Bennett v. LPC Holdings
[1998] VSC 93
•1 October 1998
SUPREME COURT OF VICTORIA
CAUSES JURISDICTION
Not Restricted
No. 8050 of 96
| GRAEME BENNETT AND | Plaintiffs |
| KAREN BENNETT | |
| v | |
| LPC HOLDINGS PTY LTD | Defendants |
| (ACN 006 582 752) LYALL PATRICK COOPER AND J. E. ABEL REAL ESTATE PTY LTD (ACN 004 622 048) |
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| JUDGE: | Ashley, J. |
| WHERE HELD: | Melbourne |
| DATE OF HEARING: | 20, 21, 24, 25, 26, 31 August; 1, 2, 3, 9, 10, 11, 14 and 15 September 1998 |
| DATE OF JUDGMENT: | 1 October 1998 |
| CASE MAY BE CITED AS: | Bennett v. LPC Holdings & Ors |
| MEDIA NEUTRAL CITATION: | [1998] VSC 93 |
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Trade Practices - Purchase of business - False representations inducing purchase -
Involvement in a contravention
Deceit - Knowingly false representations made with intent that representees purchase a
business
Damages - Measure of loss and damage for breach of Trade Practices Act 1974 (Cth)
and Fair Trading Act 1985 - Measure of damages in deceit
Trade Practices Act 1974 (Cth) ss.52, 75B, 82; Fair Trading Act 1985, ss.11, 31, 36, 37
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| APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | MR C. JOHNSON | Dwyer Mahon & Robertson |
| First Defendant | No appearance | |
| Second Defendant | MR L.P. COOPER In person | |
| For the Third Defendants | MR P.N. VICKERY, Q.C. with | Coltmans Price Brent |
| MR G.W. ROBERTSON |
HIS HONOUR:
The nature of the claim
By writ filed 9 December 1996 Graeme and Karen Bennett bring a claim for damages against LPC Holdings Pty Ltd (LPC), Lyall Cooper and J.E. Abel Real Estate Pty Ltd (Abel). By their statement of claim, as amended during the course of the trial, the plaintiffs allege that they were induced to enter into the purchase of a business by representations made in breach of s.52 of the Trade Practices Act 1974 (Cth) and s.11 of the Fair Trading Act 1985. They rely, also, upon the torts of deceit and negligence (more specifically, negligent misstatement). LPC was the vendor of the business, Mr Cooper was a director of LPC, and Abel was the selling agent. Mr Cooper was, the evidence shows, the voice of LPC to the extent that the company communicated directly with the plaintiffs. Abel's role was undertaken by Mr Rob Serroni.
The resort
The business the subject of the representations and purchase was a motel and restaurant known as "The Moonlight Bay Resort" at Rye. The motel, comprising eight self-contained units with fully appointed kitchens, commenced operations on 1 September 1990. The restaurant commenced business on 27 August 1991. The premises were erected and first conducted by a Mr and Mrs Stella, operating through companies.
Purchase by LPC
The business was purchased by, and the premises were leased to LPC on 27 July 1992. Abel, in particular Mr Serroni, was the agent for the vendor. As required by s.52 of the Estate Agents Act 1990 statements were prepared by a practising public accountant which purported to disclose the performance of the accommodation and restaurant aspects of the business from the time of their respective commencements up to 14 March 1992.
LPC puts the business on the market
LPC conducted the business for less than a year. By late November 1992 a decision had been made to sell. According to a letter written by Mr Cooper at the time, the reason for putting the business on the market was ill-health. Abel was appointed sole agent for the sale of the business on 27 November 1992. LPC then provided Abel with a little information concerning the business. Its performance was more fully set out in updated material supplied to Abel on 5 January, 8 February and 15 March 1993. In each instance, it is clear, Mr Cooper was the author of the material.
The plaintiffs become involved
The plaintiffs are now aged 50 and 46. Before purchasing the business they were farmers at Lalbert, in the State's north-west. Mr Bennett had been a farmer all his life. For ten years after she left school, Mrs Bennett had been employed in a variety of jobs, some of which were in the hospitality industry. She had done reception work, bar work, cleaning and bookkeeping. She had not worked in the hospitality industry in a managerial role.
The evidence shows that, for some years leading up to 1993, the plaintiffs were under very considerable financial pressure. In the first part of that year they sold a good deal of their land, as well as a block jointly owned by Mr Bennett and his mother. They were left with a home in the township of Lalbert, a 654 acre block, and some cash. They decided to cease farming and to acquire a suitable business. By April 1993 they had "looked at" motels in Echuca and Bendigo. Then, on the Saturday before 20 April 1993, they read an advertisement for the resort in a newspaper. The following Monday, they called Abel. They spoke to Mr Serroni. Arrangements were made to inspect the premises on the next day, Tuesday 20 April.
On 20 April the plaintiffs attended the resort and met Mr Cooper. Later, Mr Serroni attended. There was an inspection. There was conversation at which all four persons were present. According to the evidence of the plaintiffs Mr Cooper made certain representations about the occupancy rates and takings of the business. Having regard to the way in which the plaintiffs put their case in counsel's final address, I need not detail those alleged representations.
On 20 April 1993, Mr Serroni (not, as Mr Bennett said, Mr Cooper) supplied the plaintiffs with a bundle of documents. They were produced in evidence. They comprised Mr Serroni's business card, the Stella s.52 statements, a list of chattels that would be the subject of any sale (together with their historical values), and a report prepared by Mr Cooper showing the performance of the business up to 28 February 1993.
I should refer to one other aspect of the meeting on 20 April. Mrs Bennett gave evidence that Mr Cooper produced for inspection a motel guest register and a restaurant diary. In each instance pages for the period up to 20 April 1993 had been removed. The guest register showed that there "were quite a few booked in for Christmas time in the ... motel part". There were not many forward bookings in the restaurant. Mrs Bennett said that Mr Cooper had explained the missing pages by saying that they were with his accountant; that it was not unusual not to have forward bookings for the restaurant; and that "usually over the Christmas period, they were 100 per cent occupied and he usually had a waiting list of at least 30 names to go in for cancellations".
The plaintiffs, particularly Mrs Bennett, were evidently excited about what they had seen. They spoke with their accountant, Mr Tomamichel, and gave him the papers they had been given. Their accountant spoke with Mr Serroni on 21 April. He sought various details concerning the operation of the business. Mr Serroni told him that he did not know the details which were sought; but would check. Mr Serroni also told him that a s.52 statement pertinent to the conduct of the business by LPC was coming.
A s.52 statement was prepared in respect of LPC's business performance. Dated 21 April 1993, and embracing the period 15 July 1992 to 28 February 1993, it was forwarded by Abel to Mr Tomamichel under cover of letter dated 22 April 1993. The statement and letter were in the first instance faxed to the accountant. The letter, over the signature of Mr Serroni, itself made certain representations as to occupancy rates upon which the plaintiffs relied in their statement of claim. But as the plaintiffs' case was put in counsel's final address I need not refer to those plaintiffs' representations.
The s.52 statement, it seems clear, was put together in haste. It was compiled by an accountant, Mr Gloury, who was not LPC's usual accountant. Mr Gloury's address was the same as Abel's. It seems likely that, a prospective buyer having suddenly, if belatedly, emerged on the scene, and a s.52 statement being needed quickly in such circumstances, Mr Serroni suggested to Mr Cooper that the particular accountant be engaged to prepare the document.
The s.52 statement was evidently based upon Mr Cooper's report concerning the performance of the business in the period up to 28 February 1993. So much is apparent from inspection of Mr Gloury's file. A copy of that report was included in the material handed to the plaintiffs by Mr Serroni on 20 April 1993.
It is apparent that the report to which I have just referred was not the entirety of the material upon which Mr Gloury relied in preparing the s.52 statement. His working copy of that report shows amendments and additions. Some of the amendments were apparently made in accordance with summaries provided to him. Other figures were adjusted with precision, but without any such explanatory notation. Some items were added. All the evidence shows that Mr Cooper was the personification of the first defendant. He did not give or call evidence. I infer that he provided the additional material to Mr Gloury. The form or forms in which he provided it is not clear.
Mr Gloury's file contains only a few documents: a copy of the s.52 statement, the working copy of Mr Cooper's report, and a performance record of the business (also in Mr Cooper's hand) current to the week commencing 12 April 1993. There are no copies of relevant extracts from books of account. But the working copy of the report perhaps suggests that books of account were provided to Mr Gloury; and certainly his certificate at the foot of the s.52 statement refers to the figures being in accordance with "the books of account maintained and information supplied to me by the vendor". Two things are clear. Any books of account seen by Mr Gloury have not been discovered - either by LPC (which did not take any part in the proceeding) or by Mr Cooper; nor has their absence been explained in evidence.
The s.52 statement contained the three representations which, as the plaintiff's case was finally presented, were relied upon as being untrue. They are the representations set out in paragraphs 5(p), (q) and (r) of the statement of claim.
Mrs Bennett gave evidence that, subsequent to the plaintiffs' inspection, they were pressed by Mr Serroni to act quickly. They did so. They took advice from their accountant. He showed them the material faxed to him by Mr Serroni on 22 April. He concluded that, upon the figures disclosed, the business could sustain the necessary level of borrowings (at least in the short term); and that it could provide a satisfactory return on capital and a reasonable return for the labour input which would be required of the plaintiffs. I am satisfied that this was what he told the plaintiffs.
Without further inspecting the premises the plaintiffs signed a contract to purchase the business. Dated 2 May, the contract fixed the purchase price at $195,000. Possession was to be given on payment of the whole of the purchase price. A deposit was payable immediately, and the balance on 28 June 1993. The parties agreed that the purchase price should be apportioned as to plant and equipment $170,000, and as to goodwill $25,000.
About three weeks before 28 June the plaintiffs moved to Rye, and settled in at rented accommodation. I accept their evidence that they rented accommodation, rather than living at the resort, because that seemed the most cost effective thing to do in light of the information they had been supplied as to occupancy rates - which must have been reflected in the revenue which the accommodation side of the business allegedly generated.
In the period of weeks before takeover the plaintiffs attended at the resort to learn the ropes.
The purchase was settled on 28 June 1993. At that time, according to Mrs Bennett, the missing pages in the guest register and restaurant diary had not been produced, despite further request. Moreover, further pages had been removed - pages relating to the period between 28 April and 28 June.
At the time when the plaintiffs took over the business, they also took over the lease of the premises. A deed of assignment of lease was executed. It is dated 28 June 1993. The rent then payable under the lease was $4,333.35 per month.
In order to make the purchase the plaintiffs borrowed $130,000 on the security of so much of their farm as they had retained and their house property at Lalbert. Sixty five thousand dollars was available from their own funds, this being the net proceeds of sale of the balance of the farming land which the plaintiffs had owned either solely or jointly.
According to Mrs Bennett's evidence, the business did not operate in the way in which the representations concerning revenue, outgoings and profit suggested would be the case. Some matters were immediately evident, some matters became evident with the passage of time. In the first category was the plaintiffs' discovery, soon after taking over the business, that the vendor had paid the chef $100 cash in hand each week. They took this matter up with their accountant. He told them that, if the additional money was to be paid, it must be put through the books. Mrs Bennett told me that the additional money was paid, and that it was put through the books. With add-ons, the cost to the plaintiffs was about $160 a week. In the second category was revenue - most particularly in respect of the restaurant, but also deriving from provision of accommodation. The plaintiffs' expectations concerning revenue had not been high for the winter months. But they became increasingly worried. Performance of the business during the summer period fell well short of expectations. That disappointing performance continued. It persisted although, according to Mrs Bennett, the plaintiffs themselves worked hard in the business; and although they retained the staff who had been employed by LPC. Mrs Bennett told me that the chef left in February 1994, but that his replacement was competent - not that it mattered, because restaurant trade was poor.
Mrs Bennett kept monthly records of income and expenditure. According to Mr Tomamichel, those records approximate the result that would have been arrived at had he prepared monthly accounts from source material. Viewed in retrospect Mrs Bennett's records show that - even excluding start up costs ($7,782), interest on borrowings and drawings by the plaintiffs - the situation was irretrievably bad (so far as hope of producing an all of year profit was concerned) by late 1993. Thus:
Income Expenses
July $12,784.35 $ 26,025.67 August $ 8,360.45 $ 22,266.22 September $14,537.00 $ 21,503.86 October $17,130.15 $ 34,826.71 November $17,224.15 $ 29,066.05 December $27,310.10 $ 29,760.32 Total $97,346.20 $163,448.83
The month of January, and the month of February to a lesser extent, were obviously months in which the plaintiffs hoped that everything would turn around. Mrs Bennett's records for those months make it crystal clear, if there was any doubt, that the business was doomed to a very substantial all of year loss. Thus
Income Expenses
January $30,696.80 $24,889.89 February $21,544.80 $27,606.10
The accumulated trading loss, excluding interest on the borrowing of $130,000 and on a trading overdraft, and excluding also start up costs and drawings by the plaintiffs, was thus some $66,357.
It is now pertinent to refer to the relationship between the plaintiffs and their banker, National Australia Bank (NAB). I have already referred to the fact that the plaintiffs had experienced very considerable difficulty with their farming operations for a number of years preceding 1993. It was in the early part of that year that they made various property sales which, no doubt together with proceeds of sales of grain, enabled them to clear their indebtedness to NAB. Then, in order to finance purchase of the business, they obtained a loan - in the form of a fully drawn advance - of $130,000. The facility was to expire on 31 March 1994. Security included the plaintiffs' house property at Lalbert and their remaining farm block. According to a schedule to the letter of offer (described in the letter as "the loan conditions form") the loan was to be "cleared from the progressive sale of assets". That was an obvious reference to the two security properties.
In addition to the $130,000 loan, NAB provided the plaintiffs with a working overdraft. Its limit was $10,000. By November 1993 the plaintiffs needed to increase that limit. The bank agreed to increase it to $30,000, only up to 31 January 1994. Under the heading "special conditions" the bank's letter of approval required provision of financial information and said: "It is important that the sale of the Lalbert properties are vigorously pursued to effect a sale as soon as possible and reduce level of debt accordingly". I interpose to note that Mr Bennett's evidence was that, both before and for a period after the purchase of the motel, the remaining farming land and the house property were on the market, although their sale was not actively pursued. Then, there being "no buyers around", he did not pursue the matter. His evidence was that he changed his mind. He thought that if the motel business and a sharefarming arrangement he had entered into with his brother-in-law went well, there should have been enough money produced to satisfy the bank and to keep the land. But he did not tell the bank about this change of mind.
Returning to the sequence of events, it is clear that the overdraft was not reduced to $10,000 by 31 January 1994. Indeed, by March 1994 the plaintiffs were apparently seeking to extend their overdraft, offering the chattels of the business as security. At that time, it seems, the plaintiffs were unable to meet interest payments on the fully drawn advance. They met with the NAB branch manager at Rye. He asked them to obtain updated trading figures. They consulted a local accountant, Mr Ambler. He prepared a trading statement which, although its heading suggested that it embraced the period up to 3 April, in fact extended only to mid March 1994. It was sent to NAB under cover of a letter dated 29 March 1994. It showed a trading loss, inclusive of interest, of $89,109. The statement made no provision for depreciation.
Thereafter the plaintiffs again met with an officer of NAB. They were told that no additional facility would be granted to them; and that the restaurant must be closed.
The plaintiffs did close the restaurant. It ceased to operate on 16 April 1994.
In April 1994 the plaintiffs' usual accountant, Mr Tomamichel, reviewed the trading performance of the business. His review showed the position to be consistent with that reported by Mr Ambler. The plaintiffs, after consulting with their accountant, decided to sell the business. They appointed Abel the selling agent. Mr Tomamichel prepared a s.52 statement. Dated 18 April 1994 it was a bleak document, showing a loss (for the period 28 June 1993 to 3 April 1994) of $83,449 excluding interest. That figure included provision for depreciation, but excluded interest.
Attempts by Mr Serroni on behalf of Abel, to sell the business got nowhere.
The plaintiffs were unable to pay their rent. Notice to quit dated 10 June 1994 was served upon them. They vacated the premises at the end of June 1994. There being no other buyer, they sold the business to the Stella interests for $60,000 - that is, by contrast with the sum of $195,000 that they had paid LPC about 12 months earlier. From the sale price was deducted arrears of rent. That was not the end of the debacle. The plaintiffs were unable to meet interest falling due on, or to repay the fully drawn advance; not clear the overdraft. NAB exercised its rights to sell the secured properties. They were sold by auction in February 1995. The sales were not advertised as mortgagee's sales, but it seems probable that the true situation was known or guessed at by locals. In any event, the house property was sold for $60,000, and the farming land for $136 per acre. The evidence shows, unequivocally, that the sale price of the house property was within the expected range for a home - albeit a large, well-constructed and well-appointed home - in a small country town which was in some decline. There was, on the other hand, competing evidence whether the sale price of the farming land was adversely affected by the sale being forced by NAB at the particular time. I shall later refer to that evidence.
The plaintiffs' claim more fully described
The plaintiffs by their statement of claim alleged that a large number of relevant representations had been made: some in the Stella s.52 statements, some in the LPC s.52 statement, some orally by Mr Cooper - the last of these being, in substance, repeated by Mr Serroni in his letter of 22 April 1993 to the plaintiffs' accountant. Dealing first with the case reliant on statute, they alleged that the representations were made by Mr Cooper and Abel (the latter by Mr Serroni) both personally and on behalf of LPC. In the case of Mr Cooper and Abel reliance was also placed upon the accessory liability provisions - s.75B(1) Trade Practices Act and s.31 of the Fair Trading Act. The representations were alleged to have been false, and to have induced the plaintiffs to enter into the agreement. The plaintiffs alleged that by reason of conduct in breach of s.52 of the Trade Practices Act and s.11 of the Fair Trading Act they had suffered loss and damage.
The plaintiffs alleged, further or alternatively to the statutory claims, that each of the defendants owed them a common law duty of care in making the various representations. They alleged that the duty was "to take reasonable care that the financial and occupancy details they supplied were correct". Each defendant was alleged to have breached that duty, whereby the plaintiffs suffered loss and damage.
The final way in which the plaintiffs pleaded their case was in the tort of deceit. It was alleged, as against all defendants, that some of the representations which were made were fraudulently false, and that they induced the making of the contract, whereby the plaintiffs suffered loss and damage.
The course of the trial
No appearance was filed on behalf of LPC. Nor, upon careful examination, was a defence purportedly filed on its behalf. It took no part in the trial. The plaintiffs proved that it has a continuing corporate existence.
The second defendant appeared in person. He took virtually no active part in the trial. He did ask Mrs Bennett a few questions. At the conclusion of the plaintiffs' case he announced that he would neither give nor call evidence. He made a short closing address, a good deal of which related to matters concerning which it might have been expected that he would have gone into evidence.
The third defendant was represented by counsel. At the conclusion of the plaintiffs' case senior counsel for that defendant sought to make a submission that his client had no case to answer. I permitted him to make that submission; and upheld it. My ruling touched upon a number of matters pertinent to the plaintiffs' case against all defendants. I shall not repeat what I said in that connection. These reasons should be read, so far as is relevant, in conjunction with that ruling.
The plaintiffs' case as ultimately advanced against the first and second defendants
After I had ruled upon the no case submission put for the third defendant, counsel for the plaintiffs summarised his clients' claim against LPC and Mr Cooper succinctly. He relied only upon the representations set out in paragraph 5(p), (q) and (r) of the statement of claim. Thus:
"(p) income of the business during the period 15 July, 1992 to
28 February, 1993 was $227,696.00;(q) expenses of the business during the period 15 July, 1992 to 28 February, 1993 were $113,060.00; (r) nett profit of the business during the period 15 July, 1992 to 28 February, 1993 was $75,573.000."
So far as the statutory claims were concerned, counsel submitted that the representations were made by LPC; and that Mr Cooper, by virtue of s.75B(1) of the Trade Practices Act and s.31 of the Fair Trading Act, had been involved in the contravention of the operative provisions of the two Acts.
According to counsel's argument the plaintiffs suffered loss and damage by reason of the contravening conduct. They entered into the agreement, and had in consequence suffered various kinds of loss and damage.
So far as the common law claims were concerned, counsel accepted that the plaintiffs could not successfully contend that the allegedly false representations were both fraudulently and negligently made. The evidence showed, he submitted, that the conduct was fraudulent, not negligent. The plaintiffs really asked me to conclude that LPC's financial performance had been cold-bloodedly distorted, and deliberately concealed, by Mr Cooper. A claim founded in negligent misstatement could hardly sit with that scenario.
Were the impugned representations untrue?
The three representations relied upon by the plaintiffs were undoubtedly made in the LPC s.52 statement. The first important question to be decided is whether the plaintiffs have shown that the representations were untrue. Whilst the representations were discrete, they had an obvious interrelationship. The truthfulness or otherwise of the representations concerning revenue and expenditure necessarily impacted upon the represented profitability of the business. It was the represented profitability which was critical to Mr Tomamichel's favourable assessment of the business, an assessment conveyed to the plaintiffs. It is convenient, in the circumstances, to consider the disputed truthfulness of the three representations at the one time.
The representation that business revenue (or income), between 15 July 1992 and 28 February 1993 totalled $227,696 is compatible with the summary compiled by Mr Cooper at CB127. Broken down into accommodation and restaurant income the document at CB127 shows average weekly accommodation revenue of $2,578.75, and average weekly restaurant revenue of $4,321.14. Those figures may be contrasted with figures derived from the Stella s.52 statements and with the plaintiffs' trading figures. A comparison of the revenue of a business in the hands of a representor and a representee may provide evidence that a representation concerning income was untrue: see Kizbeau Pty Limited & Ors v. WG & B Pty Limited & Anor (1995) 184 C.L.R. 281 at 291 and the authorities cited at footnote (15). It may be, by analogy, that a comparison of the revenue of a business in the hands of the representor and a previous owner could provide such evidence. The represented figures, then, of Stella, and the plaintiffs' trading results were as follows:
Accommodation Restaurant
Stella $2,687 $6163 Plaintiffs (to 15 March 1994) $2,387 $1,934
(to 3 April 1994)
$2,363
$1,934 (operation ceased 16 March 1994 - so unchanged)
The plaintiffs' average weekly revenue from provision of accommodation was not much less than that alleged in the LPC s.52 statement. It was about 92% of the reported LPC figure. The periods to which the two sets of figures related were not much different. Reported Stella revenue exceeded the LPC figure. Again, not by much. But in any event the Stella statement addressed a period remote in time; and for this and other reasons the plaintiffs' accountant, Mr Tomamichel, did not regard the Stella s.52 figures as a reliable guide to the recent performance of the business; or to the performance of the business that should be anticipated.
Looked at discretely, a comparison of the accommodation component of LPC's reported revenue and the revenue generated by the plaintiffs from that source does not tell against the truthfulness of the LPC representation. But the plaintiffs relied upon other matters in this connection. I shall refer to them shortly.
The other component of LPC's stated revenue was revenue derived from the restaurant operation. The following comparisons of average weekly revenue may be made:
Stella (27 August 1991 - 14 March 1992) : $6,165.48 LPC (15 July 1992 - 28 February 1993) : $4,321.14 Plaintiffs (1 July 1992 - 15 March 1992) : $1,934.55
The difference between LPC's figure, and that of the plaintiffs', is obviously very great. The latter is only about 45% of the former. Accepting the proposition that a direct comparison between the Stella figure and the plaintiffs' performance would be unreliable, it may be observed that the LPC figure was substantially less than that reported to the Stellas. True it is that the restaurant was new when they operated it. True also that the Stella performance excluded a number of quiet months in the year. It remains true that LPC's represented weekly restaurant revenue was only 70% of that reported by the Stellas. That might, I think, support a view that the restaurant - which, it will be remembered, was part of a complex in which the motel units were self-contained, with their own kitchens - was losing any novelty value which it had with local people. Absent other facts, it might, I think, then be concluded that the plaintiffs' trading results simply showed a quickening descent into disaster. But it might alternatively be concluded, I think, that the difference between LPC's reported restaurant revenue and that achieved by the plaintiffs provides some prima face evidence that the statement as to LPC total revenue was untrue. That leads into the question whether other pertinent matters were disclosed by the evidence; and, if so, the import of those matters.
I turn, before embarking upon that enquiry, to a comparison of the level of expenses reported by LPC and the expenses which - I am satisfied - were incurred by the plaintiffs. There seems no reason, in principle, why the expenses incurred by a business in the hands of representor and representee might not provide evidence that a representation concerning expenses made by the representor was untrue. There seems to me to be no logical distinction between revenue and expenses in that connection - provided always that the court satisfied itself that the comparison was a true one. The same observation may be made, I think, in respect of a comparison of the profitability of a business in the hands of representor and representee; a matter which I shall also consider.
According to the LPC s.52 statement, expenses for the period 15 July 1992 to 28 February 1993 - excluding interest, motor vehicle expenses and depreciation - were $113,060. For a 33 week period, then, average outgoings were said to be about $3,426 per week. The overall wages component was said to be $48,610. Net profit, exclusive of the items to which I referred a moment ago, was stated to be $75,573.
Mr Tomamichel prepared accounts in respect of the plaintiffs' operation of the business for the period to 3 April 1994. Based upon those accounts he prepared a section s.52 statement. According to that statement expenses (I exclude interest, motor vehicle expenses and depreciation) were $187,259 - an average of some $4,681 per week. The overall wages component (I exclude drawings by the plaintiffs and wages paid to entertainers who from time to time worked at the restaurant) was stated to be $46,975; an average of $1,174 per week. (I have excluded wages paid to entertainers in order to make a fair comparison between the plaintiffs' wages bill and LPC's reported wages bill. LPC, on the evidence, did not engage entertainers to perform at the restaurant). The business loss incurred by the plaintiffs, again excluding interest and depreciation, was $58,716.
I make these observations: First, comparable expenses incurred by the plaintiffs were much greater than those reported by LPC - on average, by more than $1,250 per week. Second, in considerable part this difference resulted from the plaintiffs' decision to spend large amounts on advertising - in all $23,700, an average of nearly $600 per week. Third, in part this difference was attributable to items not included at all in LPC's s.52 statement: insurances ($4,094) and equipment rental ($2,928). LPC's all of year figures showed that it incurred such expenditures. The s.52 statement seems not to have been prepared on an accruals basis. Fourth, the difference was in further part attributable to moneys expended by the plaintiffs in making application for a full liquor licence ($3,946). Fifth, the average weekly wages paid by the plaintiffs were a good deal less than those reported by LPC in its s.52 statement. Sixth, LPC's reported profit and the plaintiffs' loss were in part a consequence of the differences in reported expenditure, and in part a consequence of the large difference in income ascribed to the operation of the restaurant.
A number of questions emerge from the observations which I have just made. Does the plaintiffs' wages bill support the truthfulness of LPC's s.52 statement concerning wages? Does other evidence controvert the truthfulness of LPC's statement concerning wages? Was LPC's s.52 statement untrue because it did not refer to liabilities which should be regarded as having been in part accrued as at 28 February 1993?
The plaintiffs, by their conduct of the case, put the first and second of those questions to the forefront. They attacked the reliability of LPC's statement so far as it concerned wages. In determining whether they made good that attack, as is the case with the plaintiffs' attack upon the revenue allegedly generated by LPC, it is necessary to consider whether - performance comparisons apart - other pertinent matters were disclosed by the evidence; and, if so, then the import of those matters.
It is, in my opinion, clear that the evidence did disclose a number of pertinent matters, performance comparisons apart, touching upon LPC's representations as to revenue and expenses. Those matters tell against the truthfulness of the representations.
First, relevant pages in the restaurant diary and the guest register were not available for inspection at the outset, at any time before the contract was signed, before settlement, or when requested from time to time thereafter.
The uncontradicted evidence is that pages were missing as at 20 April 1993 and that more pages were removed in the period between that date and the date on which the plaintiffs took possession. Those records could be expected to have revealed the detail of accommodation and restaurant use. That information could be expected to have provided some verification - or alternatively denial - of the revenue asserted by the LPC s.52 statement. Mr Cooper told the plaintiffs, on various occasions, that the missing pages were with LPC's accountant. The pages were not discovered. Neither Mr Cooper nor the accountant gave evidence. In my opinion an inference adverse to the first and second defendants (simply 'the defendants') is justified in those circumstances - an inference that the contents of the missing pages would not have helped the defendants' case.
Second, no books of account of the business were discovered. According to Mr Gloury's certificate such books did exist. They were not in the file maintained by Duesburys, LPC's regular accountants. Mr Cooper gave no evidence as to their whereabouts. Such books could be expected to have verified, or denied, the representations which were made as to revenue and expenses. Their unexplained absence, particularly when viewed in combination with the unexplained failure of the defendants to produce the missing pages from the guest register and restaurant diary, justifies my drawing an inference that the contents of the books of account would not have helped the defendants' case.
Third, Mr Cooper created contradictory documents concerning revenue generated by the business. The document at CB127 and the document which forms part of Exhibit K differ so far as they report restaurant revenue for the period between weeks commencing 1 March and 12 April 1993. There are five variations - three of $1,000 and two of $500 - a total difference of $4,000. It is the fact that up to the week commencing 1 March 1993 no such discrepancies are revealed. But the defendants offered no explanation for the revealed discrepancies. They have the effect, in a general way, of casting doubt on the reliability of the figures whose total is the amount set out in the s.52 statement.
Fourth, LPC was trustee of the Moonlight Bay Unit Trust. Financial reports for the trust were prepared by Duesburys for the year ended 30 June 1993. A tax return was prepared. It was based upon those reports. Total income received was noted as being $235,404, purchases $55,498 and expenses (including interest of $25,495) $191,182. The wages component of expenses was said to be $57,619. A trading loss of $11,276 was disclosed.
Comparing revenue set out in the s.52 statement and as asserted in the tax return, income between 28 February 1993 and 30 June 1993 totalled only $7,707.60. The tax return, showing all of year revenue of $235,404 may also be compared with the document at CB127, showing income as at the week commencing 12 April of $260,693.95; and the document forming part of Exhibit K, showing income (to the same time) of $263,673.95.
Again, according to the financial reports prepared by Duesburys, all of year expenses (I exclude borrowing costs and interest - which were not taken into account in the LPC s.52 statement) were $161,587. According to the s.52 statement, comparable expenses up to 28 February 1993 were $113,060. If that be so, between 28 February and 30 June 1993 expenses increased by $48,527 (indeed, wages alone increased by $9,009) whilst income increased by only $7,708 ($235,404 less $227,696). The defendants gave no evidence about these very significant anomalies. Certainly they required explanation. Focusing for the moment upon revenue, the anomalies cast grave doubt upon the reliability of the information conveyed by the s.52 statement.
Fifth, there is evidence that Mr Cooper has stated (or admitted) that the Duesburys reports and tax return did not include cash takings of $51,417. The defendants, by their failure to give evidence, left Mr Cooper's out of court statement (or admission) unverified and unexplained. There is no clear evidence, if cash takings were in truth unreported in the tax return, whether such takings were or were not included (for the period up to 28 February 1993) in the s.52 statement.
Sixth, consonant with his statement to Mrs Bennett that he paid cash in hand wages to the chef, Mr Cooper created documents and stated (or admitted) out of court that he paid cash in hand wages to a number of LPC's staff. The document at CB128-130 purports to detail cash in hand wages - the all of year total being $21,598.70.
Duesburys file contains, I think, a good deal of contradictory material in respect of wages. LPC's copy tax return notes wages at $57,619. Working papers show that there were group certificates for amounts totalling $48,481.90, and "cash" of $10,053.60 (a total of $58,535.50). The group certificates were noted as including a certificate for Mr Cooper ($8,095). The "cash" component appears to have been largely sorted out by preparation of a group certificate for Mrs Brolly (Mr Cooper's then partner - both business and personal) in an amount of $8,245. The certificate, I note, was signed by Mrs Brolly. Then there is a WorkCover earnings reconciliation for 1992/93. It is dated 17 November 1992 - apparently in error. The figure shown is $68,529.70.
It seems very clear to me, upon the question of wages, that material in the s.52 statement, in LPC's tax return, and in Duesburys' file - bearing in mind also Mr Cooper's statement to Mrs Bennett, and his other assertions (written and oral) about payment of cash in hand wages - is both contradictory and unsatisfactory. That state of affairs remains unexplained by the defendants.
More than one purpose is served by payment of cash in hand wages. The employee avoids payment of tax. The employer avoids or minimises payment of imposts such as WorkCover premiums and superannuation contributions.
It seems to me improbable that the defendants would have reported reduced revenue to LPC's accountant yet at the same time included cash in hand wages for which there were no matching group certificates. It seems to me more likely that the defendants would have reported details to Duesburys which excluded both cash takings and cash in hand payments. The former have been said to total $51,417; the latter $21,598.70. If both figures were unreported, the substantial difference was a figure upon which no tax would have been paid by anyone. (On this hypothesis I note that, if both figures had been included, LPC would have traded at a profit).
The probabilities are, I consider, that LPC's all of year wages were $79,217.90 (that is, $57,619 plus $21,598.70). That is a weekly average (for 50 weeks) of about $1,584. That compares with the 33 week average (including the busy Christmas period) of $1,273 set out in the s.52 statement.
Provisionally, then, it seems probable that the s.52 statement did understate wages paid by LPC. It can be objected, however, that the plaintiffs' average weekly wages bill - even replacing cash in hand payments to the chef with payments put through the books - was less than that set out in LPC's s.52 statement, and less still than the weekly average of $1,584 which I have postulated. Further, it may be objected that the total wages bill which I have arrived at included drawings ascribed to Mr Cooper and Mrs Brolly.
On balance, I do not consider that such objections should prevail. If it be accepted that the LPC's revenue was of the order that Mr Cooper has asserted - that is, $286,821 ($235,404 and $51,417), or even if it was short of that total but significantly more than that achieved by the plaintiffs, then it could be expected that LPC's expenses, including wages, would have been a good deal higher than those incurred by the plaintiffs. The restaurant business, particularly, performed very poorly in the plaintiffs' hands. Moreover, it is mere assertion that LPC's wages bill included drawings by Mr Cooper and Mrs Brolly. Mrs Brolly signed the two group certificates, which were dated a considerable time after the end of the 1992/93 financial year. I add this: I accept Mrs Bennett's evidence that Mr Cooper told her, only after the sale had been completed, that he paid cash in hand to the chef. One would expect such a thing to be said when relevant documents did not disclose the true situation.
I earlier hypothesised that the defendants were likely to have misreported both revenue and expenses to Duesburys, rather than revenue alone. It does not follow, on the other hand, that if expenses were misreported so also was revenue. As I pointed out, there are advantages both for employee and employer in payment of cash in hand wages.
I am nonetheless persuaded, on balance, that LPC did overstate its revenue in the s.52 statement. Revenue stated in the tax return was incompatible with the reported revenue as at 28 February 1993. Inconsistent records of revenue prepared by Mr Cooper raise suspicions. I am satisfied that the witnesses Mr and Mrs Howard attended the restaurant on a Saturday night in late January 1993 (not January 1992, as they mistakenly asserted) that it was empty apart from their party; and that Mrs Howard overheard Mr Cooper telling a Mr Marks that the business was "going bad" and that he had put it on the market. The plaintiffs' trading results suggest that restaurant income, particularly, was overstated. The missing pages from the guest register and the restaurant diary, and the unexplained absence of any LPC books of account have led me to infer that the contents of such records would not have assisted the defendants. In those circumstances I more readily draw the inference, from the evidence given, that revenue was overstated in the s.52 statement.
In concluding that LPC overstated its revenue I have not ignored attacks made in cross-examination by counsel for the third defendant upon the capacity of the plaintiffs to manage this business, and upon the way in which they actually conducted it. Many allegations were made. Most of them were rejected by the plaintiffs. Further, Mrs Howard gave evidence which was generally supportive of the way in which the plaintiffs conducted the business. She was, in my opinion, a frank and impressive witnesses.
In my opinion the evidence shows that the plaintiffs were not well-equipped, by training or skills, to operate this business. Mrs Bennett is, I think, personable. I consider that she would have presented well at the "front desk" of the motel. No doubt she was capable of taking restaurant bookings and making customers feel at home. On the other hand, I think that the burden of running the restaurant was very much cast upon the staff - a young chef and an even younger receptionist/waitress. The chef selected the menu, ordered the food, cooked it and took bookings as well. That is not to say that Mrs Bennett was not consulted about what was or should be done; but rather that she did not have the expertise to direct operations. Her lack of experience on the managerial side of the hospitality industry was exemplified, I think, by there being a relative absence of cost control in respect of restaurant operations and by the almost frantic way in which a large amount of money was put into an advertising campaign.
My firm impression is that Mr Bennett had almost no input in conducting the business. His evidence portrayed a man not happy with the move from the broadacres of the Wimmera to a small motel and restaurant on the Mornington Peninsula. His contribution to the business appears to have been some labouring work.
The plaintiffs were cross-examined to suggest that the premises were left unclean and untidy, that a small dog was permitted to roam through the reception area, that the pool was not kept clean, that garden areas were not kept up to scratch, that units were not fully supplied with needed accessories, that the hours of opening the restaurant were erratic, and that they did not sufficiently attend the premises and were poor hosts. The plaintiffs admitted that at one stage a small dog was kept on the premises (but not in areas open to public access). They admitted that, after the restaurant closed, they left the motel unattended after 5.30 or 6.00 p.m. (a little later at weekends). Otherwise they denied the allegations to which I have just referred. Their denials are the evidence. It was suggested by counsel for the third defendant that evidence would be adduced to controvert what the plaintiffs said. Prospective witnesses were identified - expressly or implicitly. The second defendant might equally have adduced any such evidence. No such evidence was adduced.
Further in concluding that LPC overstated its revenue I have not ignored evidence that the local RSL club was substantially renovated, work being completed in August 1993. Counsel for the third defendant suggested in cross-examination that the plaintiffs' poor trading results in the restaurant was the result of business being lost to the RSL club. Mrs Bennett, in substance denied this. She said that the restaurant was "a completely different operation to the RSL". She denied that the two businesses were in direct competition. She said that other restaurants in Rye were also busy. Mr Bennett's denials stand as the evidence. It would be mere speculation to accept the thrust of the questions in preference to the witness's answers.
In the event, I conclude that untrue representations were made in the LPC s.52 statement in respect of revenue, expenses, and thereby profit. It is not possible to precisely define the extent of the misrepresentation concerning revenue. It is improbable that the revenue to 28 February was as low as an all of year total of $235,404 might suggest. The reported revenue from accommodation was probably a little inflated; the reported revenue from operating the restaurant more so. Revenue derived by the plaintiffs up to early April 1994 from provision of accommodation probably reflects LPC's true performance. But revenue derived in that period by the plaintiffs from restaurant operations very probably reflects in part the plaintiffs' lack of training and skills. Also, probably, it reflects a progressive decline in restaurant business - disclosed by a comparison of the Stella, LPC and plaintiffs' figures. Doing the best I can, I consider that LPC probably derived from the operation of the restaurant in the relevant period an amount mid way between its reported revenue and the revenue actually earned by the plaintiffs from that source.
On the expenditure side I have already indicated the extent of the likely understatement of wages. I add this: although the matter need not be decided, it is likely that the failure of the s.52 statement to set out accrued expenditure also constituted a misrepresentation.
The misrepresentation of income and expenditure were significant in degree. They impacted in a cumulative way upon the representation concerning profit.
Involvement in a contravention
There is no doubt that LPC was relevantly the maker of the s.52 statement. It engaged in conduct in contravention of s.52 of the Trade Practices Act and s.11 of the Fair Trading Act.
The plaintiffs contended that Mr Cooper was a person involved in a contravention of the two provisions. In ruling upon the third defendant's no case submission, I referred to the meaning applied to s.75B(1)(a) and (c) by the High Court in Yorke and Anor v. Lucas (1985) 158 C.L.R. 661. I incorporate that part of my ruling in these reasons. I do not doubt that, in the present case, Mr Cooper's conduct fell squarely within the meaning given those provisions. The evidence shows that he was the personification of LPC. It shows that the impugned representations were made partly on the basis of information which he created in documentary form; and partly on the basis of information which, inferentially, he supplied in conference with Mr Gloury on 21 April 1993. Moreover, the evidence strongly suggests that the missing pages of the guest register and restaurant diary went missing by the intervention of Mr Cooper. It is true that Mr Cooper did not make the impugned representations - in the sense that he did not personally communicate them to the plaintiffs. But neither of the statutory provisions appears to be incapable of operating in such a case.
Inducement
There is clear evidence that the plaintiffs were induced to enter into the contract by the impugned representations. No doubt they relied substantially upon Mr Tomamichel's advice; and also upon the advice of a bank manager to whom they supplied the Stella and LPC s.52 statements. Mr Tomamichel's advice was founded on the LPC statement as to revenue, expenditure and, most important of all, profit. I consider it very likely that the bank manager's advice was founded upon the most up to date information with which he was provided - that is, the LPC statement.
Although the plaintiffs substantially relied upon professional advice in deciding to enter into the contract, I am satisfied that they also independently relied upon the LPC statement in doing so.
There was cross-examination designed to show that the plaintiffs were so beguiled by the appearance of the motel that they entered into the contract regardless of the LPC s.52 statement. I do not doubt that the plaintiffs - particularly Mrs Bennett - were very impressed at the outset by the appearance of the premises. But I do not accept that their decision to buy was founded on that consideration. I am well satisfied that their decision was founded upon the attractive figures set out in the LPC s.52 statement.
No time bar pleaded
The plaintiffs certainly suffered loss or damage by reason of breach of the statutory provisions. Its qualification is another matter. The third defendant pleaded the time bar provided by s.82(2) of the Trade Practices Act and s.37(2) of the Fair Trading Act. In ruling upon that defendant's no case submission I noted that there might well be a strong case for arguing that the plaintiffs' statutory claims were time-barred. I observed also that the question of onus of proof might be of importance. In the event, I did not rule upon that aspect of the third defendant's no case submission.
The first defendant has filed no defence. The defence of the second defendant does not plead a time bar. I pointed this out to Mr Cooper when he was making his final submission. He made no application to amend his defence. In my opinion it was for the defendants to plead and make out a time bar defence. There is no such issue before the court as between the plaintiffs and the first and second defendants.
Deceit
In the alternative to the statutory claims the plaintiffs bring a claim at common law in deceit against the first and second defendants. They plead that the impugned representations made by those defendants, were false, and were made well knowing that they were false or recklessly not caring whether they were true or false. They plead that the representations were made with the intention that the plaintiffs be induced to enter into the contract.
I am satisfied that the plaintiff has made out each aspect of those allegations against the first defendant. The evidence compels a finding that the representations were known to be false by the maker. That is a finding I make notwithstanding the weight of the burden borne in respect of an allegation of fraud; as to which see Briginshaw v. Briginshaw (1938) 60 C.L.R. 336 at 361-362 and Protean (Holdings)
Ltd (Receivers and Managers Appointed) & Ors v. American Home Assurance Co
[1985] V.R. 187 at 234 per Fullagar, J.
So far as the second defendant is concerned, the only possible point of debate is this: he was the author of the material which was set out in the representations made by the LPC s.52 statement. But he did not himself make the representations directly to the plaintiffs. However, the cases show, in more than one context, that it is unnecessary that the defendant make the statement directly to the plaintiff:
Commercial Banking Company of Sydney Limited v. R.H. Brown & Company
[1971] 126 C.L.R. 337 particularly at 343 per Menzies, J., also at 346-347 per Gibbs, J; Lake Koala Pty Ltd v. Walter [1991] 2 Qd R. 49 at 54. In the present case it is quite clear that the information which was the genesis of the representations was provided by Mr Cooper to Mr Gloury in order that, a s.52 statement containing that information having been prepared, it should be delivered to the plaintiffs (or their accountant) with the intention that the plaintiffs act in reliance upon the relevant representations.
It might perhaps have been argued by Mr Cooper, but it was not, that insofar as he provided the accountant with the information which was at the heart of the representations, he acted only as the servant or agent of LPC - that is, he did not make the representations for himself. Had that argument been raised, I would have rejected it. The evidence strongly suggests that Mr Cooper treated the company as his alter ego; that he, having caused LPC to be set up as trustee of his family trust, in substance conducted the business of the resort without regard to the company's existence (save where tax considerations intervened). He was, I should add, a creditor of the company, thereby having an interest in effecting the sale of the business.
Damages
In most cases, where a claim for damages is brought pursuant to s.82(1) of the Trade Practices Act for a breach of s.52 of that Act, the rules for assessing damages in tort are the appropriate guide. Prima facie, the measure of damages arising from the purchase of a business as a result of a misleading statement is determined by reference to the difference between the value of the business at the date of purchase and the price paid. In determining the value of the business at the date of purchase the court must take account of any relevant events occurring after that date. The prima facie approach to measurement does not deny that a purchaser who has been misled may be entitled to consequential loss which flows directly from reliance upon impugned representation(s). The way in which consequential loss may be compensable was illustrated by Beaumont, J. in Corbidge v. Bakery Fun Shop Pty Ltd (1984) A.T.P.R. 40-493 at 45,688. There is an analogy between the measurement of damages under the statutory provisions and the measurement of damages in the case of the tort of deceit. In the latter case direct consequential loss is compensable, at least if it is foreseeable. In support of these propositions I refer generally to Gates v. City Mutual Life Assurance Society Ltd (1986) 160 C.L.R. 1 particularly at 6-7, and 11-14, Wardley Australia Ltd v. Western Australia (1992) 175 C.L.R. 114, Kizbeau, op cit, particularly at 291, Gould & Anor v. Vaggelas & Ors (1985) 157 C.L.R. 215 per Gibbs, C.J. at 220-222, Brennan, J. at 254-255 and Dawson, J. at 265- 267.
What I have said about damages in connection with a claim brought pursuant to s.82(1) of the Trade Practices Act applies equally, I think, in a claim brought pursuant to s.37(1) of the Fair Trading Act. What I have said about damages in connection with a s.82(1) claim has also touched upon the approach to assessment of damages in a case of deceit. I must now apply those principles to the present case.
By further and better particulars of their statement of claim, dated 16 April 1997, the plaintiffs claimed damages which I paraphrase as follows:
(1) difference between the true value of the business at the
date of purchase and the price paid - $135,000;(2) legal costs in connection with purchase of business -
$2,423;(3) costs of acquisition of liquor licence - $3,946; (4) trading losses (excluding depreciation) -
1992/93 $ 7,620 1993/94 $ 78,814 1994/95 $18,255;
(5) loss of profits - $105,030; (6) costs of rental accommodation - $7,272; (7) additional accounting costs - $6,184 (8) loss on forced sale of remainder of farm and houseblock
at Lalbert - amount unspecified;(9) loss of earnings or return on funds - amount unspecified
In his final submissions counsel for the plaintiff did not pursue items (5) or (9). He submitted, however, that in lieu of the claim for loss of profits made by item (5) I should allow the plaintiffs an amount for alternative earnings foregone. He suggested a figure of $25,000 in the case of each plaintiff. He contended that the evidence showed item (7) to be a larger amount then the sum claimed. Concerning item (8), he quantified the loss on sale of the remainder of the farm at $41,856 (the difference between forced sale at $136 per acre and value at a time of a sale chosen by the vendor of $200 per acre). He conceded that the evidence did not support a loss resulting from the forced sale of the house property.
Mr Cooper's final submissions did not, unfortunately, assist me in resolving the question of damages. He submitted only that he did not believe any damages should be awarded against him.
I shall deal with the plaintiffs' asserted entitlement to damages in the item order set out above. First, then, item (1). It flows inevitably from my conclusion that LPC's s.52 statement inflated the revenue of the business and deflated the expenses of the business that profitability of the business was less than was represented. It does not follow, however, the business was wholly unprofitable; nor does it follow that the performance of the business in the plaintiffs' hands was a secure guide to the true performance of the business in LPC's hands. Indeed, I have concluded that factors personal to the plaintiffs played a part in the disastrous performance of the business in their hands.
There was no evidence that the price paid for the business was founded upon some specific level of profitability - for example, expressed as a percentage of the purchase price, or as a percentage of gross revenue. Rather, Mr Tomamichel considered whether the asking price could be afforded by the plaintiffs having regard to the need that they achieve something better than mere wages for their investment of capital, and having regard to the cost of funding borrowings (at least in the short term). In the circumstances, profitability does not give a clear guide to establishing the value of the business at the time of purchase. But it can be said that if $195,000 was a fair value for the business based upon the profitability asserted in the s.52 statement, then the true value must have been less if the true profitability was less.
One way of approaching the matter is this: the s.52 statement postulated a profit of $2,290 per week on revenue of $6,900 per week, cost of sales of about $1,184 per week and expenses of $3,426 per week. Those expenses excluded interest, motor vehicle expenses and depreciation. Looked at crudely, net profit (excluding those items) was about 33% of revenue. Annual net profit (excluding those items) could be extrapolated to about $119,000. On that extrapolation, an assumed fair selling price of $195,000 meant that annual net profit was about 61% of the selling price. But if the true situation, in accordance with findings I have earlier made, was that accommodation revenue was a little overstated (the plaintiffs' performance reflecting LPC's true performance) and if restaurant revenue was in truth midway between what LPC represented and what the plaintiffs achieved, then LPC's weekly revenue would have been about $5,500; cost of sales (about 17% of revenue) approximately $935 per week; and weekly expenses, adjusted for understatement of wages, about $3,476 - those figures yielding a weekly net profit of about $1,100 - annually, about $57,200. If annual net profit were taken to be 61% of a fair selling price, then upon the hypothesis just discussed a fair selling price would have been about $94,000.
There are a number of objections to the above approach. It involves taking LPC's figures for a 33 week period (including the busy season) and extrapolating them over 50 weeks. It assumes that, on the figures represented by LPC, the sale price of $195,000 was fair and reasonable. It ignores the fact that the historical value of the chattels was $275,000 and that their value was fixed at $170,000 in the contract made between LPC and the plaintiffs. It takes no account of accrued expenses not adverted to in the s.52 statement. I doubt that these are all the possible objections. That said, the approach set out above is not, I think, without logic. It reflects my opinion that the plaintiffs were in part the cause of the disastrous performance of the business. It reflects also the fact that, shorn of a business operating profitably, chattels have a much discounted value - as the plaintiffs learned, to their cost.
In the event, I conclude that the plaintiffs are entitled to damages under item (1), in an amount of $101,000 ($195,000 - $94,000).
Item (2): In my opinion the plaintiffs would not have purchased the business if its net profitability (excluding consideration of interest, motor vehicle expenses and depreciation) was only about $57,200 annually. That would not have enabled them to earn reasonable wages after interest, without more, was taken into account. I am sure that Mr Tomamichel would have advised against purchase in those circumstances; and that the plaintiffs would have taken his advice. I would allow item (2), whose quantum was proved.
Item (3): The plaintiffs took what in my opinion was a sensible - and, insofar as it may be necessary, a foreseeable - course in acquiring a full liquor licence. Comments had been made by clients and potential clients which suggested that such a licence would be an advantage. The overall performance of the business was obviously dependent upon the success of the restaurant. I consider that item(3) should be allowed. The evidence of Mr Tomamichel proved the amount of $3,946.
Item (4): The plaintiffs proved that they suffered the following total trading losses:
1992/93 $ 7,882.46 1993/94 $111,717.26 1994/95 $ 86,006.91 $205,606.63
Those losses included provision for depreciation and loss on sale of chattels totalling, in all, $100,915. The plaintiffs did not contend that those items should be included in their claim for damages for trading losses. The total amount which they claimed under this head was $104,689.
There is no doubt that the plaintiffs suffered trading losses amounting to the sum claimed. The authorities show that such a loss may be compensable; but care must be taken to ensure that there is no doubling up (for unprofitability will or may bear on the difference between the price paid for a business and its true value at date of purchase), and that buyers are not rewarded for their ineptitude.
In the present case, I have concluded that the plaintiffs' lack of relevant training and skills contributed to the poor performance of the business. In assessing the true value of the business I postulated that in LPC's hands it yielded an annual profit of about $57,200 - excluding interest, motor vehicle expenses, depreciation, and accrued expenditure not set out in LPC's s.52 statement. Allowing for interest, motor vehicle expenses and such accrued expenses, but not for depreciation or drawings by the operators, a smallish profit might have resulted had the plaintiffs conducted the business exactly as LPC had done. On the other hand, some additional expense incurred by the plaintiffs was not foolish (eg: cost of application for full liquor licence); and the substantial expenditure on advertising was an understandable product of the plaintiffs' attempts to generate revenue and profitability of the magnitude that had been represented. Such expenditures could be expected to have driven the trading result into loss.
I consider, on balance, that the plaintiffs are entitled to some damages under item (4). It is not possible to be precise in fixing upon a figure. Taking account of all the competing considerations, I consider that I should allow $40,000. That includes most of the claimed losses for 1992/93 and 1994/95 and a smallish assumed loss for 1993/94.
Item (5): I consider that the claim pursued under this heading, developed only in counsel's final address, ought not be allowed. It was a claim belatedly formulated. It was very different in type to the claim which the defendants came to court to face. Whilst I heard what the plaintiffs' counsel had to say upon the matter, no application was made to raise, formally, the claim sought to be pursued. It would be unfair to the unrepresented second defendant to permit the plaintiffs to rely upon such a claim. For that reason alone I would not allow it. Further, no evidence was advanced in respect of it. The circumstances are not such that an award of damages could be made in the plaintiffs' favour in the absence of evidence directly touching upon issues raised by that claim.
Item (6): I am satisfied that the representation as to revenue, which interrelated with what was said by Mr Cooper about occupancy levels and with represented profitability, was the reason why - on Mr Tomamichel's advice - the plaintiffs rented accommodation away from the resort rather than living in one of the units. The rental was $606 per month, and the period for which the premises were leased was about 12 months. In my opinion the cost to the plaintiffs was a direct and foreseeable consequence of the impugned representations. The fact that, as it transpired, the plaintiffs might have a suffered lesser loss overall by occupying one of the units does not deny the validity of their claim, which I allow at $7,272.
Item (7): The plaintiffs would have incurred costs in connection with the investigation of this business opportunity whether or not the investigation had resulted in advice that they should purchase the resort. So I will not allow accounting costs in that connection. But it is proper to allow costs incurred by the plaintiffs for advice and assistance given them by their accountant in setting up and conducting the business, and in connection with its disposition and the necessary aftermath. Mr Tomamichel's evidence at T642-649 leads me to allow a rounded off figure of $2,000 in respect of this item of the claim.
Item (8): The plaintiffs' remaining farming land was sold on the direction of NAB in February 1995. The price realised was $136 per acre. The land was sold because the plaintiffs could not meet interest and repayment obligations in respect of borrowings which were made to purchase and then to run the business. There is a direct link between the making of the impugned representations and the making of borrowings to finance the purchase of the business. There is a link between the impugned representations and the plaintiffs' need for an overdraft - even though I have concluded that the trading losses incurred by the plaintiffs were in considerable part attributable to their lack of relevant training and skills.
It is one thing to say that the impugned representations can be linked with the borrowings made by the plaintiffs. The important question, however, is whether, upon an assumption that the plaintiffs suffered loss by reason of the forced sale, that loss was by conduct of the defendants in breach of statute; or was sufficiently causally connected with the established deceit. In one sense there was cause and effect. Had the plaintiffs not purchased the business, they would not (unless they had purchased and run some other business) have become indebted to the bank. On the other hand, I am satisfied that, had they been equipped by training and skills to conduct the business, they should have been able to generate profits sufficient to pay interest. It seems to me unlikely, if the plaintiffs had met interest payments, that the bank would not have extended the facilities which it had granted them. The plaintiffs have not satisfied me, according to the common sense approach to causation which the authorities require, that (if there was a loss on forced sale, and, insofar as it is necessary, that such loss was foreseeable) such loss can be visited upon the defendants.
In light of the conclusion just expressed, it is not necessary to decide whether there was in fact a loss on the forced sale. But I make these few observations about the evidence on that point: Mr Bennett believed that in 1993 and 1994 the land "was worth $200" per acre. He had it on the market in 1993. He was asking $200. There was no buyer. In 1994 an offer of $150 per acre was made. Later that year there was talk of selling the block for $160 per acre. Mr Bennett believed that, later in 1995, "It probably would have got up towards $200 - it would have made $200 at least". Mr Holdsworth, an experienced real estate agent, gave evidence that he would have expected the land to bring $200-$205 per acre in 1997; so also in 1996 and 1998. In 1993 he would have expected any sale to be at about $150, in 1994 $140-150 (if the land could have been sold at all).
I consider that Mr Holdsworth was a reliable and informed witness. He did not give evidence as a valuer, but that did not make his evidence less useful or helpful. The import of his evidence was that the land made about market price when it was sold. Not until 1996 could it have been sold at a better price - $200-205 per acre.
Whether, then, the plaintiffs could have achieved any better sale price for the farming land must have depended on their having had the opportunity and ability to select a most advantageous time for sale - not with the benefit of hindsight, but with all the uncertainties that are inherent in ownership of cropping land in the Wimmera. I doubt that the price notionally achievable in such circumstances would provide a solid basis for proof of a loss on the sale which was in fact effected.
Judgment
There should be judgment for the plaintiffs against the first and second defendants in the sum of $156,641. I shall hear the parties, including the third defendant, upon the question of costs.
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