payable as follows;
(a)an amount of $100,000 upon execution of this Deed;
(b)an amount of $106,500 to be paid on 1 March 2007;
(c)an amount of $106,500 to be due on 1 October 2007 such payment to be


subject to a final reconciliation to be completed in not more than 45 days


following the due date.
5.3The parties agree that prior to payment in 5.2(b) and (c) above there will be a reconciliation of the renewal commissions with such reconciliation to be calculated in accordance with the formula. The final purchase price shall not exceed the amount calculated by reference to the formula.
5.4Having reconciled the renewal commissions and applied the formula should there be any reduction in the agreed income the purchase price will be reduced accordingly and where appropriate the amounts stated for payment in 5.2 (b) and (c) above will be reduced subject to the Vendor being entitled to the following credit against any loss suffered by the purchaser;
(a)     An amount of thirty thousand dollars ($30,000) plus any amount received by the purchaser on account of new business commissions generated before the completion date but received following the completion date;
5.5The Purchaser warrants to provide full disclosure of all relevant materials used to reconcile the renewal commissions to the Vendor.
The following matters are to be noted.
(i)     On one version of the Deed the purchase price contains the phrase ‘subject to reconciliation’ and I have included these words in the extract quoted above. In the other version of the Deed these words are not to be found. However, the effect of this phrase is achieved on either version, in any event, by virtue of the qualification in paragraph 5.2(c) and the requirements of 5.3 and 5.4.
(ii)    The drafting of paragraphs 5.2 and 5.3 is clumsy and ambiguous in parts. However, the most practical and sensible construction open on the words used is as set out in paragraphs (iii) and (iv) below.
(iii)   Prior to each payment envisaged by paragraph 5.2(b) and (c) there was to be a reconciliation of renewal commissions (as defined) undertaken in accordance with the formula (as defined).
(iv)   By not more than 45 days following the ‘due date’ (which can only, in practical terms, be a reference to the date the last payment fell due, that is, 1 October 2007) the parties were to undertake a ‘final reconciliation’. There is no definition of final reconciliation and this can only be a reference to a third reconciliation of renewal commissions in accordance with the ‘formula’ as defined in clause 1.1.
(v)    However, the practical application of the process to this point does present difficulties. This becomes evident as soon as one were to attempt to undertake the first reconciliation process by a strict application of the terms of the formula.
(vi)   Clause 5 is not explicit as to the ultimate role that any of the proposed three reconciliations is to play. The purchase price of $313,000 is to be ‘subject to’ any such reconciliation.[17] However, clause 5.3 provides that the final purchase price ‘shall not exceed the amount calculated by the formula’. This must mean that if the formula produces something less than $313,000 then the formula prevails. However, what if the formula produces a result greater than $313,000? Is it to be inferred that the formula still rules?
(vii) Clause 5.4 takes up the issue more explicitly. Again, it is clumsily worded, particularly given its reference to a new term, ‘agreed income’ (defined to be $171,000 per annum). However, clause 5.4 again specifically provides for a potential reduction in purchase price but not for any increase. Further, it would appear that only where the reconciliation process has been undertaken with a reduction resulting does the vendor become entitled to the further payment of $30,000 envisaged by and described in clause 5.4(a). However, this amount is stated to operate only as a ‘credit against any loss suffered by the purchaser’ which, to the extent it makes any sense, is plainly not what the parties intended.
The failure to undertake any reconciliation
[17] Opening words of clause 5.1, the handwritten emendation to clause 5.2, the closing words to clause 5.2(c) and clauses 5.3 and 5.4.
As it happens, no reconciliations, in accordance with the terms of clause 5 were attempted. Once the defendant became aware, some time in late 2006 or early 2007, of the findings made by the ASIC delegate the decision was taken not to pay any further monies and, in effect, not to perform the contractual obligations still outstanding relating to the reconciliations of the renewal commissions. The plaintiff maintains that it is now too late to undertake a reconciliation in that such is no longer permitted by the terms of the contract. I agree with this contention.
Clauses 5.2 and 5.3 expressly provide for time frames within which any reconciliations are to be completed. The interim reconciliations were to take place “prior to payment” as envisaged by paragraphs (b) and (c) of clause 5.2, that is, “prior to” the payments promised to be made on 1 March and 1 October 2007 respectively. A final reconciliation was to be completed within 45 days of the final payment due on 1 October 2007 that is no later than about 15 November 2007.
In terms of the defendant’s obligations to make the two outstanding instalment payments, the time for the payments was not expressly made essential by any term of the Deed. However, there is no provision in the Deed pursuant to which the plaintiff is said to be entitled to any interest in the event of late payment. Further, it was the parties’ intention at all times that completion was to take place on the date the Deed was executed (25 September 2006) at least to the extent that the vendor was to (and did) obtain the client files and the right to receive all commissions on and after that date.
It is not necessary for any particular express words to be used before a time stipulation will be construed as being essential. Ultimately, whether or not a time stipulation is essential is a matter of the parties’ intention at the time of entering the contract, to be discerned from the proper construction of the contract terms in the circumstances.[18] Ordinarily it would be unnecessary to form a final view on whether or not the times of these two payment obligations were essential because the plaintiff has not sought to make anything of the delay,[19]other than to sue for the balance of the price still outstanding. However, the issue will also bear on the proper construction of the reconciliation obligations.
[18] Williams v Edwards (1827) 2 Sim 78; 57 ER 719.
[19] For example, by purporting to terminate for breach.
Because of the nature of the subject matter of the contract, the fact that the assets were immediately transferred and placed under the control of the defendant and the lack of any contractual provisions designed to protect the plaintiff should payment be late (such as an express entitlement to interest) I am satisfied that the parties intended these dates of payment to be essential. Something had to be paid on both 1 March and 1 October 2007. Just how much was to be paid would depend on the two reconciliations to be conducted prior to each such date. Whether any underpayment was to be made up or overpayment recovered, respectively, was to depend on a final reconciliation to take place within 45 days of the final (1 October) payment.
In the present case each reconciliation requirement is, in effect, or tantamount to, a contingent condition going to the content of the respective payment obligation. In other words, the obligation to pay the amount of $106,500 by each expressed payment date, is subject to or contingent upon the reconciliation being completed prior to each such date and, in the case of the final reconciliation, within 45 days of the second due date.
In this situation, that is, where a contractual obligation (payment) is subject to the happening of a contingent event by a stipulated time, that time also is to be regarded as essential and whether or not the payment dates are regarded as essential.
The time aspect is regarded as an integral part (not merely as a machinery or ancillary aspect) of the contingency subject to the happening of which the contract is entered into.[20]
[20] Lindgren, Time in the Performance of Contracts second ed, Butterworths, at 36, together with the surrounding discussion and authorities there cited.
Even if the times for payment were not of themselves essential, these times are essential for the purpose of the contingent condition.
It has not been, nor could it be, suggested that the defendant did not have available to it or the means to make available to it the information required to perform the reconciliations within the contractually provided timeframes. In my view, the proper construction of clauses 5.2 and 5.3 is to the effect that if the defendant wished to take advantage of the reconciliation process so as to alter the instalment amounts payable it had to do so within the time frames expressly stipulated, unless prevented from doing so by the plaintiff’s breach. The plaintiff was entitled to be paid its price and on time. It was entitled to plan its future on the assumption that it would receive reconciled payments on the due dates promised.
It is now too late for the defendant, having breached the contract in a most fundamental way – after all, it was only ever entitled, at best, to a damages claim, not to refuse to pay the price – to turn around and insist on a reconciliation process different from that agreed to and provided for in the contract.
This is simply an example of the more general proposition that where a conditional contract fixes a term by which the condition must be fulfilled, then the time so fixed must be strictly adhered to.[21]
[21] See the discussion by Lewison in The Interpretation of Contracts, fourth ed, Thomson – Sweet and Maxwell at [15.08] ff.
Indeed, the question might arise as to whether the defendant is in breach of any express or implied contractual obligation in failing to undertake or facilitate timely reconciliations (see clause 5.5). If so the question might arise whether the plaintiff should now be deprived of the reconciliation process, in the event it were to operate in its favour or, is otherwise entitled to damages for breach of contract by the defendant. However, it is unnecessary to pursue these matters to a conclusion.
(i) Neither claim was pleaded nor pursued during the trial by the plaintiff. The plaintiff’s claim at all times has been for the balance of the nominal purchase price of $313,000, that is, $213,000 together with an additional $30,000 (dealt with below).
(ii) In any event, the evidence of the renewal commissions received by the defendant during the 12 months after the date of completion, adduced by the defendant during the trial (discussed later), does not demonstrate that the total amount received by the defendant exceeded $171,000. Unless the total amount received during the first year of the defendant’s operation, exceeded $171,000 any adjusted purchase price brought about by application of the formula would not exceed $313,000.[22]
[22] And any damages for breach in depriving the plaintiff of the benefits of a reconciliation would only be nominal.
The plaintiff has made out its entitlement to be paid the two further instalments of $106,500, that is, $213,000.
The thirty thousand dollars adjustment figure
The plaintiff has sought rectification of the Deed in accordance with its pleading at paragraphs 13(h) and 13(i) of its Further Amended Statement of Claim. The defendant admitted[23] that the parties, at all material times, were in agreement that the further sum of $30,000 would be paid by the defendant to the plaintiff ‘as a final instalment payable under the Deed as a credit for the expected tax liability that would arise by virtue of the … payments of $200,000 paid pursuant to the [Employment Contracts]’. This is consistent with the evidence of both Mr and Mrs Franke and the principal of the defendant, Mr Hargraves. There is no provision in the Deed that properly represents the parties’ common intention in this respect and, in particular, this common intention is not properly reflected in clause 5.4 of the Deed. Insofar as is necessary, the plaintiff is entitled to an order for the rectification of the Deed in accordance with the terms of clauses 13(h) and 13(i) of its Further Amended Statement of Claim.
[23] Paragraphs 2.3 and 12.6 of the Second Further Amended Defence, paragraph 13(g) of the Further Amended Statement of Claim.

The defendant has admitted non-payment of the $30,000 and by its pleading and by its conduct throughout the trial it has conceded that this sum of money is due and payable[24] but subject to the defendant’s cross-action for damages and claim for a set-off.
[24] See also T35-6, T97-8 and T1065.
Conclusion with respect to the statement of claim
Subject to any entitlement the defendant may have to a set-off, the plaintiff has made out its entitlement to be paid the balance of the purchase price outstanding in the sum of $243,000.
The defendant’s claim for misrepresentation and misleading or deceptive conduct.
The alleged representations as pleaded
The defendant alleges[25] that Terry Franke made a series of representations to Craig Hargraves, as agent acting for the defendant, being:
(i)that other than a minor complaint in relation to Mr Franke’s son Craig “there were no issues, debt or regulatory problems with the business”;
(ii)that the reason [Terry Franke] was looking to get out of the business was that it was getting too hard for him;
(iii)that Terry Franke would assist in the operation of the business to maximise the benefit to the defendant and would not compete with the business; and
(iv)that Terry Franke would use his best endeavours to promote the business to the existing clients.
[25] Paragraph 3 of the Second Further Amended Defence.
The proposition in (ii) above can only give rise to a representation as to Mr Franke’s then state of mind. I am satisfied on the evidence of Mr and Mrs Franke that at least one reason why they wished to sell the business was because it was getting too difficult for them and that it was time for them to consider retiring either partially or fully from the industry. However, and in any event, the fact that this was not truly Mr Franke’s state of mind at the time he entered into negotiations with the defendant has not been seriously argued by the defendant; nor is there evidence showing that the defendant relied on a representation of this nature in proceeding to acquire the plaintiff’s clients or in agreeing to the terms upon which those clients were to be acquired.
As far as (iii) and (iv) above are concerned, these again can only be representations as to the state of mind of Mr Franke at the time he made any such statement, that is, as to his then present intentions. The defendant has not established, on the evidence, that Mr Franke did not at that time have such a state of mind; such evidence as there is is to the contrary. In truth, these are more in the nature of promises or undertakings which have been dealt with by the terms of the Deed and the Deeds of Settlement (employment contracts). As the case was presented by the defendant, its claim for damages has not been based on any allegation of failure by Mr Franke in either of the respects described in (iii) and (iv).
As for (i) above, such a representation, if made, would be one of mixed fact and law. Such a statement may be capable of being characterised as a representation as to the actual state of compliance by the plaintiff. I will assume so for the present. In addition, such an assertion is also capable of being characterised as a statement of fact as to Mr Franke’s state of mind. In other words, in the event that Mr Franke did make a statement to this effect it would be tantamount to a statement of fact that he was not aware of or did not believe there to be any issues to do with regulatory problems with the business (other than those relating to Craig). I will assume for present purposes that this representation, as pleaded by the defendant, is capable of comprising a statement of fact in either or both these senses, which would fall within s7 of the Misrepresentation Act 1972 (SA) so as to permit a claim for damages in the event that, in either sense, it was false.
Statutory misleading or deceptive conduct by misrepresentation and/or by partial disclosure and silence.
Section 52 of the Trade Practices Act 1974 (Cth) and its analogue provisions in the Fair Trading Act 1987 (SA) provide, in essence, that a [corporation/person] shall not in trade or commerce engage in conduct that is misleading or deceptive or is likely to mislead or deceive. The defendant’s pleading in this respect is somewhat convoluted. However, by a combination of various paragraphs of the Second Further Amended Defence[26] and various paragraphs of the Amended Cross-Action[27] the defendant’s allegations of misleading or deceptive conduct can be summarised as follows.
[26] Paragraphs 3, 5, 6 and 12.
[27] Paragraphs 16 to 23.
(i) Mr and Mrs Franke were both aware, as at the time of the negotiations for the sale, of an ongoing ASIC investigation into the business conducted by the plaintiff.
(ii) As at the time of the negotiations, the Frankes had in their possession a documentary record of the state of the ASIC inquiry as it then stood. A significant amount of written material relevant to the investigation had been collated by the Frankes and was to be found in the lever arch folder, exhibit P7.
(iii) Included in the information available to the Frankes was: that ASIC had commenced an investigation into the plaintiff and into its directors in about November 2005, that ASIC had required the plaintiff to produce documents to it on the 8 December 2005, that ASIC had conducted an examination of the directors of the plaintiff on 17 March 2006 (the transcript of which was in exhibit P7), the nature of the matters or concerns the subject of the enquiry and that ASIC had written to the plaintiff on 3 June 2006 informing it that an order banning Mr Franke from holding a financial dealers licence was a possible outcome of the investigation.
The defendant has pleaded that the Frankes were aware of the above matters at the time of the negotiations for sale but did not disclose these matters to the defendant. The defendant maintains that at no time was it put on notice of an ASIC investigation of such a wide ranging nature as in fact was occurring. The defendant’s case is that it was only ever advised that ASIC was investigating a minor complaint in relation to some possible improper conduct by the Franke’s son, Craig Franke, who had, in effect, been led astray by a former employee, a Mr Lyndon Holland, with whom the Frankes were engaged in ongoing litigation.
Ordinarily, when parties are at arms length negotiating a commercial transaction, no positive duty to disclose matters adverse to a party’s bargaining position arises. However, a party is not entitled, by its silence, to engage in conduct that having regard to all of the circumstances is misleading or deceptive. The defendant here claims that having received assurances from the plaintiff that there were no regulatory issues or concerns with the business other than an investigation into a minor complaint concerning the son Craig, the plaintiff, through Mr and Mrs Franke, and Mr and Mrs Franke themselves engaged in misleading or deceptive conduct in failing to make full disclosure of the circumstances surrounding the ASIC investigation. In other words, by a combination of partial disclosure and silence with respect to more serious related matters the Frankes positively asserted and allowed the defendant to believe that there were no regulatory concerns with respect to the business conducted by the plaintiff.
Silence as misleading conduct
It is only in unusual circumstances or with respect to transactions of a particular type, of which the present is not one, that the law requires full disclosure of all material matters during commercial negotiations and s 52 of the Trade Practices Act does not detract from this. In Poseidon Ltd v Adelaide Petroleum NL[28] Burchett J said this:
I do not think it has ever been suggested that s52 strikes at the traditional secretiveness and obliquity of the bargaining process. Traditional bargaining may be hard, without being in the statutory sense misleading or deceptive. No-one expects all the cards to be on the table. But the bargaining process is not therefore to be seen as a licence to deceive.
[28] (1991) 105 ALR 25.
In Lam v Ausintel Investments Australia Pty Ltd[29] Gleeson CJ said:
When parties are dealing at arms length in a commercial situation in which they have conflicting interests it will often be the case that one party will be aware of information which, if known to the other, would or might cause the other party to take a different negotiating stance. This does not of itself impose any obligation on the first party to bring the information to the attention of the other party, and failure to do so would not, without more, ordinarily be regarded as dishonesty or even sharp practice.
[29] (1990) 97 FLR 458.
However, circumstances can arise where an obligation to be full and fair when conveying information does arise. For example, in Fraser v NRMA Holdings Ltd[30] the Full Court observed:
Whilst s52 does not by its terms impose an independent duty of disclosure which would require a corporation or its directors to give any particular information to members … where information for that purposes is promulgated, unless the information given constitutes a full and fair disclosure of all the facts which are material to enable the members to make an informed decision, the combination of what is said and what is left unsaid may, depending on the full circumstances, be likely to mislead or deceive the membership.
[30] (1995) 55 FCR 452.
The defendant maintains that the topic of there being an ASIC investigation into the plaintiff on foot having been raised or referred to by the Frankes, they thereupon assumed an obligation to make full and fair disclosure rather than only a partial disclosure of the extent and nature of that investigation. It is in this respect that the defendant maintains that the plaintiff and its directors engaged in statutory misleading or deceptive conduct.
The evidence bearing on the issue of misleading or deceptive conduct.
The negotiations consisted of a series of face to face meetings, probably four, held in the plaintiff’s offices. The evidence is conflicting as to precisely who attended each of the meetings. However, I am satisfied that Mr Franke and Mr Hargraves were at all of the meetings and it is likely that Mrs Franke also was present for part or all of each meeting, apart from the initial meeting that Mr Franke had with Mr Hargraves.
A friend of Mr and Mrs Franke, Mr Ian Roberts, a former solicitor but, at the time, not practising, attended to assist the Frankes at either one or two of the meetings. Over the years he had acted as a mentor to Mr Franke in the conduct of the plaintiff’s business. He attended at least one meeting when a written contract was discussed in order to assist Mr Franke in his consideration of the proffered terms. Mr Peter Thatcher was the solicitor for the defendant who had been instructed to document the proposed transaction. He attended at those meetings (probably two) where a draft contract had been provided by him for the parties’ consideration. In addition, various members of the defendant’s office staff attended at some of the meetings, although it may be that they were not present throughout the whole of any particular meeting because they were also undertaking a due diligence process with respect to the plaintiff’s files.
General observations concerning the witnesses present during part or all of the negotiations.
Mr Terry Franke spent the first three days of the trial opening his case and debating issues with the court and in giving evidence. He was extensively cross-examined. I had ample opportunity to form an assessment of him as a witness in the trial. He presented as a man without guile who was absolutely convinced of the rightness of his case. He was captious and argumentative, and suspicious and untrusting of the legal system including its various participants. He had few contemporaneous records available to him but, perhaps consistent with his personality, preferred in any event to rely on his own memory and understanding of things. Nevertheless, in my view he was an honest witness and gave a largely reliable account at least insofar as the essential components of the negotiations as they developed are concerned.
Mrs. Franke was of a more amenable personality. I also accept her as an honest witness who, to my mind, attempted to assist the court to the best of her ability. I assessed Mr Roberts as also honestly attempting to assist the court but he plainly had difficulty in accurately recalling details.
As far as those witnesses for the defendant who played any role at all during the negotiating process are concerned, I am not satisfied that any of them were dishonest or deliberately attempted to mislead the court. However, I formed the view that there was a tendency with each of them to understate the extent to which they were made aware of the presence of ASIC in the life of the Frankes. For reasons which will become apparent, I formed the view that the existence of and the nature of any ASIC investigation was not, at the time, of particular significance to the thinking of Mr Hargraves or his staff. I am satisfied that the passing of time has allowed reconstruction to intrude into the evidence of a number of the defence witnesses with respect to this issue of the extent to which the ASIC issue was raised and as to its significance.
I am satisfied that Mr Hargraves, at the time, was interested in the big picture. He was keen to acquire the 900 or so clients with existing insurance or superannuation products and was confident that he could “work” those clients or such of them as were prepared to use his services, to his advantage. He left the detail of documenting the transaction to his solicitor and the detail as to any due diligence investigations to his other staff.
Those of the defendant’s staff who were involved during the negotiation and parallel due diligence processes, that is, Mr Hargrave’s personal assistant Jacquie Evans and the defendant’s compliance officer Debra Spacie, gave evidence concerning the negotiations that was general and at times vague. They also gave their evidence in court whilst Mr Hargraves, in effect, their employer, was present in court, as was his right. I formed the view at the time that the circumstances were not conducive to encouraging a full and frank provision of information.
Evidence of Terry Franke
Mr Franke gave evidence of a number of meetings with Mr Hargraves and others during which the proposed terms for the acquisition of his clients were discussed and ultimately finalised. He gave a confused chronology of the various meetings but I am satisfied that he participated in a number, probably four, face to face meetings with Mr Hargraves and others. Mr Franke told the court that as at September 2006 (the period of the negotiations) he and his company had been under investigation by ASIC for approximately 10 months but were still awaiting a final outcome or decision. He insisted, throughout his evidence, that he and the company had done little, if anything, wrong and that the ASIC investigation had been instigated by a complaint made by a former employee of the firm, Mr Lyndon Holland, who was engaged, in effect, in a vendetta against Mr Franke and the plaintiff. Mr Franke maintained, at the time, that the worst outcome he expected was something in the nature of an enforceable undertaking. He did not expect that ASIC would ban him from holding a financial services licence or anything like that.
Mr Franke said that, at one of the earlier meetings with Mr Hargraves, he mentioned that the company was under investigation by ASIC but that this was not of concern to him. He told the court that, during this conversation with Mr Hargraves, he pointed to a lever arch file which contained the plaintiff’s then records of the ASIC investigation (P7) and offered it to Mr Hargraves for him to examine it if he wished. He said that Mr Hargraves responded by saying words to the effect that he wasn’t interested in this matter because he was only buying Mr Franke’s clients not his licence. According to Mr Franke, Mr Hargraves did not take up the offer to inspect the lever arch folder. The issue of the ASIC investigation was referred to at subsequent meetings in a light hearted manner in the sense that the existence of the investigation was common knowledge but Mr Hargraves never expressed any interest in or concern about it.
Mr Hargraves denied that he was put on notice of an ASIC investigation into the plaintiff’s business other than one limited to a concern about certain actions by the son Craig Franke. He denied that a lever arch folder containing the plaintiff’s record of the ASIC investigation to that point was referred to or offered for his examination. Mr Hargraves maintains that had the lever arch folder (P7) in fact been made available to him he certainly would have been interested in it, would have examined it and would have then been on notice that the investigation into the plaintiff by ASIC was potentially of some significant moment.
This is the nub of the factual dispute between the parties insofar as the allegations of misleading or deceptive conduct are concerned. The essence of Mr Franke’s evidence on this topic is contained in the following exchange[31]
[31] T146-147.
QI’m interested in what you said only. What can you recall saying, about that.
AThat I need to make – ‘I need to let you know that we’re being investigated by ASIC. I’m pretty sure you would have heard about it. I’m sure the whole industry has. It has been a really tough time for us and we’re now awaiting a decision. The decision was due on September 13 and it hasn’t been given, we expect to get a rap on the knuckles, it could be something serious too, we don’t know what they’re going to do. The longer it goes the better off we feel’. He was not interested in proceeding with that conversation and he was very interested in discussing the sale and he made the comment ‘Look, I’m only buying the clients. I’m not interested in any other problems you’ve got’.
QDo you recall if you raised any particular topics that the ASIC investigation was dealing with.
APrior to the sale there was very little discussion about it and that is why I offered the folder. All the details were in the folder, he could have taken the folder away, studied it and everything.
QAre you telling me prior to the sale the content of your words about it, leaving aside the folder, the content of your words about it are just what you told me a moment ago.
AThat’s correct.
QYou didn’t descend into any detail of the nature of the allegations for example –
ANo.
Q– with ASIC.
AWell, I did mention, sorry your Honour ‘It looks like we’re getting into trouble over failing to provide statements of advice to clients’. I did say to him I had done the statements of advice ‘but I got into trouble for failing to ensure the clients received them and you want to make sure that your business is definitely on the right path there’ and he said ‘Well, I’ve got my own compliance officer so I don’t have to worry about those things’.
In cross-examination Mr Franke conceded that his state of mind as at September 2006 was that he was not in breach of any regulatory obligations although he recognised that his business had made mistakes with respect to procedures and he expected a “slap on the wrist”. He denied that he told Mr Hargraves only about the issue concerning his son Craig. He was cross-examined at length as to the nature of findings made against him by the ASIC delegate, as affirmed on review in the Administrative Appeals Tribunal.[32] Mr Franke obstinately and to some extent irrationally maintained that findings of the nature recorded in the decision of the Administrative Appeals Tribunal were not made against him and such findings were unfounded. He maintained that the business conducted by the plaintiff was compliant with all regulatory requirements. It was not until relatively late in the cross-examination[33] that Mr Franke conceded that various adverse findings had been made against him by the ASIC delegate.
[32] See D13.
[33] T258-263.

During cross-examination, Mr Franke gave further examples of what he said he had told Mr Hargraves about the ASIC enquiry.[34] These assertions, particularly having regard to the language used, have the ring of truth about them given Mr Franke’s personality as I have assessed it to be including his capacity for righteous frankness. He did not come across as a dissembler.
[34] See for example, T291.34-292.6, T292.20-292.25, T292.29-293.6, T293.20-293.26, T293.35-294.1 and T323.16-323.20.
On 8 November 2008, some five or six weeks after the execution of the Deed, a banning order was issued by ASIC. The ASIC delegate found that Mr Franke had contravened the provisions of ss 946A, 946C and 947B of the Corporations Act 2001 (Cth) and ordered that he be banned from providing financial services for a period of two years. This came as a significant shock to Mr Franke.[35] According to Mr Franke, he was told by the defendant that he was no longer required, to assist with interviewing clients and with the transition of clients into the defendant’s operation. Mr Franke said that had he been asked to continue to interview clients on behalf of the defendant he would have done so notwithstanding the banning order that had been made against him.
Evidence of Wendy Franke
[35] T338.
Mrs Franke said that, apart from being introduced to Mr Hargraves, she did not participate in the very first meeting held between Mr Franke and Mr Hargraves. She did participate in their second meeting which took place in the boardroom of the plaintiff’s office. She did not believe Mr Roberts was present but Mr Hargraves had with him his employee Jacquie Evans and perhaps his solicitor Mr Peter Thatcher. She recalled a general discussion about ASIC and their method of interviewing people.[36] She then gave evidence of a third meeting being the second meeting at which she was present and at which a draft contract was presented. The following exchange occurred[37]
[36] T372.
[37] T373.14-377.22.
HIS HONOUR
Q.    What was that.
A.I believe he produced the ASIC's file then, because Terry asked me to bring one of the copies of the ASIC file, I had prepared a copy for each of us prior to the hearing.
Q.Let's just go back. Prior to that meeting, that is the third meeting, did you have a discussion with Mr Franke about ASIC.
A.Just about would I bring the folder into the next meeting, needing to give Craig some information about it.
Q.    Mr Franke said that to you.
A.    Yes.
Q.    What did you do then about the folder.
A.    Well, I decided I ‑
Q.    Go on.
A.    As I said, I had to prepare a folder for each person.
Q.    What do you mean.
A.One for the company, one for Craig Franke, one for Terry, one for me because there was different allegations ‑
Q.    That's four. So you prepared four folders.
A.Yes and one for Ian Roberts because we asked him if what we were presenting was appropriate, I suppose.
Q.Just before this third meeting or at some stage before this third meeting you told the court you had a conversation with your husband where he asked you to bring the ASIC folder.
A.    Yes.
Q.    Did you know what he meant by 'the ASIC folder'.
A.    Yes, because I prepared them all.
Q.    What did it mean.
A.It meant the folder containing all the notes of the, all the papers ASIC had served on us and our submissions to ASIC at that point.
QSo was there a folder, as you've described it, already in existence in the office, was there.
A.There was several folders, some contained the full history, mine certainly did and Terry's certainly did but Craig Franke's only contained ‑
Q.No, this is before you have prepared copies of folders, was there at some stage a folder in the office that you kept or somebody kept dealing with the ASIC investigation.
A.    Yes.
Q.    What was it, one folder.
A.    No, several.
Q.    Several folders.
A.    Yes.
Q.    Why were there several folders.
A.    Because I prepared one for each person.
Q.No, if you prepared folders you must have prepared them from something. I'm talking about the something before you decided to prepare any folders.
A.No, this is from scratch. When we received the letters from ASIC I created separate files for them. Based on that letter, and based on each person's responses to ASIC's allegations.
Q.    I don't understand this.
MR FRANKE:    I was trying to help clarify that.
HIS HONOUR:    No, I want her to clarify it, not you to clarify it.
HIS HONOUR
Q.    When the ASIC investigation came to your attention ‑
A.    Yes.
Q.    ‑ did you start to receive material from ASIC.
A.    Yes.
Q.    Did you start a file at that point.
A.I started a file and when we were called to give evidence at ASIC, that's when I created separate folders for each person who had to appear at a hearing.
Q.    Who had to appear at ASIC.
A.I had to appear, Terry Franke had to appear, Craig Franke had to appear and there was also the allegations against that company, which Terry and I had to answer.
Q.So for that purpose, for the purpose of preparing yourself for the ASIC investigation and preparing any other persons who had to give evidence you created a series of folders ‑
A.    Yes.
Q.    ‑ containing material relating to the investigation.
A.    Yes.
Q.    Where were those folders kept.
A.    Well, we each kept our own folder in our own office.
QThere comes a point, you’ve told the court, where you had a conversation with Mr Franke and you understood that you were to provide a folder to Mr Hargraves, is that what you said.
A.    Yes.
Q.    How did you go about preparing that folder.
A.Well, it was already prepared. I took my folders there, because mine contained allegations against me as compliance officer and my alleged failure to supervise representatives, which included Terry and Craig and also the company's allegation, so that was the composite folder containing everything.
Q.So the folder that you had prepared for your use you say contained everything to that point ‑
A.    Yes.
Q.    ‑ about ASIC. What did you then do with that folder.
A.    At the meeting?
Q.    Yes.
A.Took it into the meeting. I gave it to Terry, who was sitting I think on the other side of the table and he put it on the table and later on he then offered it to Mr Hargraves.
Q.That's a conclusion. Did you hear any conversation at that meeting relating to that folder.
A.    Yes.
Q.    You need to tell the court the words you heard.
A.    Okay.
Q.    I take it you were a party to any such conversation.
A.    Yes.
Q.    Did you say things.
A.    I may have done, I really don't remember what though.
Q.    What you can recall, so you can't remember if you said anything on that topic.
A.    I suppose I did but I'm sorry your Honour, I ‑
Q.What's happened has happened, all you can tell the court is what you remember. So you remember a conversation occurring about that issue.
A.    There was a very brief conversation with Terry.
Q.    Who was involved in that conversation.
A.Terry said to Craig Hargraves that here was our folder containing all the ASIC information, or something. I don't know the exact words but he said 'It's here for you to read so you've got a clear opinion', or something like that.
Q.    Was anything else said by anybody else about that.
A.    I don't think so. No. Craig Hargraves replied.
Q.    What did you hear him say.
A.    He said 'I'm only buying the clients, not the business'.
Q.    Did you hear anybody else ‑
A.    And he didn't even touch the folder; he looked at it and just ignored it.
Q.When you say 'looked at it', observed the cover of the folder. Did you see him open the folder.
A.    No, he didn't.
Q.    Did you hear anybody else say anything at that time on that topic.
A.    No.
Q.And you can't recall whether you said anything on that topic, you may have but you can't remember.
A.I might have earlier in the meeting, it usually sort of, you know, each meeting we had, including later ones, seem to start with a preamble: how are things going with ASIC, how are things going with Holland, so I probably would have contributed what my opinion at the time was.
Q.    But you can't recall that; it's possible that [sic: but] you can recall.
A.    No, just that ASIC were being unfair and so on and so forth.
XN
Q.    Can you recall Craig Hargraves' reaction to the folder.
A.    Yes, as I just said.
Q.    What was his reaction.
A.He replied that he was only buying clients of the business and he didn't attempt to open the folder at all.
I accept Mrs Franke’s evidence on this topic.[38]
[38] See also T430.
During her cross-examination, Mrs Franke told the court that she also, as at September 2006, believed that the plaintiff was compliant with all regulatory requirements and that the issues that had been raised by ASIC had been satisfactorily explained to it. Whilst, as at September 2006, they were awaiting a final decision from the ASIC delegate, she was of the view that the outcome would be satisfactory as far as the plaintiff was concerned.[39]
[39] See for example T408, 411 and 414.
Mrs Franke also gave evidence to the effect that she assumed responsibility for making the plaintiff’s files available to the defendant’s employees, Jacquie Evans and Debra Spacie so that they could conduct a due diligence process in parallel with the conduct of the negotiations as to the form of contract. Wendy Franke said that she raised with these two women the existence of the ASIC investigation.
Evidence of Ian Roberts
Mr Roberts said he first met Mr Franke in the early 90s at which time Mr Roberts was a practising solicitor. In time Mr Franke took Mr Roberts into his confidence with respect to the running of the plaintiff’s business and Mr Roberts became involved with the business not as a solicitor but as a friend and mentor. In or about 2000, Mr Roberts ceased practising as a solicitor and allowed his practicing certificate to lapse. He wanted to pursue work in the area of property development. He took the view that it was easier not to have a practicing certificate so that he would not be caught in a situation where people thought he might be able to provide legal advice or undertake legal transactions for them. In essence, Mr Roberts undertook a change of career. He maintained his friendship with Mr Franke and maintained his interest in helping he and Mrs Franke conduct their business.
Mr Roberts became aware that following an acrimonious dispute with a former associate, Mr Lyndon Holland, Mr Franke was reported to ASIC. Mr Roberts assisted Mr Franke “as a friend and confidante” in dealing with ASIC and in particular in meeting or attempting to meet the allegations that had been levelled against him and the plaintiff. Mr Roberts was present throughout the various hearings conducted by ASIC and was privy to some of the discussions between ASIC and the Frankes. Mr Roberts made this observation[40]
I found that a very difficult time because I had been very involved with Terry and Wendy for a long time. I did not wish to abandon them at a time when they were very stressed by those inquiries, yet I was acutely aware I was no longer practising as a solicitor and it could be seen to be providing a mixture of business advice which, because of the very nature of my previous career, would be couched in legal terms, so I was always mindful – I was trying to support Terry, but I was acutely aware that I didn’t want to be seen to be giving legal advice and / or acting on his behalf.
[40] T503
Mr Roberts said that his involvement with the Frankes and ASIC was at a time prior to the first time he became aware that Mr Franke was wishing to sell his client base to the defendant. At the time of the negotiations with the defendant all the ASIC hearings had been completed and its decision was awaited. Mr Roberts believed then that the Frankes had had fair hearing and he shared the view of Mr Franke that a reprimand was likely. He also did not expect Mr Franke to be banned for two years from giving financial advice. These views and expectations were discussed with Mr Franke “almost on a daily basis whilst he was in the meeting with ASIC”.
Mr Roberts was then asked to outline his involvement with the sale of business process. Mr Roberts had no contemporaneous notes to assist him and it was apparent that he struggled to recall detail. He remembered a meeting “early in the week”, which the defendant’s solicitor Mr Peter Thatcher attended. He also recalled a meeting later in that same week at the plaintiff’s offices which involved Mr Thatcher, Mr Hargraves and his assistant. Mr Roberts had an expectation that contracts were to be signed at this meeting but the form of the contract presented at the meeting was, to his recollection, somewhat at variance to that which he had been expecting. The terms of the written document then available were discussed but nothing was signed. According to Mr Roberts that was the end of his involvement; he did not attend at any meeting when a form of contract was executed. He did tell the court about his involvement during the earlier meeting in discussing the draft document that had been presented by Mr Thatcher.
I found Mr Roberts to have a poor recollection of the sequence of events and as to the detail of his involvement in the process. At one level this is understandable in that his only role was to attend one or two meetings so as to be a sounding board for Mr Franke whilst negotiations and discussions concerning a written draft document took place. He was unable to identify any of the initialling or signatures on the final executed documents as being his and I am satisfied, as being more likely than not, that he did not in fact attend on the occasion of the signing.
Notwithstanding Mr Roberts’ difficulties in recalling detail I found him, as I have already indicated, to be an honest witness who genuinely attempted to assist the court. On the critical issue of whether or not ASIC was discussed he gave this evidence which I accept.[41]
My memory, I cannot be certain that it was discussed in the first meeting with Mr Thatcher. Although certainly it was such a common thing within the office that I cannot be sure whether it was discussed with him or not on that first meeting. I thought that was more around – what was getting around with what was happening and appraising [sic] me and bringing me up to speed with the sale. What I do recall though, is on the second meeting we were waiting for Mr Hargraves to arrive and in the room was his PA at that stage and Mr Thatcher and on the table was various folders and I recall mentioning to the compliance officer or PA, whoever she was, that there was an inquiry with respect to ASIC occurring. She nodded that she was aware of it…
[41] T509.28 and see also at 509-511 generally.
Mr Roberts said that one thing he could recall throughout the process was his being “particularly mindful that there be disclosure”. Because of his commercial background and his period as a practising solicitor he was of the view that there should be disclosure of the ASIC enquiry.
Mr Roberts said that after he had had a conversation with the compliance officer, he began to look at the contract at which time Mr Hargraves arrived at the meeting. He again raised the issue of the ASIC investigation. He thought that he pushed towards Mr Hargraves the folder of documents. Mr Roberts recalled Mr Hargraves’ comment to be “I am buying the clients, I am not buying the licence”. Mr Hargraves also looked to his compliance officer and asked if she was aware of this issue and received the answer “Yes I am”.[42]
[42] T512.
Mr Roberts was not shaken on this issue during cross-examination. He maintained that the ASIC discussion occurred on a number of occasions that a folder of documents was available for inspection and that Mr Hargraves and his staff had indicated that they were aware of the existence of the investigation.
Mr Roberts referred to the folder said to have been made available as a blue folder. In the evidence of Mr and Mrs Franke, it was described as a black folder. I place little weight on discrepancies such as this. Mrs Franke’s evidence was to the effect that she had prepared a number of folders each of which contained the ASIC material so that a separate folder could be retained and referred to as necessary by the various interested persons including herself, Mr Franke, Craig Franke and Mr Roberts. It is quite possible that Mr Roberts had in mind that the ASIC folder was blue because the folder that he had been provided with at this time was blue. According to Mr Roberts he was provided with a blue folder for his own use during the ASIC investigation and from time to time he would return it to Wendy who would update it. “It was effectively my folder of the ASIC information”. He said that he did not bring his blue folder to the meeting with Mr Hargraves “it was just there”.[43] The evidence of Mrs Franke was that she brought her folder to the relevant meeting. Exhibit P7 is a dark grey lever arch folder with “Wendy” handwritten on its spine.
Evidence of the defendant’s witnesses concerning the ASIC investigation.
[43] T577.
Craig Hargraves told the court that he was an experienced but quite “low end” financial planner. He dealt with clients with investment portfolios between $0-500,000 and at one stage said that he had about 5000 clients. He bought clients from and sold clients to other financial planners as part of his business. Over the previous 20 years he had bought approximately twenty client groups and sold off parts of approximately 20 client groups. He had had two bad experiences, in this respect, including one in 1991 arising out of a transaction where the business, from which he had bought clients, had not been entirely compliant with regulatory requirements. He said that he was alert to regulatory concerns and the effect such might have on the value of businesses or clients that he purchased.
Mr Hargraves heard that Mr Franke wanted to sell his business and arranged a meeting. At this first meeting with Mr Franke it was agreed that he would pay three times annual renewal (trailing) commissions. At this stage Mr Franke was talking in terms of $200,000 being the annual renewal commissions. In all there were four meetings according to Mr Hargraves. At the second meeting Mr Hargraves took Jacquie Evans, his acquisition manager, and Debra Spacie, his compliance officer, so that they might start a due diligence process with respect to the files. Wendy Franke took these two women away to the area where the files were kept so as to facilitate the due diligence process whilst Mr Hargraves continued to discuss terms with Mr Franke. At a third meeting a draft contract was made available. The draft was discussed by the parties although Mr Hargraves does not recall Mr Roberts being at this meeting.
According to Mr Hargraves the topic of Lyndon Holland came up in the second meeting but nothing was said about ASIC. During the third meeting Terry Franke talked in stronger terms about Holland and whilst ASIC was mentioned it was referred to only in the context of Lyndon Holland persuading the son Craig Franke to sign application forms under Lyndon Holland’s name. Mr. Hargraves said that this information concerned him, “yes, look, any involvement or innuendo of that type is of concern, yes.”[44] He rang ASIC to check on the situation with the plaintiff. The person he spoke to on the telephone refused to give him any information but said “please don’t take that as a positive or a negative in this situation; I simply cannot tell you any information about ASIC”. Mr Hargraves then said that as far as he was concerned, particularly given that this was, for him, only a small acquisition, he wanted nothing to do with ASIC. In his view, while ASIC might have a view as to compliance it is very difficult for any organisation to be 100% compliant “in the eyes of ASIC”. He said that it is general industry principle “to avoid ASIC like the plague”.
[44] T628.

This aspect of Mr Crase’s report is something that I do accept.
The proper measure of loss at law
This is not a case where the transaction failed to be completed. On any analysis, the contract was affirmed by the defendant, notwithstanding the asserted wrongful conduct, and the transaction was completed. The defendant, in all material respects, acquired the assets the subject of the sale. Nevertheless, the defendant is entitled to be placed in the position it would have been in had the wrongful conduct not occurred.
As far as the asserted misrepresentations and misleading or deceptive conduct is concerned, Mr Hargraves said that he would have attempted to negotiate a lower price.[69] However, there is no evidence to support a finding that a lower price would have been accepted. In fact, the evidence of Mr Franke, which I accept, is strongly to the contrary. In these circumstances the usual measure can be described as the difference between the value of the asset as represented and its value, according to its true state, as at the date of the transaction.[70] The value of the asset as represented may or may not equate with the price negotiated to be paid.
[69] I do not accept this evidence for reasons already given nor have I found the defendant to be entitled to a claim for misrepresentation or misleading or deceptive conduct. The following discussion of damages insofar as it refers to these causes of action is to be read in this context.
[70] See generally, McGreggor on Damages 18^th edition, Sweet & Maxwell, chapter 2.
As far as the alleged breach of contract is concerned, the usual measure in a case such as the present can be described as the difference between the value of the assets at the time of the delivery to the buyer and the value they would have had if they had answered the warranty, that is, had the contractual promise (warranty) been complied with.[71] Again, the value that the assets would have had, had they answered the warranty, may or may not be the same as the price negotiated although the contract price may be taken as evidence of this where it is otherwise difficult to assess.
[71] See generally, McGreggor on Damages, 18^th edition, Sweet & Maxwell, chapter 2.
Strictly speaking, the defendant was obliged to adduce evidence of the value of the assets as represented and the value of the assets as warranted respectively. It did not do this, rather, it implicitly asserted or relied on the price negotiated as representing these two values. For the purposes of the ensuing discussion I am prepared to accept this. Accordingly, the tort measure becomes the difference between the price in fact agreed to be paid (for the assets as represented) and the value of the assets in their true (“impaired”) state and the contract measure became the difference between the price agreed to be paid (having been warranted as “unimpaired”) and the value of the assets in their true (“impaired”) state.
It was on this basis that the defendant put forward the Crase report as identifying and calculating the defendant’s loss whether the claim were to succeed in tort or in contract.
The evidence of Mr David Crase
Mr Crase is an accountant and the principal of Crase Consulting Group Pty Ltd. He has an impressive resume and significant experience in due diligence investigations and business valuations. He was engaged on behalf of the defendant to prepare a report and, in due course, to give evidence in court dealing with his assessment of the economic loss sustained by the defendant as a consequence of its acquisition of the business assets of the plaintiff. Mr Crase was instructed to make a number of assumptions as set out in clause 3.3 of his report.[72]
[72] MFI D2 p221.
In attempting to assess the financial loss suffered by the defendant Mr Crase canvassed three approaches. First, in Section 5 of his report, he calculated an adjustment to the purchase price in accordance with his interpretation of the reconciliation formula in the Deed and based on an assumed figure for total renewal commissions received during the first 12 months of operation by the defendant. This was purely a mechanical process, of no assistance to the court[73] and ultimately not relied upon by the defendant. Second, in Section 6 of his report, Mr Crase engaged in an exercise that attempted to value the “impaired” assets themselves and it is this section of the report that is relied upon by the defendant. Finally, Mr Crase offered another mechanical exercise by way of assessing the loss to the defendant resulting from its efforts to rectify the impaired nature of the assets obtained, being additional costs incurred by the defendant in responding to the problem, as it perceived it, of Mr Franke having been banned. In this Section Mr Crase merely notes his instructions to assume that such time and opportunity costs incurred by the defendant amounted to $100,000. The only aspect of this section 7 of the report that can be of any assistance to the court is that in paragraph 7.7. Mr Crase points out that were the calculation of loss based on his evaluation of the assets in their impaired state to be relied on (Section 6 of his report) there could be no additional claim in respect of rectification of the impaired assets because the discounted purchase price recommended by him takes into consideration the cost of rectification.
[73] The proper application of the contract formula raises difficult questions of construction that are solely within the province of the court and not any expert witness. The assumed figure for commissions adopted is, perhaps by happenstance, close to but not the same as the total renewal commissions in fact received by the defendant. Ultimately all Mr Crase does in this section is to perform a mathematical exercise which the court is capable of doing for itself. Finally, for reasons already given I do not propose to base any remedy due either to the plaintiff or the defendant on the contractual reconciliation process which was to be engaged in no later than 45 days after the date the last payment was due.
I turn to Section 6 of the report; this is the heartland of the report and central to the defendant’s claim for damages. I set out Section 6 in full.
6.     VALUATION OF IMPAIRED ‘ABIA’ ASSETS
6.1.   The Business Sale Deed indicated that [the defendant] had agreed to pay an amount of three (3) times Renewal Commission income of [the plaintiff], subject to adjustment.
6.2.   I conduct many business valuations of financial planning business [sic] on behalf of financial institutions and others.
6.3.   I comment that a three (3) times multiplier of Renewal Commission income is very common in the financial planning industry as a ‘rule of thumb’ approach to assessing a business with non-impaired assets.
6.4.   The assets of ABIA were stated at clause 1.1 of the Business Sale Deed to include:
(a)“the name;
(b)the Renewal Commissions; and
(c)the Client Files”.
6.5.   I am instructed that the abovementioned Assets were materially impaired. This assessment appears valid as I am instructed that there was adverse media publicity associated with [the plaintiff] arising from the ASIC investigations and banning of its proprietors. Further, there was a need to expend considerable management and other resources to rectify deficient Client Files and to endeavour to pacify disgruntled [the plaintiff] clients upon disclosure of the banning of [the plaintiff] proprietors by ASIC.
6.6.   Generally if assets were known to be impaired of this nature [sic] and given the need to resolve expeditiously, there would have been a substantial discount to the otherwise fair market value. The discount would reflect the heightened risk to the purchaser of acquiring the impaired asset and the urgency of the sale by the vendor.
6.7.   I am instructed that in this instance the vendor [the plaintiff] did not disclose that its assets were impaired and if this is proven as a matter of fact, it may be reasonably concluded that it secured a sales value for its assets greater than their actual worth as impaired assets.
6.8.   Whilst the Business Sale Deed provided a claw back mechanism in the form of a reconciliation adjustment based on Renewal Commission income received in the twelve month period after its sale, the extent of retained funds (i.e. deferred payment of $213,000) may have ultimately proven to be insufficient given the nature of the impairment.
6.9.   As a general principle, the greater the level of risk the lower the amount that will be paid and the greater the level of security (i.e. deferred payment).
6.10. The sale price achieved by [the plaintiff] for its business assets was consistent with a non-impaired asset sale.
6.11. In my opinion, the fair value agreed of $513,000 should have been discounted by between one-quarter (25%) and one-half (50%) if there had been disclosure of the nature and extent of the impairment of assets of [the plaintiff] at the time of sale. In turn, this means that the value of the [the plaintiff] business assets would have been worth between $256,500 and $384,750, rather than $513,000, if the status of the [the plaintiff] had been fully disclosed.
6.12. In view of the foregoing, I conclude that the economic loss of [the defendant] is in the range of $128,250[74] and $256,500[75], being the excess purchase consideration for the [plaintiff] assets.
6.13. It is noted that the foregoing calculation averts the need to separately calculate the extra costs associated with remedying the impaired assets (Section 7). The calculation of reduced Renewal Commission income (Section 5) can also be ignore as it is addressed via the extent of the discount depicted above.
[74] Contracted amount $513,000 less discounted fair value of $384,750 = $128,250
[75] Contracted amount $513,000 less discounted fair value of $256,500 = $256,500
I accept that Mr Crase is experienced in valuing a range of businesses including businesses involving financial planning. However, in a report of 22 pages (together with a further 34 pages of appendices) the only part that addresses his opinion is paragraph 6.11 above. When all else – the assumptions, the recitation of his experience, the irrelevant calculations in sections 5 and 7 are taken away – we are left with bare assertion. It is very much a “trust me, I am an expert” opinion. The valuation that Mr Crase has proffered being renewal commissions existing as at the date of the transaction multiplied by three for an “unimpaired” business and multiplied by between 1.5 and 2.25[76] for a business that is “impaired” in the manner assumed by him in his report is, in truth, directed to the bases upon which negotiations for the sale price for such a business might be conducted. During his evidence Mr Crase said this.[77]
I think the issue, as I understand it, would be what would be the value I would pay for this business at the relevant time if I was aware that there was an impaired asset and, if that’s the case, then I would discount the value because of the known impaired asset. Discount it because of risk, whether that risk ultimately eventuated or not because I’m doing it at a point in time, whether it eventuated. I would also discount it because of opportunity, so as a buyer I would seize it as an opportunity to, in effect, take advantage of an impaired asset (emphasis supplied).
[76] See T 842.
[77] At T846.
Mr Crase frankly conceded both in his report and in his evidence that the use of multiples in the manner described by him was very common in the financial planning industry as “a rule of thumb”. I am satisfied that such rules of thumb are used when it comes to negotiating the purchase price of a business. This was the approach adopted by both Mr Franke and Mr Hargraves during their negotiations; it was readily agreed that the price would be three times proved commissions. In addition and in my view, as a consequence, the due diligence process undertaken on behalf of the defendant (as described by Ms Evans and Ms Spacie) only needed to be and was relatively perfunctory. The reason for this, of course, is that the contract was designed to ensure that the defendant obtained $171,000 worth of commissions in the first year which would have vindicated the price initially agreed or, to the extent that the defendant received less than that, a reconciliation process would simply reduce the price accordingly. In other words, whether or not the assets, being the client files and the renewal commissions, were “impaired” in any way, the real issue was whether or not the various client portfolios would remain with the defendant’s business. This would be accommodated by the reconciliation process embedded in the contract.
I do not accept that the rules of thumb adopted by Mr Crase comprise a proper basis on which to value the business itself. All financial planning businesses differ. Mr Crase has not analysed in any way the business of the plaintiff, the nature of its clients, the nature of the insurance and superannuation products held, and the long term value that might be expected to come from the particular clients in the plaintiff portfolio. All Mr Crase has done is proffer a rough and ready means towards negotiating a contractual price. Whilst rules of thumb can be of interest in attempting to determine fair value of a business or business assets they should be regarded with professional caution for the reasons provided by Lonergan[78]
[78] Wayne Lonergan The Valuation of Business, Shares and Other Equity 3^rd ed Business and Professional Publishing at 251-254.
In addition, Mr Crase has made a number of assumptions which, as far as his knowledge is concerned, lack specificity. These include that there was adverse media publicity regarding the plaintiff’s proprietors at the time of the ASIC banning order, that following the banning order the plaintiff proprietors no longer actively assisted with the retention of clients and that the client files acquired from the plaintiff required extensive review and rectification and significant management time and intervention on behalf of the defendant. There is very little evidence (to which I will come) in support of at least the first and third of these assumptions or which provides any real content or specificity to these assumptions. Indeed, as far as the third of these assumptions is concerned Mr Crase can only have relied on his instructions (see Section 7 of his report) that the defendant had expended $100,000 – a grossly inflated estimation on any view of the evidence (see below). These assumptions form the core of the alleged “impairment” of the sale assets assumed and relied upon by Mr Crase.
I am not prepared to accept the opinion of Mr Crase as providing an accurate valuation, in fact, of the assets sold by the plaintiff to the defendant. As I have said, Mr Crase provides no more than an approach to negotiating a purchase price. It is plain from the evidence of Mr Franke that any attempt to take advantage of the situation so as to negotiate a lower price would not have been successful. The defendant has not provided evidence which analyses the true state of the plaintiff’s business or, at least, the assets that were sold and which attempts to value those assets on a basis somewhat more rigorous than appealing to a rule of thumb.[79]
[79] A number of such bases are explored in the expert literature, including Lonergan, The Valuation of Business, Shares and other Equity, 3^rd ed, Business and Professional Publishing.
In any event, if I am wrong in my criticisms of the evidence of Mr Crase to this point, the defendant also fails when the issue of causation is considered.
The question of causation
Mr Crase has assumed that the ASIC findings of non-compliance leading to a banning of Mr Franke caused the assets – in particular the client list and consequential entitlement to renewal commissions, to be worth less than they were worth absent these events. The assets would be impaired in this sense if these events (i) caused clients to leave after having been taken over by the defendant and/or (ii) materially increased the risk of clients leaving so that additional resources had to be directed at retaining clients.
The evidence supports a finding that clients were lost during the first 12 months of operation by the defendant. However, it is not possible to obtain a completely accurate picture in this respect. The defendant produced a number of documents which were intended to inform the court of the extent to which clients, taken over by the defendant, left during the first twelve months of its operation and the extent to which, as a consequence, the defendant received renewal commissions during that first twelve months of something less than $171,000. A significant amount of time was devoted to this issue but it is not necessary to explore this evidence in great detail in this judgment.
The evidence of the defendant’s office staff and, in particular, that of Kathleen Woodley was to the effect that as soon as the plaintiff’s clients were taken over by and subsumed into the defendant’s business a computerised record was commenced. This record, in addition to information about each client initially obtained, was routinely added to by a running record of commissions received together with information concerning face to face and other dealings with each client as they occurred. As a result, the defendant was able to produce to the court two principal documents although, because of difficulties with explaining and ultimately being able to vouch for the accuracy of the documents, two versions of each document were supplied.
The first document[80] headed “ABIA Client Spread Sheet” purports to list every client taken over together with, amongst other information, a figure for commission that the defendant assumed or expected it would receive during the first twelve months of operation. Exhibit D9A records a total expected renewal commissions for the first twelve months of operation as being $169,178.67 which is not far short of the $171,000 figure provided for in the contract.
[80] Exhibit D9, replaced, in effect by exhibit D9A.
The second spreadsheet document[81] purports to record renewal commissions, in fact, received with respect to all of the clients taken over by the defendant. It is the defendant’s case, based on exhibit D11A that the total renewal commissions received during the first twelve months of operation was $150,067.92. However, this cannot be accepted as an accurate record. A number of entries in that document represent assumptions based on payment trends and have been included with respect to months were there is no record verifying the amount of commission in fact received. It is not disputed by the defendant that it received commission for these months. A number of other entries have been, as was described in evidence, “flat lined”. The defendant has allowed, in favour of the plaintiff, a deemed receipt of continuing commission with respect to clients whom the defendant has taken out of a plaintiff’s product and transferred to a preferred defendant’s product. In these respects no allowance has been made for potential increases in commission amounts due to inflation and changes in client ages.
[81] Exhibit D11 and its replacement D11A
On the evidence available, I am unable to be confident as to the extent of the commissions actually received by the defendant during its first year, other than that it was at least in the order of $150,000 (exhibit D11A) although it may well have been more than that. I say that I am not satisfied that exhibit D11A accurately records commissions received because it contains an element of estimation and also because having considered all of the evidence given with respect to the preparation and generation of the spread sheets in D9A and D11A, I am not at all satisfied that there has not been significant opportunity for human error to occur.

I am satisfied based on exhibit 11A and the evidence of Kathleen Woodley that a number of clients taken over by the defendant took their business elsewhere within the first twelve months of operation by the defendant. I am also satisfied that if one were to restrict the inquiry to renewal commissions received by the defendant (or deemed received) with respect to products that the plaintiff had placed its clients in, it is more likely than not that the defendant received something less than $171,000 by way of renewal commissions during the first year. In making this finding I have ignored, the fact, that the defendant took a number of the plaintiff’s clients and transferred them into other products which in some cases led to a significant increase in the income received by the defendant during that first year over that which would have been received had the client been left in the product originally procured by the plaintiff.[82]
[82] See, for example, the position of Mr Mahar canvassed in the evidence and at exhibit D15 and also exhibits D19 and D21 and the evidence of Ms Woodley concerning these documents.
I return to the issue of loss of clients. The fact that clients were lost over the first twelve months is not an unexpected outcome. Clearly, in any financial planning business clients will come and go over a twelve month period and indeed the fact that some clients might be lost was anticipated by the parties and provided for by the contract terms. However, the defendant has never attempted, other than in the most general sense, to establish a causal connection between this loss of clients (and its translation into loss of commission) and the ASIC findings and banning of Mr Franke. In this respect, the court has before it the evidence, adduced by the defendant, of Robert Turner, who was its financial advisor or representative dealing with the acquired clients during the first twelve months and Mr Robert Bobridge who was the its sales manager in charge of the various financial advisors, including Robert Turner, at the time. I found the evidence of both of these witnesses to be unsatisfactory. Each gave evidence of a very general nature containing elements of reconstruction.
Mr Turner initially travelled with Mr Franke to visit clients. Once he was told by his employer of the banning order he stopped involving Mr Franke in this process. He asserted that his dealings with the clients became difficult particularly when he told them about Mr Franke’s banning order. His evidence was, in this respect, at a most general level. He was shown the spreadsheet exhibit D9A which under the heading “Outcome” contains comments, sometimes in quite some detail, about the defendant’s relationship with each client, what happened with respect to a client and why it happened. He said that he used his file notes to contribute to the comments that were recorded by the office staff in exhibit D9A. I interpolate here that apart from one client to which I refer below there is nothing within those comments that directly suggests a particular client was lost because of a difficulty or perceived problem with Mr Franke.
When pressed for examples, Mr Turner identified a client, Mr Steven Horn, whom he recalled as leaving because of the Terry Franke licence issue. The Steven Horn entry in exhibit D9A is the only one where the reason given for the closure of the policy refers to the Terry Franke problem - “when he found out about Terry Franke and all the hardship he went through”. I find this entry curious and am not prepared to accept it as evidence of the truth of the proposition. According to exhibit D11A no commission was received with respect to Steven Horn’s policy from October 2006 onwards, that is, at no time after the transfer of the clients on 25 September 2006 was Mr Horn’s policy paying a commission. I infer that it had been cancelled as at or prior to October 2006. This was well before the ASIC delegate made his findings and ordered that Mr Franke be banned. During his cross examination of Mr Turner, Mr Franke put to him that Steven Horn had left or cancelled his policy before the transfer of clients took place. Mr Turner, not surprisingly, could not dispute this. In any event, as far as Steven Horn is concerned, exhibit D9A and Mr Turner’s evidence is of a hearsay nature and I do not accept it for its truth. It is possible, although I am in no position to make a finding to this effect, that Mr Turner followed up Mr Horn, being a file that was transferred, but that Mr Turner has conflated a stated observation by Mr Horn as to his knowledge of Terry Franke’s problems with a “reason” to have taken his policy away notwithstanding that the policy was taken away in or before September 2006. The defendant has not satisfied me that Mr Horn is an example of a client who left because of the banning of Mr Franke.
Mr Turner also gave the example of two brothers called Van Gasteren who, in effect, drifted away after hearing about Terry Franke’s problems and notwithstanding efforts by Mr Turner to retain them. However, according to exhibit D11A commissions on their policies continued well into the 2007 year. Further, exhibit D9A records that they were to have a second review with “Rob” on 31 October 2007. There is a reference to the policies having closed but no reference to any reason for this.
These are the only two examples that were given by Mr Turner in support of his general proposition that they were typical of clients who started to put up a smoke screen once they knew that Terry Franke lost his licence.[83]
[83] T996.
As I have said, I found Mr Turner to be an unsatisfactory witness who was prepared to make assumptions about why clients left and whose evidence I found to be unreliable on this topic.
Mr Robert Bobridge told the court that he was surprised to learn of the banning order on or about 6 November 2006. He became aware of it through the ASIC website and from various trade press publications. He provided the court with a Google search of what was available to be read on the internet at the time.[84] Apart from an ABC Online entry, the other references related to in-house or trade publications. No evidence has been provided to the court of any client who became aware of any of these trade publications or of the ABC Online entry.
[84] Exhibit D16.
Mr Bobridge himself had no direct knowledge of any customer who left or took business away as a result of finding out and being concerned about the ASIC investigation and result. He did not keep a record of any such clients and could give no specific examples of clients that caused a particular problem. He acknowledged during his cross-examination that he would not expect clients to read the industry magazines of the type he identified by his Google search.
As I have said, I found Mr Bobridge’s evidence also to be of too general a nature infused with hearsay and ultimately of little assistance to the court on the issues of whether or not, as a matter of fact, clients were concerned about the ASIC determination and whether or not, as a matter of fact, any client or clients took business from the defendant because of such a concern.
I am not satisfied that the defendant has established that it lost clients as a result of the ASIC inquiry and determination. It follows from this and the unsubstantiated Crase assumption that the defendant’s extra effort or “rectification” costs were $100,000.00 (see further below) that I am not satisfied that the assets sold to the defendant were in fact impaired in the manner assumed by Mr Crase. This on its own is a complete answer to the defendant’s claim for damages based on the Crase report.
Alternative measure of damages – extra effort
It follows from the previous section that I am not satisfied of any direct causal connection between the ASIC investigation and determination and the need, in fact, for the defendant to expend additional resources in managing the clients it took over. However and notwithstanding that in my view, throughout this trial, the defendant has overstated its level of concern with respect to the ASIC determination, I do accept that the defendant acted reasonably in attempting to mitigate any future possible losses, in taking some of the steps it took to protect itself once it heard about the ASIC determination. It was not unreasonable for the defendant to have been concerned that there might be some negative effects for its business (although not to the extent that is asserted throughout the trial) or that ASIC might come calling to look at the files taken over to see whether the defendant had rectified any perceived problems. It was not unreasonable for the defendant to take steps to protect itself in these respects.
However, again the evidence adduced by the defendant here was of a very general nature. It is not possible to precisely quantify any additional expense that the defendant incurred in trying to protect the client base it took over. So much is evident from the fact that it was unable to provide any detailed information in this respect to Mr Crase such that Mr Crase was reduced to operating on an assumption that an amount of $100,000 was expended by the defendant in this endeavour.
Mr Hargraves did not personally deal with any of the clients. He met with management and oversaw the process of integration. After hearing of the banning, he gave instructions that all of the clients should be contacted as soon as possible with a view to satisfying any client concerns. He said he might have spent half a day a week for six months although he did not say whether this was time additional to that which he ordinarily would have spent with respect to the new client portfolio or as to any opportunity cost, that is, other work he was unable to perform because of this. He told the court he had no direct knowledge of any particular clients or of their concerns. I do not accept that Mr Hargraves spent half a day a week for six months solely on the plaintiff’s client portfolio. I believe there to be an element of exaggeration here. Consistent with his evidence generally, and his approach to the negotiations and formation of the contract and his senior role in the conduct of the defendant’s business, I doubt that Mr Hargraves did much more than instruct his various employees to deal with the problem, to receive reports from them and to advise them further as to what they should do from time to time.
Jacquie Evans told the court that after the defendant heard of the banning order a general instruction was issued to “speed up the process of getting the files up to scratch”. The following exchange occurred.[85]
[85] T761-762.
A…We had given ourselves a start of 12 months to go through the clients; to meet with them all, go through the files and amend them into how our files would look and we very quickly decided we had to do that as quickly as possible. To get it done within six months.
QDid you take on more people.
AWe just became more full-time. So rather than working with other departments, that is all we did.
QWhat happened to the work you had previously done if you were working fully on this.
AIt had to be absorbed within the company.
HIS HONOUR
QYou brought forward work that you would have had to do on those files in any event, is that right.
AYes.
QYour concern is that – not concern, but what you are telling me is that there was a certain amount of work that had to be done in the ordinary course to incorporate these new clients into your business and into your procedures and approaches and you had to throw resources at it to achieve that sort of work in a much earlier time frame than otherwise would have been the case.
AThat’s right.
Ms Evans returned to this topic later in her cross-examination where this exchange occurred.[86]
[86] T805
QCan I put it to you another way, you were not concerned that there was anything wrong with the files.
ANot overly.
QWhen you were advised that we were banned what was your activity that you had to do. What had to be done in a hurry.
AWe wanted to make sure that every client was contacted and seen by an advisor where possible to make sure that the relevant compliance documents were recorded on the file.
QBut you weren’t worried about the files, the files were okay, so what cost was there to do that.
AThey were okay, as long as all of a sudden we weren’t to be audited by ASIC and held accountable for what was on the files. We could tell from looking at them that certain documentation wasn’t as compliant as we would have our files.
QThat’s an opinion, isn’t it.
AYes, it is.
Mr Bobridge also gave evidence on this topic. He confirmed that the defendant needed to bring forward its review of the files to ensure that they were in a form satisfactory to the defendant and that it needed to bring forwarded visits to each client by advisors. Mr Bobridge said that the defendant kept no costing records with respect to any extra work that was involved in this exercise. Essentially, he had to rearrange the work of the defendant so that more staff could be devoted in the early months to the plaintiff’s files over and above that initially anticipated. He also told the court that they employed a new person to make telephone calls and to assist with the preparation of the files. He said that she spent twelve months involved with the transition of the plaintiff portfolio into the defendant portfolio. However, she remained employed for quite some time thereafter. Mr Bobridge described the employee as a part-time employee with a wage “at a guess” of $20,000-24,000. Mr Bobridge’s evidence on this topic also was of a general nature and the extent to which this person’s services were needed in any event following the acquisition of the Franke portfolio and independently of the ASIC problem was not made clear. This is particularly so given that Mr Bobridge’s evidence here conflicts with that of Ms Evans who said the work was absorbed within the company with no additional employees required.[87]
[87] T761-762.
One must start with the proposition that the overnight acquisition of 900 clients, independently of any ASIC issue, would necessitate significant business resources and may even require a new employee or two to be taken on. The defendant has provided no documentary records of additional expense to which it has been put and the claim under this heading has been pressed at the most general of levels. Nevertheless, I am satisfied that it was reasonable for the defendant to advance and increase its resource effort in managing the plaintiff clients for a period after it became aware of the ASIC determination. It is not possible to precisely calculate the dollar cost to the defendant of undertaking this exercise. However, using a broad brush, based on the evidence I have heard, I will allow the plaintiff $20,000 under this head. Given that I am allowing nothing with respect to the primary claim for damages, no question of double counting arises. As I have said, whilst I am not satisfied that a loss of this nature has been directly caused by the plaintiff’s breach of contract or by any misrepresentation or misleading or deceptive conduct by or on behalf of the plaintiff I am satisfied that it was reasonable, in the circumstances, for the defendant to take at least some of the steps it took, by way of mitigation of any loss it might suffer as a consequence of the plaintiff’s breach of contract.[88]
Damages calculated by way of actual commissions received
[88] See, for example, Banco De Portugal v Waterlow & Sons Ltd [1932] AC 452 and generally, British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673.
The question arises as to whether the defendant is entitled to recover damages based on the reduction of commissions in fact received during the first twelve months, that is, to in effect apply the parties initial understanding, purportedly provided for in the reconciliation provisions in the deed for sale, that the plaintiff was to be entitled to three times actual commissions received. However, this is not a form of loss that the defendant has demonstrated was caused by any breach of warranty, misrepresentation or misleading or deceptive conduct. As already discussed, there is insufficient evidence to support a finding that any clients or commissions lost by the defendant during the first twelve months were caused by any of the wrongful conduct alleged by the defendant. I have already found that it is too late, on the proper construction of the relevant contract provisions, for the defendant to claw back part of the agreed price based on an application of the reconciliation formula now.
Conclusion and Orders
My conclusions are as set out in the following orders.
1. The plaintiff is entitled to judgment on its claim, as against the defendant, for the balance of the purchase price in the amount of $243,000.
2. The defendant is entitled to judgment on its counterclaim, as against the plaintiff, in the amount of $20,000 on account of damages for breach of contract.
3. The defendant’s claims against the plaintiff in all other respects and against Terry Franke and Wendy Franke are dismissed.
4. The defendant is entitled to set off[89] the sum of $20,000, to which it is entitled pursuant to Order 2, against the amount payable by the defendant to the plaintiff pursuant to order 1.
5. Accordingly, the defendant is ordered to pay to the plaintiff the sum of $223,000.
[89] The plaintiff has not disputed the defendant’s entitlement to a set-off in the event that its claim for damages were to be successful. In any event the authorities support the proposition that an unliquidated claim may be set off in equity against a liquidated claim where it is proper to do so provided that the claims arise out of the same transaction, eg see the discussion and authorities referred to in Meagher, Gummow and Lehane, Equity, Doctrines and Remedies, Lexis Nexis Butterworths, 4^th ed [37-005] ff.
I will hear the parties on the question of interest and costs.