Campbell v Mihnyak, George
[1996] FCA 1172
•19 Dec 1996
IN THE FEDERAL COURT OF AUSTRALIA )
)
NEW SOUTH WALES DISTRICT REGISTRY ) No. NG 483 of 1995
)
GENERAL DIVISION )
BETWEEN : MARK CAMPBELL
First Applicant
FRIEDA CAMPBELL
Second Applicant
AND : GEORGE MIHNYAK
First Respondent
AGNES MIHNYAK
Second Respondent
ANTHONY ARENA
Third Respondent
ARENA BUSINESS CONNECTION PTY LTD
(ACN 033 250 511)
Fourth Respondent
Coram : Davies J
Place : Sydney
Dated : 19 December 1996MINUTES OF ORDER
Judgment for the applicants against George Mihnyak and Agnes Mihnyak in the sum of $ 242,459. The application against Arena Business Connection Pty Ltd is dismissed with costs. George Mihnyak and Agnes Mihnyak shall pay the applicants costs including the costs payable by them to Arena Business Connection Pty Ltd.
NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules
IN THE FEDERAL COURT OF AUSTRALIA )
)
NEW SOUTH WALES DISTRICT REGISTR ) No. NG 483 of 1995
)
GENERAL DIVISION )BETWEEN : MARK CAMPBELL
First Applicant
FRIEDA CAMPBELL
Second Applicant
AND : GEORGE MIHNYAK
First Respondent
AGNES MIHNYAK
Second Respondent
ANTHONY ARENA
Third Respondent
ARENA BUSINESS CONNECTION PTY LTD
(ACN 033 250 511)
Fourth Respondent
Coram : Davies J
Place : Sydney
Dated : 19 December 1996REASONS FOR JUDGMENT
In this application, the first and second applicants, Mr Mark Campbell and Mrs Frieda Campbell, who purchased a business in early 1995, have sued the vendors of that business, Mr George Mihnyak and Mrs Agnes Mihnyak, alleging breaches of s.42(1) of the Fair Trading Act 1987 (NSW) which provides:
"41. (1) For the purposes of this Part, where a person makes a representation with respect to any future matter (including the doing of, or the refusing to do, any act) and the person does not have reasonable grounds for making the representation, the representation shall be taken to be misleading."
Mr and Mrs Campbell have also sued the business agent, Arena Business Connection Pty Ltd ("the agency"), relying upon s.42 of the Fair Trading Act and upon the equivalent section of the Trade Practices Act 1974 (Cth), s.52. The applicants also allege that the agency was negligent and breached its duty of care to them. The aiding and abetting provisions of the Trade Practices Act are not relied upon but it is convenient to set out those provisions as well as s.52. Section 52(1) provides:
"52. (1) A corporation shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive."
Section 75B(1) provides:
"75B. (1) A reference in this Part to a person involved in a contravention of a provision of Part IV, IVA or V shall be read as a reference to a person who:
(a)has aided, abetted, counselled or procured the contravention;
(b) has induced, whether by threats or promises or otherwise, the contravention;
(c)has been in any way, directly or indirectly, knowingly concerned in, or party to, the contravention; or
(d)has conspired with others to effect the contravention."
Mr and Mrs Campbell had previously been involved with partners in a retail business in Lindfield selling chickens, including barbecued chickens. That business was sold. In early 1995 Mr Campbell was seeking to establish a practice as a barrister and was anxious to set his wife up in another business which would provide income for the family.
The business which is the subject of these proceedings was called The Lemon Grove Chickens ("the business"). It involved both the wholesale and the retail sale of chickens and like goods. About 65% of the volume of sales was in the wholesale side but the profit margin on the retail side was the greater. The wholesale sales were made to restaurants such as Indian and Thai restaurants. The business was located in the Lemon Grove Shopping Centre situated in the Chatswood shopping area.
In November 1994, Mr Mihnyak put the business on the market. He spoke to Mr N. A. Taktikos of the agency. They had a conversation and a business listing form was filled out and was signed by Mr Mihnyak. There was, I believe, then brought into existence a profit and loss statement for the year ended 30 June 1994 to which I shall refer later in more detail. It was from the information in the business listing form and from the information in the profit and loss account for the year ended 30 June 1994 that the agency prepared what it described as a business profile.
The business profile, which was entered into the agency's computer, from which a print-out could be obtained, set out the following financial details:
"WEEKLY TAKINGS 15230 %
COST OF GOODS 9900 65
GROSS PROFIT 5330 35
1. Rent1038
Outgoings
3. Electricity 304
4. Gas
5. Telephone 59
6. Insurance 25
7. Wages 625
8. Motor Vehicle 38
9. Other 3
TOTAL EXPENSES 2092
NET PROFIT 3238
PRICE WHEN FIRST LISTED 159000
CURRENT ASKING PRICE 159000
STOCK 5000-6000
The business profile went on to say that the profit had been calculated "From Profit & Loss Account for Y/E 30.6.94" and it gave a general description of the business which included comments such as "a sound business", "good location" and "regular clientele". The profile stated under "particulars", inter alia:
"This family-owned business is located in one of Chatswood's major shopping complexes and so benefits from the large passing trade in addition to its regular customers. It has no competition, and is reputed to be the only BBQ chicken shop in Chatswood.
...It supplies nearby Coffee Shops and Restaurants on a Wholesale basis...
...
This is a sound business in a good centre with an established clientele, and would be ideal to operate as a family business."
It was apparent from the profile that the price asked was $159,000. It also appeared from another part of the business profile that if it was required a Nissan Pulsar motor vehicle would be included in the sale price if the full asking price was paid.
Subsequently, the business was advertised by the agency. One advertisement which appeared on 5 December 1994 in the Chinese language included the information that the annual profit was $111,953, which was, in fact, the figure which appeared as the net profit in the profit and loss account for the year ended 30 June 1994.
On 5 January 1995 after seeing an advertisement, Mr and Mrs Campbell spoke with a Mr R C McJannet, an employee of the agency. The substance of the profile was read out to them and they were given a copy of it together with some other pages. There was a front sheet headed "The Business Connection" and there were two pages of notes headed "When Buying a Business" and I think there were some notes containing definitions of technical terms. Mr and Mrs Campbell subsequently saw the shop and they had some discussions with Mr Mihnyak. They obtained other information including information which the vendors had prepared which showed the takings. They also received some invoices showing cost of purchases.
A contract was entered into on 31 January 1995 for a price of $146,000, which may well have been the full price less the value of the Nissan Pulsar vehicle. The contract attached the name and addresses of all the wholesale customers. The contract was conditional on the satisfactory completion of a trial, the trial to take place in relation to takings of "$15,230 per week (minus 5%)". There was a trial over the three week period commencing 13 February 1995. The takings during that period, which were set out on a document which was initialled on behalf of both the vendors and the purchasers, were, in the first week $19,321, in the second week $19,099, and in the third week $17,038.
After the trial period, settlement occurred and the business came into the hands of Mr and Mrs Campbell. Thereafter, business deteriorated substantially and the following figures, which were prepared by Mrs Campbell, show that deterioration:
6-Mar
11-Mar
13-Mar
18-Mar
19-Mar
25-Mar
27-Mar
1-Apr
3-Apr
8-Apr
10-Apr
15-Apr
17-Apr
22-Apr
24-Apr
29-Apr
1-May
6-May
8-Mar
13-May
15-May
20-May
TAKINGS
Retail sales
$6,300
$5,400
$5,330
$5,340
$5,700
$5,358
$4,646
$5,000
$5,507
$5,436
$4,869
Wholesale sales
$9,858
$9,275
$7,962
$7,899
$6,930
$6,657
$5,874
$5,834
$5,333
$4,747
$4,382
Total
$16,158
$14,675
$13,292
$13,239
$12,630
$12,015
$10,520
$10,834
$10,840
$10,183
$9,251
COST OF GOODS
$15,683
$12,676
$10,851
$11,349
$10,031
$7,583
$8,117
$7,998
$8,518
$7,940
$6,772
GROSS PROFIT
$475
$1,999
$2,441
$1,890
$2,599
$4,432
$2,403
$2,836
$2,322
$2,243
$2,479
Mr and Mrs Campbell encountered financial difficulties and ultimately sought to sell the business. They were unsuccessful in selling it for other than a nominal price. However, at the end of 1995, when they were under pressure from the landlords, they sold the business for $13,800 to a Sharon Tan. That occurred on 15 December 1995.
There are three relevant accounts which I should set out together and which I shall label A, B and C. Account A is the profit and loss account for the year ended 30 June 1993 which was the basis of the tax return of Mr and Mrs Mihnyak for 1993 and which was prepared by their accountant. Account B is the account for the year ended 30 June 1994 to which I have already referred and which I think was brought into existence in late November 1994. Account C is the account for the year ended 30 June 1994 as prepared by the accountant and which became the basis of the tax return lodged by Mr and Mrs Mihnyak for that year. The tax return was signed on 27 March of 1995 after settlement had taken place in relation to the business.
A B C
Sale606,351.65 792,000.00 794,957.16
Less Cost of Opening Stock 6,150.00 6,150.00 8,360.00
Purchases443,780.96 514,800.00 655,163.02
449,930.96520,950.00 660,725.02
Less Closing Stock 5,560.00 5,560.00 4,800.00
Total Cost of Sale 444,370.96 515,390.00 655,923.02
Gross Profit 161,980.69 276,610.00 139,034.14
Other income 42.38 2,238.15
Less operating expenses
Accountancy fees 580.00 580.00 600.00
Advertising 378.00 378.00 421.00
Bank charges 298.00 298.68 221.55
Commission 500.00
Debt Collection Expenses 100.00
Depreciation of fixed assets 23,209.00 23,209.00 23,632.00
Filing fees90.00 90.00 163.00
General expenses 160.00 160.00 90.00
Insurance 1,178.25 1300.00 1,533.16
Interest 20,106.60 24,816.61
Legal fees 87.50 87.50 5,772.80
Light and power 15,784.14 15,784.14 6,905.08
Motor vehicle expenses 1,976.28 1,976.28 937.20
Rates & Taxes 738.00
Packaging .00
Printing, postage, stationary 150.50 156.50 .00
Rent 69,467.02 64,823.02 53,073.74
Repairs & Maintenance 1,513.55 338.65
Salaries and wages (employees) 1,187.37 32,500.00 .00
Subscriptions and donations 121.30 121.30 96.80
Staff Amenties 50.90
Superannuation 80.42
Telephone 3,086.08 3,086.08 1,236.38
Total expenses 139,380.27 164.656,42 73,270.68
Net profit (Loss) 22,742.80 111.953,58 26,217.01
Mr Mihnyak denied knowledge of account B, saying that he saw it only after these proceedings had commenced and that he obtained a copy from the agency. I am satisfied, however, that account B was prepared by Mr Mihnyak and was provided by him to Mr Taktikos for the purpose of informing Mr Taktikos of the state of the business and with information to be placed into the business profile. There was a need for such information for the business listing form, which Mr Mihnyak had signed, set out takings of $15,000 per week but omitted all other financial information. So there was a reason for the preparation of the document.
Mr Mihnyak, in fact, was the only person who had the information necessary for the preparation of account B. He had knowledge of the business and it is not suggested that there was anybody in the agency who would have had that knowledge. It is also not suggested that the account came from the accountant. Dr Judie Walton, a forensic scientist, has examined the printing on account B with the printing appearing on a number of letters in evidence which were typed and signed by Mr Mihnyak. She gave evidence that the documents came from the same printer. Dr Walton also pointed out that account B has German style numeric punctuation which I have not replicated above. On examining the document, this is quite obvious. Dr Walton mentioned some other minor factors which might also be thought to attribute the document to Mr Mihnyak. Another such factor which came out in the course of Mr Mihnyak's evidence is that account B, which was printed on yellow paper, was printed on paper of a type which he used from time to time in the business. Having regard to all those facts, I am quite satisfied that the document was prepared by Mr Mihnyak.
In his evidence, Mr Taktikos said, first, that he denied knowledge of account B and, then, that he could not recall it; but he then went on to say that he could not recall or explain how the profile had been prepared.
I am satisfied on the evidence that the information necessary to prepare the profile was obtained by Mr Taktikos from Mr Mihnyak. Thus, for example, in the cross-examination of Mr Taktikos by Mr Mihnyak, this evidence was given:
"Yes, okay. On the first day when we met and you listed the business for sale and also we found the exclusive agency agreement, did you ask questions about the performance of the business?---Yes.
Takings?---Yes.
Expenses?---Yes.
Electricity bill?---Yes.
Insurance?---Not sure.
Anyway, you put down these figures in your notebook or on a piece of paper, did you?---I'm not sure.
Now the question is, when you asked me these questions, how did you record the answers?---You did show me some information. I recall you showing me your cheque book for the rent.
But how did you record for yourself or for the Business Connection, how did you record the information?---I can't recall; I honestly can't recall. It's a long time.
But you can confirm that you did ask questions?---Yes."
There was also evidence of a like nature given by Mr Mihnyak who gave this evidence:
"Although nothing is written here did you discuss with Mr Taktikos the cost of goods per week?---Yes, my recollection is that I gave him the takings figures and I gave him an estimate of the cost of goods and I gave him estimate [sic] of all other costs including electricity, rent, whatever came to my mind and we arrived I think to a - well not a complete but at least an indication of the expenses. That is my recollection of the events.
It was an estimate of the cost of goods for which period of time?---I think the current, I think the current, that is 1994.
Although nothing is written down you gave him an estimate of the cost of goods you say...?---Well, my understanding was that I gave figures relevant to the current situation of the business not previous years."
I am satisfied that those matters were discussed. I am satisfied that what occurred was that account B was provided by Mr Mihnyak to Mr Taktikos and was used by Mr Taktikos as the information required for the preparation of the business profile.
It will be seen that the information in the business profile set out the weekly figures corresponding with the annual figures for the items in account B. There is only one variation and that is in respect of rent. In relation to that we have the answer which Mr Taktikos gave to Mr Mihnyak, which was that he recalled Mr Mihnyak showing him his cheque book for the rent. So I assume that, in that one respect, Mr Taktikos took the actual figure which appeared in Mr Mihnyak's cheque book.
This case has proceeded on the basis that the figures in account C, that is, the figures prepared by the accountant, were the correct figures for the business for the year ended 30 June 1994 and that account B was incorrect. The applicants' expert, Mr J.N. Sefton, and the agency's expert, Mr C.A. Jugmans, both based their valuations on account C. Mr Mihnyak himself gave clear evidence that account C set out the true position:
"Mr Mihnyak, I just wish to begin by asking you to confirm from the witness box some of the things you have told the court from the bar table in the last few days when you have not been on your oath. First of all, to the best of your knowledge and belief the true cost of goods of running the Chicken Shop business is the cost that was set out in the tax returns?---Yes.
So far as you are concerned certainly to the best of your knowledge and belief the true cost of sales of the Lemon Grove Chicken Shop business for the financial year ended 30 June 1993 was $444,370.96, is that correct? You may check your records if you need to, sir?---Yes.
The true cost of sales of the Lemon Grove Chicken Shop business for the financial year ending 30 June 1994 was $655,923.02. Is that right, sir?---Yeah, it could be, I don't have it in front of me.
...
Total cost of sales $655,923.02?---Yes, that's right."
On an earlier day, I had asked the parties what was the case they were going to put. Mr Mihnyak informed me that he would say that account C set out the correct figures. Neither counsel for the applicants nor for the agency proffered any different approach.
Mr Mihnyak's answer in evidence was, in fact, not challenged by counsel. They had access to his written records, to his records of takings and to his invoices and, if they had wished to do so, they could have filed affidavits setting out what they contended was the correct position, taking into account not only the recorded takings and purchases but also, if they wished to do so, such cash transactions as they might have calculated. No party did so and the documents I have mentioned are not in evidence.
Counsel for the agency went some way to querying Mr Mihnyak's evidence on the point in this passage:
"Is it the case that instead of providing your accountant with the original invoices...that you provided him with your own estimate?‑‑‑That's right.
How did you arrive at that estimate?‑‑‑Well, now and then I did a summary of the expenses for the week and I extrapolated that amount for the year.
I see, so for example for the 1994 return is your recollection of what you did on that occasion to take one week's figures and then just multiply them by 52?‑‑‑Yes."
However, that evidence is a quite inadequate basis on which to conclude that the figures in account C were not correct. Specific evidence has been given that they were correct. No party brought forward records to show that they were not correct and no counsel put to Mr Mihnyak that they were not correct.
I therefore approach the matter on the basis that the cost of goods and the gross profit set out in account C for the year ended 30 June 1994 were the correct cost of goods and correct gross profit. On this footing, it is clear that the business was misrepresented in the business profile. The business profile had represented a gross profit of $5330 and a net weekly profit of $3,238. The true position was quite different, for the net profit for the whole year was a very modest one. It is also clear that, on the financial position as disclosed by account C, this business would hardly meet the general description given of it as a sound business benefiting from a large passing trade without competition and so on. Net profit as calculated by the accountant was $20,255 for the year and that was without taking into account the fact that Mr and Mrs Mihnyak had worked full time in the business and there was no allowance for their remuneration.
Using the account C figures, Mr Sefton made some adjustments. He concluded that the interest paid on the finance should not be taken into account, a matter with which Mr Jugmans agreed. Mr Sefton also thought that the depreciation claim was a little excessive and adjusted it. Mr Sefton also considered that something should be taken into account for the work that had been done by the two people who were required to work in the business and he allowed $40,000 for that. He then determined the pre-tax future maintainable profits of the business at $20,000 and an after tax figure of $16,000. In his view, a prudent purchaser would expect a return of between 40 and 45% on the invested funds and from this he capitalised the worth of the business at between $35,555 and $40,000.
Mr Jugmans did not adjust depreciation and did not take into account anything for the work done by the proprietors. He came to an adjusted net profit of the business which varied over a three year period from $32,575 to $46,507. In his view a prudent purchaser would have paid approximately two to two and a half times the adjusted net profit of the business. He valued the business at between $93,000 and $116,000.
I prefer Mr Sefton's approach to this matter. In my opinion, in valuing this business it is necessary to take into account the fact that, when it was sold, two people were working full time in the business and, moreover, that it was a business with a high turnover, just under $800,000 for the year, with quite a modest return. With this business, one can see the results of personal work and a return for the labour of Mr and Mrs Mihnyak rather than a return on local goodwill, that is goodwill attaching to the locality in which the shop was situated. I think, myself, that the business was so dependent upon the work done that one cannot fairly assess its value without taking labour costs into account. So on that issue, I prefer Mr Sefton's assessment.
At this point, I should mention that, in my opinion, the problems which Mr and Mrs Campbell encountered did not arise solely from the difference between the actual cost of the goods and the cost as represented. It seems to me that the business had a high turnover and that Mr and Mrs Mihnyak had worked full time and very effectively in the business. I would conclude that they were both popular with the customers and that, as a result, the turnover had increased year by year. Mr Campbell, who was attempting to build a practice as a barrister, did not work in the business as Mr Mihnyak had done and did not assist Mrs Campbell in the business as much as he probably ought to have done. The business was primarily left to Mrs Campbell, who employed a Mrs R.G. Reyes to run the wholesale side. Mrs Reyes was not as competent as Mr Mihnyak. Mrs Campbell did not have the expertise or drive to enable her to manage the complex business nor, for that matter, did she have all the finance that she required. She encountered financial difficulties right at the start. Nor did Mrs Campbell have proper support for deliveries and there were problems with these. Mrs Campbell concentrated on the retail trade. Although this fell off to some extent, it held up much better than the wholesale side. I mention these matters now as relevant to the point that I prefer Mrs Sefton's evaluation.
The defence was put by counsel for the agency that there had been no reliance by the applicants on the information set out in the business profile. He submitted that the applicants did their own analysis and did not rely upon what the agent had informed them.
I consider Mr Campbell and Mrs Campbell to have been honest witnesses. However, their evidence was in some aspects muddled or confused. This may have been, in part, because they both had, during 1995, health problems, Mr Campbell having a problem with alcohol and Mrs Campbell with nervous upset. Moreover, I think they failed to understand and to come to grips with their own deficiencies in running the business, which had depended so much upon the personal activities of Mr and Mrs Mihnyak.
Perhaps not fully comprehending what had occurred, Mr Campbell's and Mrs Campbell's first affidavits were somewhat muddled and so was some of their oral evidence. As a result, the evidence is not as precise as one would wish. However, it appears that Mr & Mrs Campbell saw Mr McJannet on 5 January 1995 and again on the following day or thereabouts when Mr McJannet gave them the business profile. Mr Taktikos then took them to the shop and introduced them to Mr and Mrs Mihnyak. Probably on the following day, Mr Taktikos collected from Mr Mihnyak a number of documents which included records of turnover figures, that is to say takings, which Mr Mihnyak had maintained for some years.
Mr McJannet gave evidence that he copied and gave to Mrs Campbell the lease of the premises, the financial statements of the vendors for the year ended 30 June 1992, the financial statements of the vendors for the year ended 1993, which is the account A I have mentioned, a one page document being the profit and loss account for the year ended 30 June 1994, which is account B I have mentioned, and handwritten wholesale/retail Christmas takings figures for the business from 1990-1994. Mr and Mrs Campbell however deny receiving the account B. I prefer their evidence on this point and thought, when hearing Mr McJannet in the witness box, that he was inclined to give such evidence as he considered to be useful rather than giving evidence of facts that he could actually recall. The evidence of Mr A.N. Arena, a director of the agency, confirms that when, some weeks after the purchase of the business, Mr Campbell came to complain about the profitability of the business, he was shown account B, that it was copied for him and that he went away with the copy. This would not have occurred if the document had previously been in the hands of Mr Campbell and if he had been fully familiar with it.
In addition to those documents which the Campbells received, they asked Mr Mihnyak for details of expenditure. He told them that the account for the year ended 30 June 1994 was not yet available. However, he gave to them some invoices with a view to showing the purchases of the business.
Mr Mihnyak first gave evidence that the invoices were the invoices for the six months from July to December 1994. Subsequently, he said that the invoices may have been for a longer period. Mr Mihnyak produced two folders to the Court, which were marked for indentification but are not in evidence. Mr Mihnyak said, in his evidence, that these and certain other folders which were shown to him were not in the form that they had been in 1994 and that he could not say precisely what he had given Mr and Mrs Campbell.
Mrs Campbell at first said that the invoices received had been invoices for the period July 1993 to December 1994, but later she gave evidence that she only recalled the invoices for the six months from July to December 1994. In evidence as exhibit 1 are hand written notes made principally by Mrs Campbell but to which Mr Campbell and the Campbell children contributed, which list takings and cost of goods for the six months period from July to December 1994.
Mr Campbell gave evidence that he received the invoices for the period 1 July 1993 to 31 December 1994. He said that he added these up and would have put the results on slips of paper or in his computer, the entries in which were subsequently lost. I doubt that Mr Campbell did as complete an inspection of the invoices as he said, otherwise there would have been no need for the careful handwritten records which appear in exhibit 1.
In the result, the evidence is not at all clear as to what documents were inspected and precisely what was done with them. However, it does not seem to me to matter very much what period was examined. Certainly, a check was made of some invoices and the check for July to December 1994 was a careful and complete check.
After receiving the invoices and calculating the cost of goods, Mr and Mrs Campbell found that the cost of goods was far in excess of the cost which that had been represented, that is to say $9,900 per week, and they found that the profit was not there. They returned the invoices to Mr Mihnyak at his home and said that they were not interested in the business. On the following day, Mr Mihnyak contacted Mr and Mrs Campbell and informed them that they had probably wrongly taken into account the cost of tubs, the cost of which was listed on each invoice. This cost, however, was not charged to the business as the business had its own tubs. Mr and Mrs Campbell called again at the home of Mr and Mrs Mihnyak and collected all or some of the invoices. Exhibit 1 shows, inter alia, the final calculation of the cost of the tubs for the period July to December 1994. Perhaps a calculation was done for an earlier period but, if so, the results are not known.
The result for the period July to December 1994 was a cost of goods which was a little above $9,900 but, as the takings for the six-months period were higher than the $15,230 which was the figure set out in the business profile, the result did not throw doubt on the net profit which the business profile represented. Mr and Mrs Campbell decided to go ahead with the purchase.
Counsel for the agency submitted that the applicants placed no reliance on the figures set out in the business profile. He submitted that they made their own investigations and relied upon that. However, Mr Campbell consistently denied that he put the figures in the business profile out of his mind. Mr Campbell gave this evidence, for example:
"So you believed it important, did you not, to attempt to obtain some verification of the trading position between June 1994 and the end of December 1994?---Yes.
In other words, what you wanted to do was rather than rely on the figures that you had been given you wanted them updated by more accurate and more contemporaneous material?---No I wanted to make sure that there hadn't been any dramatic changes.
Yes because you did not want to rely on the figures that you had been given because they were out of date?---I did rely - I relied on those explicitly.
I know you want to keep saying you rely, I am just asking you now what was the purpose in speaking to the vendors about what had happened in the last six months?---To bring the information up to date.
Mr Campbell further said:
"You very soon were able to verify by going through the turnover figures the turnover figures as you had been told, so you say, by the business profile, that is the 15,000-odd per week?---Whether it was a verification or not I did add up the turnover figures and compared them to what was stated in the profile.
You did that for the purpose of verifying whether the figure in the profile was correct or not, surely?---I compared two sets of figures, yes."
Mrs Campbell was cross-examined to like effect and gave like answers:
"Yes, and so it is the case, is it not, that you relied upon what Mr Mihnyak told you and showed you in order to decide whether or not to buy the business?---Part, yes.
That was the only thing you relied on, was it not, what Mr Mihnyak told you...?---Not the only thing.
What I am suggesting to you is that the answer which you gave to Mr Mihnyak in cross-examination that you believed what he was telling you meant that you relied on what Mr Mihnyak told you and what Mr Mihnyak showed you in deciding whether or not to buy the business?---And I keep saying not completely.
Not completely, I see. Well, you did not rely upon anything which the Business Connection gave you, did you?---Part, yes.
What document do you say you relied on that the Business Connection gave you?---That profile that they gave to us."
I have formed the view that Mr and Mrs Campbell were influenced by the business profile. The figures there stated were stated so as to interest a prospective purchaser and they were no doubt intended to keep a prospective purchaser interested. It was the business profile which set out the details of the business and enabled a comparison to be made with the price. Mr and Mrs Campbell never received any other information which would be likely to have supplanted the information in the business profile. They certainly received the handwritten notes as to takings and they received the invoices I have mentioned, but a purchaser would not be likely to have acted on figures such as that alone without some representation being made such as was made in the business profile.
The point has been made that Mr and Mrs Campbell did not in writing compare the calculations that they made as to takings and cost with the figures set out in the business profile. However, I would not expect them to have done so. The principal figures in the business profile were figures which they did not need to set down in writing. They would have recalled them at all times.
I have concluded that Mr and Mrs Campbell took the information in the business profile into account and relied upon it when they agreed to pay the purchase price of $146,000 and, indeed, that it was the prospect of obtaining the net profit as set out in the business profile which led them to agree to purchase the business and to pay that price.
I have already said that I am satisfied that Mr Mihnyak prepared account B and gave it to Mr Taktikos for use in the preparation of the business profile and that I am satisfied that Mr Mihnyak prepared the account as agent for himself and his wife. It follows that, because the account was misleading, there was a breach by Mr and Mrs Mihnyak of s.42 of the Fair Trading Act.
So far as the fourth respondent, the agency, is concerned, the principle to be applied is that set out in Yorke v Lucas (1985) 158 CLR 661 at 666, when Mason AC J, Wilson, Deane & Dawson JJ said;
"That does not, however, mean that a corporation which purports to do no more than pass on information supplied by another must nevertheless be engaging in misleading or deceptive conduct if the information turns out to be false. If the circumstances are such as to make it apparent that the corporation is not the source of the information and that it expressly or impliedly disclaims any belief in its truth or falsity, merely passing it on for what it is worth, we very much doubt that the corporation can properly be said to be itself engaging in conduct that is misleading or deceptive."
This dicta finds strong support in s.75B of the Trade Practices Act which deals with the situation where a person is directly or indirectly knowingly concerned in or a party to the contravention.
Real estate and business agents can be guilty of a direct breach of the Fair Trading Act or of the Trade Practices Act though acting as agent. Argy v Blunts & Lane Cove Real Estate Pty Ltd (1990) 26 FCR 112 is one example, in which case the agent was responsible for the offending brochure. On occasions, the circumstances of the case can give a representation a special significance by reason of its being made by the agent. Two such cases were, I think, John G Glass Real Estate Pty Ltd v Karawi Constructions Pty Ltd (1993) ATPR 41-249 and Butt v Tingey (1993) ATPR (Digest) 46-110. In Glass's case the representation, which had been made by the agent in a brochure, was as to net lettable area, which is a trade term, a term used by agents. The fact that the term used was a trade term and that the information appeared in the agent's brochure led the court to think that the agent had engaged in misleading and decepture conduct. In Butt v Tingey, a solicitor had written to say that there was no need for an injunction because certain funds were held. In my dissenting judgment, I expressed the view that, because the matter was stated by a solicitor in relation to threatened proceedings, the representation involved more than the mere passing on of information from a client. However, in the ordinary course of events, an agent, such as a real estate or business agent, is not liable for passing on information obtained from a client.
In the present case, the subject information was information which a prospective purchaser would have assumed came from the vendor for it was financial information of which only the vendor would have been aware and, indeed, Mr and Mrs Campbell received the information in that sense. Mr Campbell gave evidence that he understood that the figures would have come from a source other than the agent, namely, that the agent would have obtained the figures from the vendor or a source connected to the vendor:
"You always believed, did you not, that such figures as were provided to you had been provided from some source other than the agent?.... Yes.
Well, you knew that the profile, insofar as it referred to those figures, was merely relaying to you figures that appeared in another document?...Yes.
And a document which had not been prepared by the agent?...Yes".
Counsel for the applicants relied upon the profile and the fact that it was apparently drawn up by a secretary named Karen, from information which had been supplied to her. The information as to the general attributes of the business can be seen to have come from the business listing form signed by Mr Mihnyak. Thus, in that form, terms such as "good centre", "good exposure", "sound business", "regular clients", "suit family business", "only chicken shop in Chatswood" and the like appear. I am satisfied that the secretary, Karen, prepared the business profile adopting such terms as appeared in the business listing form. The financial information came from account B, save as to the rent as I have mentioned.
In my opinion, in transferring the information from the business listing form into the business profile and in converting the annual figures in account B to the weekly figures in the business profile, the agency did not make any addition, alteration or omission that was significant, at least for present purposes.
At one time, counsel for the applicant alleged a misrepresentation in the description of the Lemon Grove Shopping Centre as a "major shopping centre" and in the reference to "large passing trade", but this allegation was not pursued. In any event Mrs Campbell had worked nearby in the Chatswood post office and was familiar with the area. A challenge to the reference, in the business profile, to the wholesale supply of goods to nearby coffee shops and restaurants was also abandoned, properly so as the wholesale customers were all listed in the contract.
Counsel for the applicant submitted that it was significant that the agency had adopted the figure for purchases of $514,800 and had divided that by 52 to obtain a net figure of $9,900, whereas account B had included additional figures and made a further adjustment to purchases by adding stock on hand at the beginning of the period and deducting stock on hand to the end of the period to give a net cost of sales of $515,390 which, when divided by 52, comes to $9911. I regard this difference as insignificant.
In my opinion the agency merely passed on information which it had obtained from Mr Mihnyak and merely passed it on for what it was worth. One may note that the profile commenced with the note:
"The information contained in this profile has been supplied to The Business Connection by the vendor of this business. The Business Connection makes no warranty, either explicit or implicit, as to the truth or accuracy of the information contained herein. The purchaser should make his or her own inquiries and satisfy himself or herself as to the truth and accuracy of the facts stated herein."
Counsel for the applicant submitted that there was no express evidence that the agency acted in good faith and he submitted that, in the absence of such evidence, a conclusion should be drawn that the agency did not so act. As the financial information came from Mr Mihnyak, I draw the conclusion that the agency acted in good faith. However, I am also satisfied that no evidence was adduced against the agency which cast upon it any evidentiary burden to adduce positive evidence of good faith. Counsel for the applicant relied upon the fact that the secretary, Karen, and an employee, John Gee, were not called as witnesses. However, I draw no adverse inference from this fact as neither appears to have had any contact with Mr Mihnyak or the applicants.
Finally, on the question of the Trade Practices Act, I note that the applicants allege that the agency made representations, which appear in the documents attached to the business profile, that it would "work to secure an outcome that's beneficial to both parties" and that it had "all the information you need in coming to a decision on a business". I need not set out the full context in which those statements were made. In my opinion, the statements were basically "puffing" by the agency. There is no evidence that they were relied upon by Mr and Mrs Campbell or affected the matter in any way. In my opinion the applicant suffered no loss by reason of them.
The principles of negligence are sufficiently set out in the decision of the High Court of Australia in San Sebastian Pty Ltd v Minister Administering the Environmental Planning & Assessment Act 1979 (1986) 162 CLR 340. In dealing with a case of economic loss, Gibbs CJ, Mason, Wilson, Dawson JJ set out at 358 the crux of what is required when they said:
"It follows then that if the appellants' case is to succeed they must establish at least, amongst other things, (1) that the alleged representation was made, and (2) that the Authority and the Council made the representation with the intention of inducing members of the class of developers to act in reliance on the representation. The conclusion which we have reached is that the appellants have failed to establish the first matter and therefore the second matter cannot arise."
Brennan J dealt with the matter at 372 when he said:
"Where a representor gives information or advice on a serious or business matter, intending thereby to induce the representee to act on it, the representor is under a duty of care in giving that advice or information if three conditions are satisfied. First (corresponding with the first condition expressed by Barwick C.J.), if the representor realises or ought to realise that the representee will trust in his especial competence to give that information or advice; second (corresponding with the third condition), if it would be reasonably for the representee to accept and rely on that information or advice; and third (applying the underlying principle of the law of negligence), if it is reasonably foreseeable that the representee is likely to suffer loss should the information turn out to be incorrect or the advice turn out to be unsound."
In the present case, nothing was said or done by the agency which gave rise to a duty of care. The additional information supplied with the business profile contained this information:
"2) FINANCIAL FIGURES
The past performance of the business is not always a good indication of a business's viability. We should say that the prudent buyer will seek to view tax figures and if you have an accountant he will surely ask to see the financial history of the business. Figures can even be indicative of the value of the business. However, see figures for what they are - at best they are an indication of the business's viability, at worst they can be misleading.
8) WHAT IS A BUSINESS WORTH?
Having found a business that qualifies well according to the criteria we have outlined above, what should you pay for the business? Unless you are experienced in this field, you will not know what to pay and will be at best guided by what your accountant thinks. The opinion of an experienced business broker will be of much assistance. Even if you don't buy through us we would be happy to advise you in this regard, at no cost to you. See attached Research Report.
9) WHY BUY THROUGH THE BUSINESS CONNECTION?
The Business Connection has been selling businesses on the North Shore for over forty years. You don't last that long unless your work is of the highest standard. We will handle negotiations between yourself and the vendor. Although we are paid our fee by the vendor we work to secure an outcome that's beneficial to both parties.
The Business Connection has regular and intimate contact with the market. If you establish a relationship with us, you will learn about good businesses that become available before they are advertised at large.
The Business Connection has all the information you need in coming to a decision on a business. This includes the figures, the lease and other pertinent information about the general area where the business is located.
The Business Connection has a range of businesses for you to look at. From this range you will be able to make an informed decision.
Important new legislation affects the rights of tenants in retail premises in N.S.W. The Business Connection can comprehensively advise you of these rights.
The advice you receive from The Business Connection costs you nothing but can save you a lot."
Much of this material seems to me to be undesirable for it tends to obscure the ordinary position of the agent, which is as agent for the vendor. That position should remain clear. Otherwise misunderstandings can arise and conflicts of interest can occur. But in the present case, there is no suggestion that Mr and Mrs Campbell understood the agency to be other than agent for the vendors. Mrs Campbell, in her evidence, said that she had not seen the pages to which I have just referred. Mr and Mrs Campbell did not seek advice from the agency and they were not given advice by the agency. Most of the discussions which took place took place directly between the Campbells and Mr Mihnyak. In my opinion, there is no factor in the present case which would have given rise to a duty of care on the part of the agency.
It is alleged by counsel for the applicants that, inter alia:
"The fourth respondent...was in breach of its duty of care and skill to the applicants in -
(a) failing to exercise due care and skill in the compilation of the financial details, and particularly the cost of goods, stated in the business profile;
(b)failing to verify the alleged provenance of the financial details represented in the business profile;
(c)failing to verify the profit with the first and second respondents accountant, Mr Leon Appochian;
(d) failing to make a proper investigation as to the costs of goods of the business and failed to warn the applicants that no such investigation had been made;
..."
In my opinion, the agency did not fail to do anything which one would have expected an agent to do and did not do anything that one would not have expected an agent to do. The agency was given by Mr Mihnyak a document purporting to be a profit and loss account and the agency acted upon it. In doing so, it acted as one would have expected an agent to act.
It follows that there should be judgment against Mr and Mrs Mihnyak but that the claim against the agency should be dismissed.
I turn now to the question of damages. The usual starting point for damages in a case such as the present is the difference between the amount the purchasers outlaid and the value of what was received for that price. However, in this case, the business unravelled rather rapidly when Mr and Mrs Mihnyak left it. So much had depended upon their work, their expertise and their reputation. In the hands of Mr and Mrs Campbell, the business was unprofitable and unsaleable. In my opinion, the only appropriate way of dealing with economic loss is to allow the applicants their financial losses in 1995. I would therefore allow the sums as set out in the document handed up by counsel being item 1, deposit paid; item 3, balance of purchase price on settlement; item 4, stock purchases from the first and second respondents; item 5, lessors' legal fees; item 7, stamp duty on lease; item 8, operating loss from 3/3/95 to 30/6/95; item 9, resale of business, less item 10, sale of stock; item 11, operating loss from 1/7/95 - 31/12/95; and item 12, cost of resale. Those items total $198,967 to which interest must be added in accordance with the scales set out in the Supreme Court rules, which is the usual practice. The total is $242,459.
I would not allow loss of wages, as neither Mr nor Mrs Campbell was employed when they purchased the business. A claim has also been made for damages for personal injury, distress and suffering. Counsel for the applicants claims $10,000 for Mr Campbell and $30,000 for Mrs Campbell.
In my opinion, Mr Campbell has not established that he suffered any peronal injury or like matter which should be compensated by way of damages.
Mrs Campbell had previously had medical treatment for nervous or psychological problems. During the difficulties with the business she, on one occasion, took an overdose of tablets, was hospitalised at the Royal North Shore Hospital and thereafter received medical treatment for some time. In my opinion Mrs Campbell's problems largely related to her relationship with her husband. In early 1995, Mr Campbell was establishing his practice as a barrister, his income was low and he therefore encouraged his wife to enter this business to assist supporting the family, but he did not provide Mrs Campbell with sufficient financial or other support. Some of the wholesale clients required credit and Mrs Campbell found that she was short of money to pay creditors. The vehicle used for deliveries did not have the same space for carriage of the goods as Mr Mihnyak's vehicle had done. Mr Campbell did not give Mrs Campbell assistance in the business anywhere near comparable to the work done by Mr Mihnyak. Mr Campbell also continued to have problems with alcohol. On the day on which Mrs Campbell overdosed, a Saturday morning, Mr Campbell had been expected to help her with deliveries but apparently arrived late, did one delivery and then fell asleep. I think that this was the substance of the evidence although the precise facts were no doubt somewhat different.
I have concluded that Mrs Campbell's disorder arose largely not from the financial position of the business but her husband's lack of support and her perception of this. Mrs Campbell conceded in evidence that one of the matters she had said to her physician was that Mr Campbell had pushed her into purchasing the business. Mrs Campbell said, in her evidence, that this was not true in fact, but the fact that she said it to the physician is illustrative of her feelings at the time. In my opinion, her feelings probably centred considerably around her husband.
In the circumstances, and in the absence of any evidence from a medical practitioner or, for that matter even the tender of a medical certificate or the hospital records, I am not satisfied that Mrs Campbell's condition resulted from or was caused by Mr and Mrs Mihnyak's representations as to the cost of goods and as to the profit of the business.
Counsel for the applicants also sought exemplary damages against Mr Mihnyak. However, I am not satisfied that fraud or other like circumstance was proved. In the end proof that account C correctly stated the financial state of the business rested on Mr Mihnyak's evidence. To prove fraud, I would have expected better and more detailed proof than that.
I turn to costs. Counsel for the applicants has asked for a Sanderson order, namely, that the costs of the agency be paid directly by Mr and Mrs Mihnyak. However, it was not necessary for the applicants to join the agency, or Mr Arena, as it did in the first instance. The applicants were aware that account B was held by the agency and they had been informed, not many weeks after the purchase, that the figures in the business profile were founded on account B. The proceedings were brought against the agency in the light of this knowledge.
In my opinion the agency is entitled to an order for costs against the applicants. However, in the light of Mr Mihnyak's evidence and his denial that he provided account B to the agency, a Bullock order is appropriate. Therefore, the costs recoverable by the applicants against Mr and Mrs Mihnyak should include the costs payable to the agency.
There will be judgment for the applicants against Mr and Mrs Mihnyak in the sum of $242,459. The application against the agency will be dismissed with costs. Mr and Mrs Mihnyak should pay the applicants' costs of the proceedings including the costs payable by them to the agency.
I certify that this and the preceding
27 pages are a true copy of the
Reasons for Judgment herein of
his Honour Justice Davies.
Associate:
Date: 19 December 1996
Counsel for the applicants: P.W. Bates
N. Potts
Solicitors for the applicants: White Barnes
The 1st and 2nd respondents: Mr G. Mihnyak (in person)
Counsel for the 3rd and 4th respondents: M.T. McCulloch
Solicitors for the 3rd and 4th respondents: Murray Stewart & Fogarty
Date of hearing: 9 - 17 December 1996
Date of judgment: 19 December 1996
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