Catalano v Zollo - [2006] SADC 111

District Court of South Australia
(Civil)
CATALANO v ZOLLO
[2006] SADC 111
Judgment of His Honour Judge Tilmouth
22 September 2006
TRADE AND COMMERCE - TRADE AND COMMERCE GENERALLY - STATUTES RELATING TO MISLEADING OR DECEPTIVE CONDUCT IN TRADE - SOUTH AUSTRALIA
Land and Business (Sale and Conveyancing) Act 1994
Contract for the sale of a business - Alleged defects in a vendor's statement furnished before sale - Meaning of "defective" notice in s15 of Land and Business (Sale and Conveyancing) Act 1994 - Obligation of vendor to qualify and quantify the effect of prescribed circumstances pursuant to s15 of Land and Business (Sale and Conveyancing) Act 1994.
Misrepresentations Act 1972 (SA)
Alleged misrepresentation through silence on the part of a vendor, or the failure to mention a particular matter of significance.
Breach of contract relating to deed of restraint.
Contract for the sale of a business - Alleged breach of restraint of trade provision - Plaintiff locked out of opportunity to secure business by actions of defendant.

DAMAGES - MEASURE AND REMOTENESS OF DAMAGES IN ACTIONS FOR TORT
Relief sought under the Land and Business (Sale and Conveyancing) Act 1994 (SA) and under the Misrepresentation Act 1972 (SA) - Plaintiff sought recovery of the purchase price and the loss of anticipated profits.
Plaintiff proved breach of the s15 of Land and Business (Sale and Conveyancing) Act 1994 - Misrepresentation proved through silence on the part of the vendor, or the failure to mention a particular matter of significance.

DAMAGES - MEASURE AND REMOTENESS OF DAMAGES IN ACTIONS FOR BREACH OF CONTRACT
Consequential losses of profit awarded to plaintiff under Land and Business (Sale and Conveyancing) Act 1994 (SA) or under the Misrepresentations Act 1972 (SA) but not both.
Plaintiff entitled to an award of damages against the second defendant, representing the difference between the value of the business and the price paid - Plaintiff also entitled to damages of the amount of lost profits.
Land and Business (Sale and Conveyancing) Act 1994 (SA) s15, s8, s10(2); Misrepresentations Act 1972 (SA) s7; Land and Business (Sale and Conveyancing) Regulations 1995 r4; Land Agents, Brokers and Valuers Act 1973 (SA) (repealed) s91G, referred to.
Nguyen v Taylor (1992) 27 NSWLR 48; Myles Pearce & Co Pty Ltd v Leuci and Martin (1997) 193 LSJS 491; F v R (1983) 22 SASR 189; Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (No. 1) (1988) 39 FCR 546; State of South Australia v Johnson (1982) 42 ALR 161; Gould v Vaggelas (1983-1984) 157 CLR 215; Bartley & Anor v Myers & Ors (2002) 83 SASR 183; Topfelt Pty Ltd v State Bank of New South Wales Ltd (1993) 47 FCR 226, applied.
Adams v Lambert (2006) 80 ALJR 679; Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1; Kenny v Good Pty Ltd v Mgica (1992) Limited (1999) 199 CLR 413; Kizbeau Pty Limited v W G & B Pty Limited (1995) 184 CLR 281; Neilsen v Hemptson Holdings Pty Ltd (1969) 2 QB 158; Doyle v Olby (Ironmongers) Ltd (2005) 92 SASR 303; The Commonwealth of Australia v Amann Aviation Pty Limited (1991) 174 CLR 64; Bull v Attorney-General for New South Wales (1913) 17 CLR 370, considered.

CATALANO v ZOLLO
[2006] SADC 111
JudgeTilmouth
Civil
Preliminary

Tony Catalano, an engineer by profession, was in the habit of seeking out profitable businesses in order to enhance the family income, and where possible, to provide employment opportunities for his children, a son and a daughter. One such investment was in a company called Alano Water, formed some time in the 2005 financial year, about which very little evidence was given. Another was a car washing business trading as “Bright ‘N’ Clean”, purchased in early 2000, about which the Court heard a great deal of evidence.
This litigation centres upon a claim by Mr Carl Antonio Catalano (hereinafter at most times “Tony Catalano”) and his wife Angela (the plaintiffs), for damages arising out of the purchase of Bright ‘N’ Clean. At the core of their claim are alleged defects in a vendor’s statement furnished before the transaction was completed and misrepresentations said to have been made by the second defendant Zollo Nominees Pty Ltd, and by its agent, a business broker engaged by them to sell the business. Relief is sought under the Land and Business (Sale and Conveyancing) Act 1994 (SA) (“the Act”) and under the Misrepresentations Act 1972 (SA). Those by way of recision and in breach of contract were not pressed.
Pre-contractual dealings
By mid to late 1999, the Catalano family ended their involvement in a reception centre business. Later that year, an advertisement placed in The Advertiser of Wednesday 15 December 1999, came to the attention of their son Mark Catalano. This formed part of a larger advertisement lodged by Weston Raine & Horne (as the firm then was), and read ([Exhibit P1]):
“Dynamic Cash Business $130,000
Long-term staff in place. Could be run under management or by owner. 1998/99 returns show net profit in excess of $77,000 after owner’s wages have been paid.”
It was lodged by Kevin Grant, the business broker enlisted by the defendants. No point was taken that he acted in any capacity other than as their agent – for the first defendants with respect to a lease and the second defendant with respect to that sale of the business - in the course of the negotiations leading up to the purchase[1]. There was a good deal of disputed evidence concerning a meeting with Mr Grant in mid January 2000 at his Hutt Street office. A second advertisement was placed in The Advertiser on 12 January 2000 in exactly the same terms as the first [Exhibit P1].
[1] Kemp v Vettese (2000) 77 SASR 53.
On all accounts discussions took place between Mr Grant and Tony and Mark Catalano on 17 January 2000 and there was a shorter meeting the following day. On 17 January the Catalanos were handed trading statements for the last three full financial years of the Bright ‘N’ Clean business. Mr Catalano made a series of notes at the time on a copy of those statements. This became Exhibit P2. He also made further notes when discussing the merits of purchase, later on. As the terms of the discussions with Mr Grant are somewhat controversial, it will be necessary to return to this subject later.
It is clear the statements in question were prepared by the accountants for the defendants, Fennell Allen & Co, and forwarded to Mr Grant. It suffices presently to record these commenced on 1 July 1996 and concluded on 30 June 1999, showing a small increase in profit over that period of time. Gross income was between the low to mid $400,000’s p.a., trading profits of between $42,000 and $77,692 p.a. were achieved and net profits were returned of between $100,732 and $195,601.
These were supplemented by further trading figures for the July-December 1999 trading period. They were presented to Tony and Mark on a facsimile letterhead of Weston Raine & Horne dated 17 January 2000, prepared in handwriting by Mr Grant [Exhibit P3], broken down month-by-month over the stated period. The precise format and content of the facsimile, which because of its central importance in the case, is reproduced as follows:
The Catalano’s were at the same time handed a completed Form 2 under the Act, entitled “Statement under section 8”, also dated 17 January 2000 [Exhibit P5]. This incorporated the same trading statement for the previous three financial years separately given to Tony and/or Mark Catalano; these were marked in handwriting by Mr Grant as pages 5(a) and 5(b) respectively in the Form 2 disclosure. At the same time he proferred a Business Sale Agreement prepared by him, which on both accounts was taken away by the Catalanos for them to study and consider. The asking price was $130,000, as recorded in Schedule 1, plus stock of $8,200. The draft agreement also contemplated as an integral part of the sale, the entry into a lease over the real estate on which Bright ‘N’ Clean was situated, for a term of five years, at a current rental of $30,000, subject to annual CPI review. At this time Mark Catalano executed a confidentiality agreement protecting the supplied information [Exhibit D3].
Sale of Bright ‘N’ Clean
The draft sale agreement was returned by the following day, 18 January, either pre-executed by Tony Catalano, or otherwise executed by him in Grant’s office that day. The contracting parties were Zollo Nominees Pty Ltd as vendor and Carl Antonio Catalano “and/or nominee”, as purchaser. It was counter-executed by Julie Zollo in the presence of Mr Grant later on, in her capacity as a Director of the vendor, and by Mr Catalano in the presence of his son Mark [Exhibit P4], whenever that was. The completed document, Exhibit P5 in these proceedings, also bears the date 18 January 2000, adjacent to the signatories. A deposit of $3,000 was paid then, or the next day; a receipt bore the date 19 January 2000 [Exhibit D4].
A lease dated 18 February 2000 was executed by Mr and Mrs Catalano in favour of the personal defendants. This was to commence from 14 February 2000 and expire on 13 February 2005, with respect to the real estate at 415 Brighton Road, Brighton, in the terms contemplated above [Exhibit P6].
The balance of the purchase price was raised by a loan facility with Bendigo Bank Limited, under which both plaintiffs personally borrowed a total of $147,000; repayments were due monthly commencing on 17 March 2000 [Exhibit P8]. The Bendigo Bank records reveal regular repayments in slightly varying but roughly similar amounts, right through to February 2006 [Exhibit P9]. There is no reason to doubt the evidence of Tony Catalano that this loan was secured by mortgage over the family home, owned jointly with his wife.
The family unsuccessfully traded the Bright ‘N’ Clean business until the lease came to an end. On expiration they returned vacant possession to the lessors, ceased operations and walked out. Not one skerrick of evidence was devoted to the subsequent fate of the business.
The Financial Structure of the Catalano Family Business
In their further Statement of Claim of 29 June 2006, on which the plaintiffs went to trial, they claimed damages measured by reference to loss of profit as follows:
15.     … the Business has achieved the following profits or losses for the following periods:
15.1   the Settlement Date – 30 June 2000 – profit $1,763.56;
15.2   1 July 2000 – 30 June 2001 – loss $55,093.00;
15.3   1 July 2001 – 30 June 2002 – loss $18, 355.64;
15.4   1 July 2002 – 30 June 2003 – profit $416.00;
15.5   1 July 2003 – 30 June 2004 – loss $45,346.92;
15.6   1 July 2004 – 14 February 2005 – loss $24,222.71.”
The source of these respective sums comes in part, from the profit and loss accounts of the Catalano Family Trust[2]. Mr McCarthy, a careful and conservative public accountant, gave evidence of preparing those accounts, as well personally for Tony Catalano and the Family Trust over the years since 1996. He also compiled their respective taxation returns. The Trust was formed on his advice and their affairs were structured accordingly, no doubt for sound financial and taxation reasons.
[2] Exhibits P23 (para 15.2), P25 (para 15.4).
The effect of Mr McCarthy’s evidence, which may be readily accepted, is that the scheme erected for conducting Bright ‘N’ Clean, was that it was purchased personally by Tony Catalano, and leased by him to the Catalano Family Trust. Consequently, in legal terms, ownership (including the plant and equipment and the goodwill) remained with Tony Catalano. The Trustee was Maca Developments Pty Ltd. Some payments were made to him by the trust for the hire of the plant and equipment and to recoup interest on the Bank loan. The records and the evidence clearly demonstrate that Mrs Catalano had no direct involvement, financially or otherwise.
It appears from all the evidence that the car washing business proved unprofitable, from relatively early on. By the time Mr McCarthy first reviewed the situation in some detail during November or December 2001, a decision was made that Tony Catalano would charge the business the actual amount of interest paid by him on the Bendigo Bank loan. This was one of several means designed to help keep the business afloat. The various taxation records confirm that manner of dealing. The family employed a number of measures over time to improve turnover, without success. These included various promotions, operating a café for customers, actively touting for business, trialing a voucher system, purchasing new equipment and so on. Mark Catalano managed the business. He drew no wages over the entire five years of their involvement.
Trading position of Bright ‘N’ Clean at point of sale
The financial records of Bright ‘N’ Clean were examined by Mr Nicoll, a well qualified chartered accountant, engaged and called by the plaintiffs in these proceedings . He did not advise on the merits of the purchase, nor was he asked to. His various reports comprise [Exhibits P33A-D inclusive]. Mr Nicoll identified a number of significant deficiencies, in his opinion, in the Form 2 supplied by the vendor on the sale of the business, in this instance.
More significantly, following an exhaustive examination, he found the income derived from a government (Fleet SA) contract previously enjoyed by the business, comprised 74.42 per cent of turnover; a calculation made from the primary records, kept by the vendor, Zollo Nominees Pty Ltd[3]. Based on this conclusion, Mr Nicoll proceeded to value the business at around the sale price obtained by the second defendant of $130,000, assuming the Fleet SA contract remained on foot. In the event that it did not, he regarded the Bright ‘N’ Clean business as being of all but no value. As it happens, that contract terminated in October 1999. His evidence on this topic was:
"QIf you then applied the figures by taking off 74% of the turnover to account for loss of Fleet SA, where does that leave you.
AIt would essentially mean that the business was worthless because you could never make a profit. The only worth of the business would be in my opinion, the plant and equipment.
[3] Exhibit P33C.
It is on these conclusions, and the trading position and true value of the business lying behind them, on which the plaintiffs heavily relied in claiming damages pursuant to s15 of the Act, and for misrepresentation contrary to s7 of the Misrepresentation Act. They seek recovery of the purchase price and the loss of anticipated profits. Claims for unpaid wages to family members and the leasing costs, as such, were not maintained.
The trading position of Bright ‘N’ Clean in the months preceding sale, was complicated by the fact that there were “carry-over” payments from the expired Fleet SA contract received afterwards, and by the fact that further income was temporarily injected into the business, from work secured by Mrs Zollo from a firm Auto-Group, a car auction business located in the North-Western suburbs of Adelaide. After handing over the business to the Catalanos, the natural defendants secured a significant amount of work for Auto-Group, in their own right. This work was increasingly carried out on the Auto-Group premises, and provided an income according to the invoices rendered in the name of the second defendant, of more than $200,000 p.a. on average over the following five years[4].
[4] Exhibit P33D.
The Auto Group payments for Bright ‘N’ Clean as shown in Exhibit P27, comprised four bank deposit slips dated 15 November 1999 ($1,255), 14 December 1999 ($4,325), 27 December 1999 ($3,465) and 12 January 2000 ($7,485). These payments sustained higher earnings figures from this source, as did a Fleet SA payment of $11,600 in November 1999 [Exhibit P33C]. Of the income received in November and December 1999 then, a significant component was injected from either expired or temporary sources.
The claim under the Land Business (Sale and Conveyancing) Act
The first claim to damages arises from s15 of the Act. Clearly this transaction constituted a contract for the sale of a business within the meaning of the Act[5]. In order to appreciate the basis of this limb in the action, it is necessary to set out the relevant provisions in full:-
[5] Compare APD Parcel Delivery Pty Ltd v Baumann (2002) 223 LSJS 436: [2002] SASC 350.
LAND AND BUSINESS (SALE AND CONVEYANCING) ACT 1994 - SECT 15
15—Remedies
(1)Where a vendor's statement is not given or certified as required by this Part, or the statement given is defective, the purchaser may apply to a court of competent jurisdiction for an order under this section.
(2)On the hearing of an application under subsection (1) the Court may, if satisfied that the purchaser has been prejudiced by the failure to comply with this Part, exercise any one or more of the following powers:
(a)avoid the contract and make such other orders as the Court thinks necessary or desirable to restore the parties to the contract to their respective positions before entering into the contract;
(b)award such damages as may, in the opinion of the Court, be necessary to compensate loss arising from the non-compliance;
(c)     make such other orders as may be just in the circumstances.
(3)     Damages may be awarded under subsection (2)(b) against—
(a)     the vendor;
(b)if it appears that the purchaser has been prejudiced by a failure on the part of an agent to carry out duties imposed by this Part—the agent,
or both.
These provisions leave the measure of damages at large for the Court to assess, thus making available to it the full range of damages, in order to compensate for loss or damage caused by the contravening conduct. It can also be seen that the statutory cause of action under s15 is complete on proof of the statement required by Part 2 being “defective” in the first place (ss15(1)), and the purchaser being prejudiced in the second (ss15(2)). It is not necessary to prove damages in order to make good the action.
Whether the requisite statement is defective, is not determined in a vacuum, but against the entire requirement to serve in the form “required by regulation” (ss8(1)). That in turn is supplied by r4 of the Land and Business (Sale and Conveyancing) Regulations 1995 which provides:-
4—Forms
A form set out in Schedule 1 must be completed in accordance with the instructions contained in the form and, if a form indicates that a particular document is to be attached to the form, that document must be so attached.
The Regulations then continue:-
10—Sale of small business—prescribed particulars
For the purposes of section 8(1)(b) of the Act, the prescribed particulars are—
(a) the particulars set out in Form 2 Schedule 1; and
(b)the particulars set out in Form 2 Schedule 2 Division 2 under the headings "Particulars relating to environment protection" and "Particulars relating to the Stock Act 1990" to the extent that the matters set out under those headings affect, presently or prospectively, the business the subject of the sale.
Form 2 of Schedule 1, entitled “Statement under section 8” of the Act, states in the opening paragraph, that the ‘purpose of a statement under section 8 … is to put you on notice of certain particulars concerning the business to be acquired …”. It then prescribes the necessary content by subject matter. Part E relates (amongst other things) to trading statements for the “last 3 financial years”. Schedule 1 Division 2 contains a series of numbered prescribed particulars, including items 7 and 8, being two items supplied and completed by the vendor in this case, in the following way:
7.During the period between the end of the most recent financial year or period covered in the summary of Division1 of Schedule 1 and the date appearing in Part C of this statement –
(a)the business was satisfactorily maintained;
(b)no circumstances adversely affecting the business arose except the following:
(c)the average weekly sales have been $7,975.00 26 weeks to 31.12.99;
(d)the daily hours of trading have been 8.30 am – 5.00 pm.
8.During the period referred to in Item 7, have any circumstances arisen or have any trading practices been adopted (including any substantial discounting of goods or services) that have affected –
(a)     the gross profit of the business in dollar terms? Yes
(b)     the gross profit of the business in percentage terms? Yes
If the answer to either question is YES, give full particulars.
DEPT OF SUPPLY CONTRACT ENDED OCTOBER 1999”.

The base obligation to furnish the essential requirements contained in the Form 2 particulars, including the three years financial details, were fulfilled by the second defendant in this case. The critical question remains however, whether the answers to Items 7 and 8 were “defective” in the context of these combined regulatory obligations and requirements.
As is readily apparent, Item 7 mentioned no “circumstance adversely affecting the business” and Item 8, although disclosing that the contract had ended, contained no further reference to the impact of the “Department of Supply” contract on the gross profit of Bright ‘N’ Clean. This was the Fleet SA contract, as it is called throughout these reasons.
In approaching this question, it is necessary to bear in mind the legislative history. The Act replaced the Land Agents, Brokers and Valuers Act 1973 (SA). Both contained an identical provision incorporating the general concept of “defective” statements [ss15 and 91G respectively], in contrast with other expressions that might have been adopted by Parliament, such as the more familiar “misleading”, “deceptive”, or “incomplete” and so on. This was remedial legislation, effecting changes to the existing law, for the benefit of the community in order to “regulate the sale of land and business”.
The statutory scheme therefore creates the essential obligation to furnish the prescribed particulars in accordance with the instructions and the content of the pro-forma Form 2. So much is evident from the language employed, “must” in s8: Project Blue Sky Inc v Australian Broadcasting Authority.[6]
[6] (1998) 194 CLR 355
Accordingly, the legislation is to be construed in the event of ambiguity, in a way that “would promote the purpose or object of the Act”, in the words of Isaacs J in Bull v Attorney-Generalfor New South Wales:[7]
In the first place, this is a remedial Act, and therefore, if any ambiguity existed, like all such Acts should be construed beneficially. This means, of course, not that the true signification of the provision should be strained or exceeded, but that it should be construed so as to give the fullest relief which the fair meaning of its language will allow. [footnotes omitted]
[7] (1913) 17 CLR 370, 384
As the Act does not define “defective” it must be accorded its ordinary grammatical meaning. In summary, “defective” does not carry any particular legal connotation, it simply covers “something lacking”. Otherwise it attracts a wide general meaning, as noted by Lockhart J in another context: Topfelt Pty Ltd v State Bank of New South Wales Ltd:[8]
According to its ordinary usage a "defect" means a lack or absence of something necessary or essential for completeness; a shortcoming or deficiency; an imperfection. A defect according to ordinary understanding is not necessarily something which is of a minor nature, it may be either major or minor. The word "defect" has been considered by judgments of courts in a variety of contexts: see, for example, Tate v Latham & Son [1897] l QB 502 per Bruce J at 506-507 ("defect in the condition"); Dawson v African Consolidated Land and Trading Co [1898] 1 Ch 6 ("defect in appointment"); Sanderson v National Coal Board [1961] 2 QB 244 ("patent defect"); Metcalf v Great Boulder Pty Gold Mines Ltd (1905) 3 CLR 543 ("defect in condition"); Hampson v Clyne (1967) 86 WN (Pt 1) (NSW) 321; Re Gagliardi; Ex parte Mount (1984) 5 FCR 52 ("defect" as failure to sign and file a certificate).
[8] (1993) 47 FCR 226 at 237
It is not difficult to ascertain the evident purpose and effect of the obligations prevailing since 1973. One purpose, and one immediate effect, was to erode the common law principle “let the buyer beware”. The precise evil sought to be remedied by the 1973 (and successive legislation) was made clear in the second reading speech[9], in the context of what was then s91[10].
There has been a considerable number of cases where misrepresentations have been made as to the turnover of small business. Inspection of the books has failed to reveal a misrepresentation of the true position. It is not until after the purchaser has entered into possession and has had time to assess and see for himself the actual turnover that the misrepresentation comes to his notice. The provisions of this clause should protect purchasers against the unscrupulous or careless vendor, but will not affect the honest person who is disposing of a small business.
Kirby P (as his Honour then was) spoke of the purpose of analogous legislation in Nguyen v Taylor[11] as one designed:
to reduce the opportunity for gazumping…achieved…by shifting to the vendor the obligation to make disclosure to the purchaser…[and]…to do away with the costly and time-consuming searches and inquiries… .
Further as Bleby J observed in Myles Pearce & Co Pty Ltd v Leuci and Martin[12]:
It appears reasonably clear that Parliament intended that a purchaser should be given all that relevant information ... (i)f some of that material information is not supplied or is misleading the purchaser cannot make an informed decision ... .
If that places a heavy onus on vendors and agents to provide complete and accurate information, that merely reflects the policy of the legislation.
[9] [Legislative Council November 7 1973, p1624].
[10] Now s15
[11] (1992) 27 NSWLR 48 at 52
[12] (1997) 193 LSJS 491 at 498.
Bearing these considerations in mind, the content of the Form 2 served in this matter, must be assessed against the objects and purposes of the Act and according to the structure and content of the form in which they appear. When read as a whole, it must be determined whether it achieves the purposes of the legislation to the extent that there is substantial compliance with the statutory scheme: Myles Pearce & Co Pty Ltd v Leuci and Martin[13].
[13] Above at 500
When it comes to Items 7 and 8 in particular, both are confined in point of time to the same period, namely “the period covered in the summary of Division 1 of schedule 1” - which was I July 1996 to 30 June 1999[14] - and “the date appearing in Part C of this statement” - which was 17 January 2000[15].
[14] Exhibit P5 page 4
[15] Exhibit P5 page 2 of 9.
Item 7 directs attention to the running of the business, circumstances adversely affecting the business, average weekly sales and hours of trading, over that entire period. Item 8 focuses on the supply of more specific information in the identical time frame, firstly by seeking disclosure of “any circumstances [that have] arisen” or any “trading practices” adopted, affecting gross profit in both dollar and percentage terms. This is a necessary consequence of properly answering the question posed by Item 8 “(I)f the answer to either questions is yes, give full particulars”.
Construed in this way, the items in question clearly direct attention initially to business practices or other identifiable circumstances relating to the business in general, and then to those specifically affecting gross profit that is, in colloquial language, anything affecting the “bottom line”. In legal terms, the purpose of Items 7 and 8 is to oblige the vendor at first to qualify and then quantify the effect of the prescribed circumstances, relative to the gross profit of the business. This the vendor did not do.
It was put on behalf of the defendants that these items were divided between those internal to the business (Item 7) and those external to it (Item 8). There is no good sense in drawing such a fine distinction; the disclosure of the loss of the “Department of Supply” contract could as readily been made under either. Since the lost contract adversely affected the business on any view, it ought to have been placed in Item 7. Further, that circumstance was capable of fitting both descriptions, as the contract was external to the business, but affected its viability greatly. Even though the loss of the contract was duly disclosed, that did not of itself inform the potential purchaser of the consequences or impact at all; it might have been minor or as in this case, major. Moreover the critical information was not something that could readily be ascertained by the purchaser. Of course, further detail could have been sought by the purchaser, but it was not, for reasons that should become more apparent later in these reasons. In any case there is no legal obligation on the purchaser to make that further enquiry.
However that may be, it remains the fact that the Form 2 as completed by the vendor, did not translate the effect of the loss of the Fleet SA contract on the gross profit of the business, in any terms. A proper reading of the Form 2, taking into account its structure and content and given the intention of the regulatory regime lying behind it, leads to the conclusion that the vendor must disclose any circumstances or practice affecting the gross profit, and that it must also do so translated into both dollar and percentage terms. Form 2 was drafted and designed in the manner referred to for the entirely sensible purpose of “teasing–out” this very kind of information. If it were otherwise, Items 8 (a) and (b) would be rendered otiose, thereby, quite erroneously “attribute to the legislature an overwhelming preference for form over substance”: Adams v Lambert[16].
[16] (2006) 80 ALJR 679 [34].
It should be made clear at this point, that the evidence of Mr Nicoll, insofar as he expressed opinions on supposed deficiencies in the subject Form 2, plays no part in reaching this conclusion. Evidence of this nature was tendered as illustrative of accounting practices when advising vendors or purchasers of their respective obligations and rights under the legislation. However, that evidence cannot influence the Court in its function of determining the proper construction of the statutory scheme, or for that matter of determining in a given case, whether the proven facts amount to the kind of deficiency contemplated by s15(1): Marquis Camden v Commissioners of Inland Revenue[17]. These are questions of law and conclusions of fact, for the Court to resolve. The situation is analogous (with appropriate modification to the present context) with that dealt with by King CJ in F v R[18], in a passage subsequently quoted with approval by the High Court in Rogers v Whitaker[19]:-
In many cases an approved professional practice as to disclosure will be decisive. But professions may adopt unreasonable practices. Practices may develop in professions, particularly as to disclosure, not because they serve the interests of the clients, but because they protect the interests or convenience of members of the profession. The court has an obligation to scrutinize professional practices to ensure that they accord with the standard of reasonableness imposed by the law. A practice as to disclosure approved and adopted by a profession or a section of it may be in many cases the determining consideration as to what is reasonable. On the facts of a particular case the answer to the question whether the defendant's conduct conformed to approved professional practice may decide the issue of negligence, and the test has been posed in such terms in a number of cases. The ultimate question, however, is not whether the defendant's conduct accords with the practices of his profession or some part of it, but whether it conforms to the standard of reasonable care demanded by the law. That is a question for the court and the duty of deciding it cannot be delegated to any profession or group in the community.
In any case, Mr Nicoll’s views as to accounting advice might be one thing, but the obligations resting on a vendor, are quite another.
[17] [1914] 1 KB 641.
[18] (1983) 33 SASR 189 at 194
[19] (1992) 175 CLR 479 at 488
Legislative requirements applied to the facts
The facts of this case illustrate the utility of the above construction. The evidence of Mr Nicoll that the Fleet SA contract amounted to 74% of the business income and that it was valueless without it, not only went unchallenged, it also went uncontradicted, for the defendants gave no evidence, nor did they adduce any expert evidence calling his conclusions into question. Perhaps this is not so surprising since their own records formed the basis of Mr Nicoll’s analysis.
Those records show the turnover of Bright ‘N’ Clean between October 1997 and December 1999 of $990,873.94 [Exhibit P33C], with a contribution from Fleet SA in the same period of $737,430. That is precisely 74.42%[20]. They also show that the additional figures relating to the further trading period beyond the three full financial years, of $7,974 per week, included carry-over payments from the expired contract of $11,600 during November 1999, thus temporarily “inflating” turnover in that period, not to mention the other sums injected by Auto Group.
[20] Exhibit P33A p4.
Based on these uncontested facts, a compliant response to the particulars required by the Form 2, as to Item 8(a) would be along the lines; “yes” by $737,430 over that period. Equally Item 8(b) called for an answer “yes, 74%”. Further, due compliance with the Form 2 required the position of carry-over payments for November to have been identified separately as such, excluded altogether, or at least for the base figure of $7,974 p.m. to have been qualified in a meaningful way. The Form 2, was therefore defective in at least those three material respects. It was further deficient in that the income to the date of purchase, as required by s10(2) of the Act was absent. By January there was no further income from Fleet SA, and the Auto Group business was scaling down, such that for the first time the true effect of the declining revenue was more likely to have been more accurately reflected by the January sales figures.
If the Form 2 in general, and the Items 7 and 8 requirements in particular, were to be construed as sought by the defendants, that would reduce their effectiveness substantially, if not entirely. The defendants must have known that the Fleet SA contract formed an appreciable and significant portion of their income stream, over those three years. They must also have realised, because of their intimate knowledge from running the business, that if asked they would have to concede as much. On that matter a letter written by Mrs Zollo to Fleet SA dated 30 March 1999 [Exhibit P28] contains a succinct admission by her in her capacity as a Director of the second defendant, that “(T)he vast majority of our business over the past three years has been to Fleet SA…”. Despite this, they advertised the business on two separate occasions as returning “net profit in excess of $77,000”. Their failure to give evidence, or to call contradictory evidence, provides nothing to detract from this conclusion: Jones v Dunkel[21].
[21] (1959) 101 CLR 298.
Looked at from the other side of the transaction, it is a matter of common sense that no-one in their right mind would have proceeded with the purchase of Bright ‘N’ Clean had they known of the high degree of reliance of the business on Fleet SA. It must follow that the vendor’s statement was not one given in accordance with Part 2 of the Act. The first trigger to the statutory right to claim damages under the Act is therefore made out, thus enabling Tony Catalano as purchaser, to “exercise any one or more” of the remedies it provides (ss15(2)). The claim by Mrs Catalano breaks down at this hurdle, as she was not a purchaser.
Prejudice to the purchaser?
A second prerequisite to damages, lies in proof of “prejudice” to the purchaser upon the failure to comply with the Act: s15 (2). Once again, at this point, the claim by Mrs Catalano fails, for the same reason. The position of her husband stands quite differently.
The Act requires proof by him of “prejudice”, that is something less than damage, whilst at common law actions in tort, except for those in trespass, are incomplete without proof of damage. Obviously “prejudice” simply means to harm, impair or injure another’s rights, or to create detriment, injustice or unfairness.
No matter how defined, there can be no doubting prejudice to Tony Catalano. He entered into the agreement to purchase a business by paying $130,000, a business on the evidence, that was practically worthless. As a further consequence, he borrowed money to complete the purchase and he put the family home at risk by proffering it as security. An investment property was sold as a consequence. He was saddled on the horns of a considerable dilemma as time went on, of making a difficult choice whether it was best to trade on, rescind the contract, or even prematurely walk out of the business, being confronted with a doomed enterprise he understood at the time of purchase to be quite profitable. The second precondition to the claim to damages under the Act is therefore satisfied.
There can be no doubt that Tony Catalano would not have proceeded to contract, had he realised the true trading position of Bright ‘N’ Clean. His evidence was that he was looking for a profitable investment, the payback period being “less than five years” and “if it didn't meet that, then I wouldn't do it”. Whatever the commercial merits of this stance were, it is not inherently difficult at all to accept as a reasonable “bench mark”.
The claim under the Misrepresentation Act
The second cause of action pressed by the plaintiffs was one brought under the Misrepresentation Act (above), which in material part provides:-
7—Damages for misrepresentation
(1) Where a contracting party is induced to enter into a contract by a misrepresentation made—
(a) by another party to the contract; or
(b) by a person acting for, or on behalf of, another party to the contract; or
(c)by a person who receives any direct or indirect consideration or material advantage as a result of the formation of the contract,
and any person (whether or not he or she is the person by whom the misrepresentation was made) would, if the misrepresentation had been made fraudulently, be liable for damages in tort to the contracting party subjected to the misrepresentation in respect of loss suffered by him or her as a result of the formation of the contract, that person is, subject to subsection (2), so liable to that contracting party, in all respects as if the misrepresentation had been made fraudulently and were actionable in tort.
It is evident that the elements of this action differ from those provided for under the Act. Here, the legislation requires proof of an inducement to enter into a contract acting under a misrepresentation (s7(1))[22].
[22] Australian Steel & Mining Corporation Pty Ltd v Corbin [1974] 2 NSWLR 202, 209-210, Copping & Penhall v ANZ McCaughan (No 2) (1995) 181 LSJS 151, 157-158.
Mr Cole for the plaintiffs rested the case for the plaintiffs under this limb, on oral misrepresentations claimed to have been made to Tony and Mark Catalano during the meeting at Hutt Street on 17 January 2000. An alternative submission was advanced based on the failure of the vendor to reveal more than it did through the Form 2.
Representation by the vendor’s agent?
Mr Grant is alleged to have orally represented to both Tony and Mark Catalano, as it appears during the meeting of 17 January 2000, that the loss of the Fleet SA contract represented about a 20% of the business's turnover. It is further alleged that he dictated the corresponding adjustments to each item in the financial statements, one by one.
Before proceeding to analyse the evidence, on no view of the matter could Mrs Catalano succeed in an action for damages under the Misrepresentations Act. Firstly she was not a contracting party within the meaning of s7(1) and secondly because she was not induced by anyone. Accordingly her claim under this head also fails at the threshold stage. The extent of the disagreement between the Catalano’s on the one hand and Mr Grant on the other, might be broadly summarised in the following way.

According to Tony Catalano the course of events was that the first advertisement caught the eye of his son Mark, who drew it to his attention. Mark made enquiries and reported that the business was potentially a viable proposition. Mark then went to Weston Raine and Horne alone, sometime after 15 December 1999, and was given a copy of two pages of the trading statements for the last three financial years [Exhibit P2(a)]. They examined these and thought it worthwhile to investigate further. There were two meetings with Mr Grant, one early January and the other on the 17^th.
Both went to see Mr Grant who advised them the Fleet SA business, was worth “only 20% of the total income”. Mr Grant then made some calculations on the effect of the loss of that contract, going through each item “reading out the effect of losing the 20% business and I was writing it down on the left hand side”. These notes appear on Exhibit P2 on the left hand margin in black ink.
At some time during the course of these discussions, Tony Catalano made a note on Exhibit P2 “Ave [average] 26,000/month”, because Mr Grant gave him that figure as the average per month as the expected income. A further note “6,650/w”, was made, calculated by dividing the former by four to achieve a weekly figure. A final figure of $349 [$349,000] was also written down, being the multiplier of 6650 by 52 to produce an annual figure[23]. He said these figures were put there following what Mr Grant told him “what the expected costs would be without Fleet SA being involved”.
[23] Also in black ink in the bottom right of page 1, Exhibit P2.
Exhibit P2 also contains other figures, this time written in blue ink, most in the centre of page one, which Tony Catalano added after the meeting, probably later that night at home when discussing the prospects with other members of the family around the kitchen table. Those figures reflect the starting point furnished by Mr Grant, according to Tony Catalano, but “in some cases I might have thought a bit different so I adjusted that to be a bit more conservative”. The outcome was an estimate of $336,000 which by then he had in mind as the likely adjusted annual cost of running the business. On the second page of Exhibit P2, there are further notes written by him relating to private expenses of the business, which on all accounts were supplied by Mr Grant the following day, that is 18 January 2000. Mr Grant himself only received them that morning by way of facsimile from Fennell, Allan & Co [Exhibit P3A]. Those correlate with notes made by Mark Catalano [Exhibit P2a], and the evidence of Mr Grant himself.
Whatever the content of the discussion of the 17^th, Mr Catalano formed the view that the business was “very profitable”. After considering the payback period was less than five years, “which was my rule of buying a business”, he determined to go ahead with the purchase. He also confirmed paying the deposit a day or so later, as there was another purchaser apparently interested in the business at the time.
For his part Mark Catalano was more precise as to dates and times. He deposed to seeing the advertisement in December, at a time when the family was looking for a certain type of business, and subsequently speaking to his father about it, who told him to “ring up and make enquiries”. Mark Catalano spoke to Mr Grant on the telephone and claims that sometime around late December 1999, made an appointment to see him. On this first contact, Mr Grant informed him a Fleet SA contract was recently lost and that it was worth about 20% of the business. Mark Catalano quickly jotted some notes on the copy of the two pages of trading statements given to him by Mr Grant at this first meeting and took them home to discuss with his father and the family.
Mr Grant denied handing a copy of the trading statements to Mark Catalano, other than for the first time at the meeting of 17 January 2000. He denied making any representation at all, or those alleged and said there was only the one meeting of consequence between them.
It has not been possible to reconcile the conflict in the evidence on the form and the content of the discussions with Mr Grant, or whether more than one meeting took place, based solely on appearances in the witness box. None of the three men involved appeared to be doing other than their best to recall the events, as they now recollect them to be. No doubt the passage of time has eroded the memory of each, although Mr Grant had the advantage of some contemporaneous notes and file entries, which tend to support his version of the events, so far as the number and date of meetings goes. The resolution of the dispute then very much depends on the objective facts and the intrinsic likelihood of the probable course of events.
It was Mr Grant’s evidence that he would not have handed over the financial records of Bright ‘N’ Clean before securing, as was common practice, the signing of an undertaking of confidentiality. It would also have been a highly risky exercise, to have bodly represented the effect of losing the contract was 20%. On the other hand, no advantage is gained by the Catalanos in claiming to have been given the trading figures earlier; nothing of substance – credit aside – turns on the issue. Indeed the claim is somewhat counter-productive, because the longer they had, the more time was available to devote careful consideration to the transaction, to seek independent advice, or to “cool-off”, had they so desired. As no contributory defence is pleaded, these possibilities remain of no further relevance[24].
[24] Refer Austley v Austrust Ltd (1999) 197 CLR 1.
As against that, it was put to Tony Catalano in cross-examination that he “never asked Grant to tell [him] what proportion of the earnings …were attributable to the Fleet SA contract”[25], whereas in his evidence-in-chief, it became clear this topic did arise during the discussions occurring on 17 January:-
QWhat did you tell him.
AI had asked the vendor that, as that was a likely question from prospective purchasers. The vendor advised that it was hard to quantify. He said that because the car wash always looked reasonably full that they believed they were missing out on some drive-by work. They also believed that they were missing out on work that they could have gone for, for other tenders, government tenders and/or private enterprise work, with fleets from car yards, but they couldn’t go for that work because they were committed to the Fleet SA contract. They also said that it had plusses and minuses in losing the contract, in that the freight costs they wee almost eradicated and that the wages were reduced.
The discrepancy is suggestive of a change of recollection on the part of Mr Grant: Allied Pastoral Holdings Pty Ltd v Commissioner of Taxation[26]. As with Tony and Mark Catalano, given the passage of time, there must inevitably be elements of reconstruction present in the evidence of all three men.
[25] Transcript P221 L28-32.
[26] [1983] NSWLR 1 at 26, the seventh point made by Hunt J.
All in all, the objective facts and the evidence just summarised, suggest the probabilities are that the first advertisement may have been seen by Mark Catalano and an informal approach made before January 17. Whatever the precise sequence of events, Mark Catalano rang to make the appointment with Mr Grant. He may then have been told some general things about the business, but more than likely was not given a copy of the two pages of financial records comprising Exhibit D2(a), until 17 January 2000 or slightly earlier, either after giving or promising to give, the undertaking. It seems clear enough that he took the records and discussed them with his father, possibly overnight. They then made arrangements to see Grant on the 17^th since another potential purchaser was expressing interest. In any event, as noted, the precise sequence of events in the result is unimportant, except and insofar as it reflects upon the reliability of the witnesses concerned.
The statements attributable to Mr Grant cause more difficulty. They entail serious misrepresentations. Mr Grant’s evidence was that he knew nothing of the workings of the business and there is no evidence that he communicated with the Zollos, in order to obtain the detailed information necessary to have produced the individual adjustments made by Mr Catalano against the expenses. The 20% premise was false, in any event. The plaintiffs’ case depends upon the assumption that Mr Grant either invented the figures allegedly supplied, or that he spoke to Mr and Mrs Zollo, who then falsely provided those figures for him to relay. Neither is inherently likely.
Tony Catalano struck me as a witness with an eye for detail for things that interested him and the reverse was true with respect to those that did not. The fact that the estimate he compiled as to Fleet SA turnover and overall contribution to the business [Exhibit P13] did not vary “to any great degree” from the identical analysis later undertaken by Mr Nicoll [Exhibit P33C], provides a good example.
Mark Catalano was more focussed on day to day concerns relating to the business, and he deferred, after due discussion, to his father. Mr Grant struck me as a careful and experienced business broker.
The truth of the matter is that the financial records handed to the Catalanos, supplemented as they were by the later trading figures recorded in Exhibit P3, led the Catalanos to conclude that the Fleet SA contract must have represented approximately 20% of turnover.
I find that the probabilities are that there was some discussion about those figures, no sooner than the 17^th. These figures suggest a fall in the order of a 20% in takings, after October 1999. Whatever Mr Grant said about the issue, was in no way his own representation; it simply reflected the state of affairs established by the figures in Exhibit P3 themselves, as interpreted by Tony Catalano. Insofar as Tony Catalano made notes against specific items on his copy of the trading figures, these were adjustments made of his own accord deriving from the premise of the 20% loss. I am unable to conclude on balance, that Mr Grant dictated those figures as he had no relevant knowledge, and they were contrary to the underlying facts, as they are now known. It may well be that Tony Catalano verbalised his notes and his calculations during the meeting, but that is a different matter.
Silence as a basis for misrepresentation.
As it happens, 80% of the average gross profit from sales over those three previous trading years, is $437,368 per annum. Tony Catalano’s reworking of the figures down to $346,000 as noted on Exhibit P2, is virtually 20% of that figure, which strongly suggests this was the source of the 20% estimate. I find this is the genesis of the conclusion that the loss of the subject contract represented approximately 20% of the overall business turnover. In essence this consideration forms the alternative basis for misrepresentation urged by the plaintiffs.
The unquantified figures disclosed in Exhibit P3 itself, would lead a reasonable purchaser to believe that the income for November of $7,974 p.w. contained no component attributable to the expired contract. When the monthly figures is reduced by the $11,600 injected by Fleet SA, the November figure becomes $16,156, or $6,939 per week.
Silence on the part of a vendor, or the failure to mention a particular matter of significance, may in some instances constitute misrepresentation[27], according to the acknowledged principle summarised in Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (No.1)[28]:
At common law, silence can give rise to an actionable misrepresentation where there is a duty upon the representor to reveal a matter if it exists, and where the other party is therefore entitled to infer that matter does not exist from the silence of the representor: W Scott Fell & Co Ltd v Lloyd (1906) 4 CLR 572 per Griffith CJ at 577; Halsbury's Laws of England (4th ed, 1980), Vol 31, par 1052. The circumstances in which silence may constitute misleading conduct under the Act were referred to in Rhone-Poulenc Agrochimie SA v UIM Chemical Services Pty Ltd (1986) 12 FCR 477. That case established that silence may be relied on in order to show a breach of s 52 when the circumstances give rise to an obligation to disclose relevant facts: see Bowen CJ at 490, Lockhart J at 504 and Jackson J at 508. The duty to disclose is not confined to cases where there are particular relationships, such as trustee and beneficiary or solicitor and client, principal and agent and guardian and ward. There is no useful purpose in seeking to analyse the circumstances in which the duty to disclose will arise as this must depend on the facts of each case.
In the present case the vendor sold a business knowing that it was subject to serious limitations upon its lawful seating capacity, limitations imposed by both the licensing authorities and the local council which vitally affected the business, its goodwill, takings and profitability and knowing that in fact the restaurant was being conducted contrary to law with a substantial element of overseating. The vendor's agent had given the purchaser to understand that the limitations upon the seating capacity and the limitations arising from the licensing of the restaurant were less restrictive than was in fact the case, while the manner in which the business was conducted at the time of sale supported this understanding. In my opinion these circumstances gave rise to a duty on the part of Henjo as vendor to reveal the true position to Collins Marrickville, the potential purchaser, before any contract was signed.
[27] See Henio Investments Pty Ltd v Collins Marrickville Pty Ltd (No. 1) (1988) 39 FCR 546, Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31, Fraser v NRMA Holdings Ltd (1995) 55 FCR 452, Software Integrators Pty Ltd v Roadrunner Couriers Pty Ltd (1997) 69 SASR 288.
[28] Above at 39 FCR 557.
That is the situation here. The vendor sold the business knowing its main source of income had dried up, and yet had given the purchaser to understand that the business was none-the-less profitable, which clearly was not the case. Any purchaser looking at Exhibit P3 in the form handed to Tony Catalano by Mr Grant, would have been led to believe there was an insubstantial fall in turnover following the loss of the Fleet SA contract. Given the effect of that loss was so marked, and that a purchaser had no means of discovering the relevant information from sources other than the vendor, a clear obligation arose to declare that kind of information.
That duty was magnified once the business was advertised as achieving profits in excess of $77,000, advertisements placed well after the Fleet SA contract had expired, and after income from that source had stopped coming in. Nothing like that figure was capable of being realised given the actual trading position as at the time those advertisements were published in The Advertiser. It is difficult to imagine any more important or material consideration in the context of this particular transaction, other than the fact that the Department of Supply or Fleet SA contract made up the overwhelming majority of its business.
The cause of action under the Misrepresentation Act is therefore made good, on this ground so far as Tony Catalano is concerned, given that he was induced to enter into the contract, for the reasons already identified above.
The measure of damage – general considerations.
In general terms, the object of an award of damages is to place the plaintiffs in the position they would have been, but for the contravening (or tortious) act: State of South Australia v Johnson[29], Gates v City Mutual Life Assurance Society Ltd[30], Wardley Australia Ltd v Western Australia[31]. In that respect there may also be compensation for consequential losses flowing directly from such actions, including the loss of opportunities foregone: Henville v Walker[32].
[29] (1982) 42 ALR 161 at 169-170.
[30] (1986) 160 CLR 1, 13-14.
[31] (1992) 175 CLR 514, 525-526.
[32] (2001) 206 CLR 459, 502-503.
Under the Misrepresentations Act, the proper measure of damages is the tortious measure for fraudulent misrepresentation, even in the case of an innocent misrepresentation: Roy Scott Trust Ltd v Rogerson[33], Copping v ANZ McCaughan Ltd[34].
[33] [1991] 2QB 297, 305.
[34] (1997) 67 SASR 525, 579-580.
An assessment in the particular circumstances of this case is complicated because Mr Catalano chose to run the business through the agency of the family trust, a different legal entity to the primary contracting party. There is no claim by the trustee company itself, Maca Developments Pty Ltd, to recover damages.
The measure of damages – claims under both Acts.
Such damages may be awarded under s15(2) of the Act as are “necessary to compensate loss arising from non-compliance”. That exercise involves, as Gaudron J points out in Marks v GIO Australia Holdings[35], “identifying the loss or damage suffered …”. Notwithstanding the various potential approaches to assessing damages, the starting point for the plaintiff was the purchase price of $130,000, based on the premise that the business was worthless. There can be no doubting that the usual measure of damages in circumstances such as this, is the difference between the true value of the property acquired at the time of transacting and the price paid for it[36].
[35] (1998) 196 CLR 494, [15].
[36] Kenny & Good Pty Ltd v Mgica (1992) Limited (1999) 199 CLR 413, Kizbeau Pty Limited v W G & B Pty Limited (1995) 184 CLR 281.
When Mr McCarthy structured the books of account, he valued the plant and equipment, at least for bookkeeping purposes, as being in the order of $89,000, whereas the written down historical value in the books of accounts recorded at the time of purchase was in the order of $25,000. Nevertheless counsel for the plaintiffs properly conceded they had to “offset” taxation benefits against the starting point of the purchase price: Neilsen V Hemptson Holdings Pty Ltd[37]; Doyle v Olby (Ironmongers) Ltd[38].
[37](1986) 65 ALR 302, 313),
[38] (1969) 2 QB 158, 171.
The net effect of this manner of treating plant and equipment and in claiming depreciation, was that Tony Catalano reduced the incidence of income tax payable personally by him. The evidence of Mr McCarthy was that the tax advantage averaged at 40 cents in the dollar. Over five years, the tax benefit gained for depreciated plant and equipment initially valued at $89,000, was about $35,600. On this footing damages reduce from $130,000 to $94,400.
Another consideration relates to the burden of interest accruing on the Bendigo Bank advance. This was paid personally by Mr Catalano for which, in the end result, he charged the family trust an identical sum, for the reasons explained already. This is therefore largely a neutral consideration - money in and money out of the same order. There was one exception. An additional $9,000 was paid to him in the 2001 financial year, income on which he was liable to the 40% marginal tax rate. The net income on that was then in the order of $5,400, a tax benefit of $3,600, thus reducing damages on this method of calculation to $90,800.
A final consideration concerns the administrative costs of the borrowing, detailed in Exhibit P8. A total advance of $147,000 was provided by Bendigo Bank, the additional $17,000 being made up of various borrowing costs, including conveyancing, bank administration charges, legal fees and the like. Mr McCarthy said some borrowing expenses were claimed by Tony Catalano “one-fifth proportionate claimable … over five years”, producing a tax benefit of approximately $1,000 for each of five years, $5,000 in rounded terms. This further reduces the level of damages actually sustained to $85,800, or virtually $45,000 less than the original purchase price.

For the defendants’ part Mr Strawbridge argued that Tony Catalano obtained tax advantages over the term of the agreement in the order of $40,000 - $50,000. Applying the approach taken by the Full Court in Slinger & Anor v Southern White Pty Ltd[39], the best award possible was about $28,000, comprising the “goodwill, content of the purchase”. The submission was put that the cases show the lost value of goodwill represents the appropriate measure of damages in cases such as this.
[39] (2005) 92 SASR 303,(Besanko J, Duggan, Layton JJ concurring).
In Slinger there was a trial finding that the purchaser was misled as to the turnover of a childcare business at the time of contracting, such that the Form 2 ought to have been amended to reflect a significant change in the circumstances of the business, relating to projected income and turnover. On the question of damages, the central question was the manner of calculating the difference between the price paid and the value of the business. Slinger provides no basis for the proposition that as a matter of law the measure of loss is restricted to the value of the goodwill. That issue does not arise in this case, as on the uncontested evidence the business was valueless without the benefit of the Fleet SA streams of income.
The value of the assets arrived at by Mr McCarthy, was one made for legitimate accounting purposes. This has operated to the detriment of the plaintiffs so far as the level of damages goes, because the starting point of the purchase price has been duly reduced to reflect the actual advantages received. Had the books been entered upon the historical asset value nominated by the first defendant in the depreciation schedule to the primary agreement, then the goodwill component would be correspondingly higher and the immediate tax advantages correspondingly less. The true value of the goodwill – as opposed to book value – was more likely in this case to have been in the order of $100,000 to $110,000 or thereabouts. On that footing the measure of compensatory damages would have been of that magnitude. However, Tony Catalano having structured the business in the way he has, must take his measure of damages accordingly.
For these reasons he is entitled to an award of $85,800. It might be added at this point that the measure of damages in the claim under the Misrepresentation Act would be identical, the relevant measure being equivalent to that obtained in an action in deceit, as explained by this Court in State of South Australia v Johnson[40].
"The principle which underlines the award of damages in tort is, generally speaking, that of restitutio in integrum. The object is to restore the plaintiff to the position in which he would have been placed if the wrongful act had not been committed. The measure will vary as between deceit and negligence. In deceit, the plaintiff recovers the difference between the amount paid and the value of the property acquired, the object being to place him in a position equivalent to that which he would have occupied had the transaction not taken place. The defendant being guilty of a deliberate wrong, the damages will include the whole loss directly flowing from the fraudulent inducement because, as Lord Denning MR declared in Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158 at 167, "it does not lie in the mouth of the fraudulent person to say that they could not reasonably have been foreseen".It is otherwise in cases of negligent misrepresentation. Although the wrongdoer is liable for the damage which flows directly from his wrongful act or omission, the plaintiff's damages are limited to that which was reasonably foreseeable. This limitation applies in accordance with the general principle in negligence."
[40] Above at 169.
Consequential Losses
A further submission was developed on behalf of the plaintiffs, claiming loss of profit going beyond the loss in value of the business purchased. This particular means of redress is available, if duly proved, under both statutory causes: Slinger (above) under the Act, and Gould v Vaggelas (at 220) in the case of the Misrepresentation Act. The amended statement of claim (para 27.3) seeks “loss of anticipated profit … of not less than $100,000 p.a”.
This line of argument commenced by relying on Gould v Vaggelas[41];
There is no reason in principle why the defrauded purchaser should not recover damages for all the loss that flowed directly from the fraudulent inducement (unless, possibly, the loss was not foreseeable). If the purchaser, besides paying more for the business than it was worth, has suffered additional losses which resulted directly from the fraud he ought to be compensated for them. Of course, the court must be satisfied that the loss did result directly from the fraud and not from some supervening cause such as the folly, error or misfortune of the purchaser himself, and must ensure that no additional compensation is given for losses when those losses, or the probability of their occurrence, has already been taken into account in determining the value of the business. In accordance with the general principle, consequential losses have in a number of cases been allowed to a defrauded purchaser.
[41] (1983-1984) 157 CLR 215 at 221-222.
Certainly it is open in an appropriate case to claim as an additional head of damages, expenses incurred and losses sustained, over and above the difference between the price paid and the value received: Slinger[42] limited to what the plaintiffs might have earned if the Form 2 had not been defective, or the misrepresentations not been made: State of South Australia v Johnson[43] .
[42] Above at [80].
[43] Above at 169, 170.
The plaintiffs sought to quantify such consequential losses by commencing with those incurred by the trust, as recorded in the tax returns of the family trust from 1 July 2000 to 14 February 2005, a total of $165,876[44]. It conceded profits of $2,180[45]. Carried forward losses pre-contract would also have to be deducted on this proposal. There was also related income from Castle Plaza of $13,900, reducing the amount claimed.
[44] Exhibits P23, P24, P25, P26 and P31.
[45] Exhibits P17 and P25.
The defence submission was that these losses were not directly consequential upon any liability arising under the Act or the Misrepresentation Act. It was further contended that various downwards adjustments were necessary, on account of interest expenses, and on account of inherent taxation benefits, which in the ultimate analysis produced very little, if any, damage and then only in the order of about $8,500. The defendants also submitted there were carried forward accumulated losses of several hundred thousand dollars, available to Mr Catalano which he could potentially take the benefit of in the future.
The fundamental problem on both sides with this analysis, is that very little evidence was specifically directed to it. There was no forensic accounting evidence explaining the net effect on the business as structured by Mr McCarthy, as to the financial consequences the failure of the business had directly on the trust, or from which a comparison could be made between its financial position at the outset, with its position at the conclusion of the contract. No evidence was adduced as to how, when or on what basis distributions were made to trust beneficiaries, still less to Tony Catalano. As a matter of fact the evidence of Mr McCarthy was that the burden of the trust losses fell upon Maca Development as Trustee[46].
[46] See Finlay v Silicon Industries Pty Ltd (2003) 229 LSJS 14, [28-30]: [2003] SASC 236.
The same applies to the analysis produced by the defence in reply. The schedule proferred by Mr Strawbridge as an aide-memoir, and the facts and assumptions lying behind it, were conjecture, as they were unproved on the evidence. They went untested by cross-examination of the plaintiffs’ accounting witnesses.
Likewise the submission that some tax advantages remained in The Family Trust that Tony Catalano might in some unspecified way later seek the advantage of, was highly speculative. It must be remembered in this context that the claim for damages is vested by s15(3)(b) of the Act, personally in Tony Catalano as purchaser and that the Family Trust is not a party to the action and does not seek damages in its own right.
This is not to say that merely because a trustee company ran the day-to-day business of Bright ‘N’ Clean, no damages could for that reason be awarded to Mr Catalano under the rubric of consequential damages. Clearly they can, providing such consequential losses are otherwise payable to him: Bartley & Anor v Myers & Ors[47]. Furthermore, there is no evidence at all suggesting that the business would be operated by or under a family trust, was known or foreseeable to the defendants: Bartley v Meyers[48]. Consequentially as to damages on the basis as sought, the plaintiffs fail to discharge the burden of quantifying in money terms what should be adopted in the sum awarded: Watts v Rake[49].
[47] (2002) 83 SASR 183, [222-224].
[48] Above at [225].
[49] (1960) 108 CLR 158, 159 per Dixon CJ.
On close analysis, Mr Catalano proved something quite different in form and content. According to the evidence, after bringing into account income by way of plant and equipment hire and the tax advantages due to depreciation, the yearly losses directly sustained by Tony Catalano and carried into his personal tax returns for the 2000-2005 financial years over the course of the business, were in total $97,288[50]. That sum represents the measure of the proved loss of profits directly sustained by him, being the “net loss from the income expenses derived from the hire of the plant and equipment … from the Bright ‘N’ Clean business”[51]. As these would have also reduced his taxable income at the marginal tax rate of 40%, that sum should be reduced correspondingly (ie by $38,915.20) in order to reflect the actual tax advantage derived by him from accounting those losses in that way.
[50] Exhibit P17, p2 ($1,517), P18, p2 ($7,575), P19, p2 ($14,400), P20, p2 ($11,753), P21, p2 ($10,238), and P32, P2 ($51,805).
[51] Transcript P350-1, 358-9, 362, 365 and 369-70.
In the result Tony Catalano should have judgment entered in his favour for consequential losses of profit in the sum of $58,372.80, either in his action under the Act or alternatively under the Misrepresentation Act, but not both. This exercise entails no question of double compensation: Slinger v Southern White Pty Ltd[52], since each award relates to a quite different head of damage, and because the calculations factor in the actual income and tax advantages received. It also represents a singularly modest award, considering the newspaper advertisements promised profits in excess of $77,000 p.a. and net profits shown in the financial statements exceeded $100,000 per annum, including $195,601 for the full year to 30 June 1999.
[52] Above at 89-90.
Continued Trading Unreasonable?
In the event that damages were awarded for lost profits, the defendants contended these should be severely restricted, and certainly not allowed over the whole five years. It may be accepted that the Court “must take care not to include sums for consequences which may be due to the plaintiffs’ own unreasonable actions which are too remote …”[53].
[53] Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158, 171.
It was submitted for the defence that the plaintiffs should have realised early on and certainly well before proceedings were issued against them in the Magistrates Court in October 2002 for unpaid rent under the lease, that the business was not ever going to be profitable and that they should have pulled out or rescinded by then, or even earlier. The rent claimed at the time was $3,927, however the proceedings were transferred into this court in November after the plaintiffs counter-claimed for damages. It was consequently put that loss of profits should be limited to the point in time at which the plaintiffs ought to have reasonably abandoned the business; no more than two or two and a half years at best.
This stance places too great a burden on the plaintiffs. The evidence of Mr Catalano as to the reasons why he persisted, endeavouring to trade out and why he tried various options in that endeavour, is inherently plausible. Moreover, he and son Mark approached the first defendants in late March or early April 2000 and again in early May 2000, only to be reassured that February and March was a “lull period” or “seasonal” and that “they … should crack the whip a bit more” with their employees. These assurances were accepted by them in “good faith”.
Had the plaintiffs rescinded or walked out of the business, that would have inevitably found them responding to proceedings at the behest of the Zollos, to enforce payment of rent due under the lease, almost certainly for the whole of the remaining term. Moreover, there was the Bendigo Bank loan to service, and default carried with it the very real prospect of foreclosure. Litigation was uncertain, and likely to be costly and protracted, as evidenced no better than by the course of these proceedings. Prior to this they had tried everything to find ways to improve operations. It is to be remembered in this connection that Mr Grant pointed out in his discussions with Tony and Mark Catalano of 17 January 2001 before execution of the subject agreement, not only that the loss of the Fleet SA contract was “hard to quantify”, but also that there was other work available.
In these combined circumstances it was not unreasonable in the least for them to have continued trading and to experiment with various alternative means of securing business, bearing in mind their expectation of turnover as represented to them in the Form 2: Gould v Vaggelas[54]. The evidence of Mr Smith did not advance the defendants’ case in relation to this particular issue. The situation was very much one described by Pincus J in Neilsen v Hemptson Holdings Pty Ltd[55] namely that Tony Catalano reasonably took “the view that rather than sell straightaway at considerable loss, (his) interests (were) better served by holding on in the hope of an improvement”.
[54] Above at 243-244.
[55] Above at 38.
The alleged breach of restraint trade provisions
The case for the plaintiffs under this final cause of action, was pitched in this instance, on the footing of a lost chance of gaining Auto Group work. Special condition 5 to the business sale agreement [Exhibit P4] contained a deed of restraint, struck between the purchaser, the vendor (second defendant), and the first defendants as “associated persons”. Clause 1 provided:
“… Neither the vendor nor any of the Associated Persons will for a period of 3 years within a radius of 20 kilometres … carry on or be directly or indirectly engaged or interested in any business… promoting, operating, engaging in or carrying on any business the same or substantially similar to or in competition with the business as conducted by the Vendor immediately before the Date of Possession”.
The plaintiffs submit the relevant business was a car wash business. The evidence discloses that Mr and Mrs Zollo carried on a high volume of work of the same nature for Auto-Group Limited, a public company, as evidenced by the invoices [Exhibit P33D]. It is known for certain they conducted business inside the 20 kilometre radius, because the surveyor's report admittedly proves that much [Exhibit P30], as the distance between the subject business and Auto-Group, which was located at 232 Grand Junction Road, Athol Park, lies within 100 m of 17.6 km. Although Mr Hook spoke of the Auto Group address as being at 122-128 Grand Junction Road, no point was taken by the defendants as to the discrepancy between that address and that nominated in Exhibit P30.
As a result, the plaintiffs claim to have lost any chance, or to have been “locked out of any opportunity”, to acquire Auto Group business, by either washing, cleaning or detailing vehicles at their 415 Brighton Road premises or alternatively at the Auto Group premises. Since the restraint was limited to three years, only potential trading to February 2003 is relevant.
It was proved the Auto Group arrangements with the Zollos were not insubstantial, although the precise contractual arrangements between them were not elicited. The invoices rendered to Auto Group were in the name of Zollo Nominees Pty Ltd and for the first year were $209,456, for the second year $217,949, and for the third year they were $226,973 [Exhibit P33]. As mentioned earlier, it appears that for some time in November and December 1999, and during January 2000, Mrs Zollo brought Auto Group vehicles to Brighton Road. The value of this work is referred to above. It also appears that she stopped this arrangement at some imprecise time following handing over to the Catalano family.
The evidence establishes that Auto Group commenced cleaning its own vehicles in around September or October 1999, but the facilities then proved too basic and unsatisfactory. They desired to install “proper facilities” on site and obtain the appropriate permits for the discharge of wastewater. The first defendant made an application for that purpose on 6 March 2000, for the 232 Grand Junction Road facility [Exhibit P7].
Mr Hooks’ evidence was that he worked for Auto Group Limited from 1999. It commenced operations in South Australia during September of that year and held its first auctions in this State for the sale of motor vehicles in October. These were sold at public auction, cleaned and washed beforehand, using leased equipment. In late 1999, he met Julie and Jerry Zollo for the first time. Sometime thereafter Auto Group informally arranged for some proportion of their vehicles to be cleaned at Bright ‘N’ Clean through Mrs Zollo. However, this proved inconvenient to the extent that eventually the Zollos were invited to clean the cars for Auto Group at Grand Junction Road. By early 2000, a determination was made to clean all vehicles on site rather than at Bright ‘N’ Clean, or anywhere else, for what appeared to be the perfectly sensible reasons, put forward by Mr Hook[56]:-
We had to have them cleaned on site. There was a number of issues there. No.1 was sort of insurance. There was those headaches. There was the distance from taking them down there and picking them back up. In the business we are in we run auction Thursday to Thursday, so the majority of your cars don't come in until a Monday, is mostly the biggest day. It doesn't give a big turn around time to get off the premises, get cleaned and get them back. It was becoming a logistical nightmare really, as I say. So it really had to be a decision that we had to do it on site even though we were doing it on site. We couldn't and we didn't have the expertise.
[56] Transcript 507 L12-23.
It is clear enough from the evidence, as Mr Hook expressed it, that cleaning Auto Group vehicles at Bright ‘N’ Clean logistically “just was not going to work”. Accordingly, even if the Catalanos might have secured some of this business, it was always only going to be for the short time, and then only until Auto Group upgraded its facilities and obtained the approvals required. More than that, the initial arrangement to engage Mr and Mrs Zollo was made in late 1999, that is pre-contract. The evidence is unclear when this situation crystallised or precisely when it was that Mrs Zollo finally stopped bringing cars to Bright ‘N’ Clean altogether. Possession was given on 14 February 2000.
The invoices in [Exhibit P33E] appear to commence from March 2000. It is impossible to work out from them what the value of the lost business might have been in the period of a month or so at stake.
Given the evidence of Mr Hook, it is plain that the business emanating from Auto Group, was due to a “holding” situation, and only then for so long as facilities remained inadequate. Irrespective of the chances of securing any further business, which were rather low given the evidence of Mr Hook, it could only have persisted for perhaps a month or so.

It was argued on behalf of the defendants that the proven facts demonstrate no breach of the restraint covenant, because there was no “operating … or carrying on any business the same as or substantially similar to or in competition with the business … “Bright ‘N’ Clean”[57]. The submission was that as the Auto Group ran a private business, and did not clean cars for the general public, there was no comparable business in competition in any proscribed way with Bright ‘N’ Clean. The underlying fact in this submission may be accepted, but the inference to be drawn from it, may not.
[57] Clause 1.1.1, special Condition 5; Exhibit P4.
There are two sound reasons for rejecting this contention. The first is that the core work of the respective businesses was washing, cleaning and detailing motor vehicles. Even though Auto Group had more than enough of its own work to fully occupy its facilities, it is clear they were used for anyone wishing to sell cars by auction through them from anywhere in Australia, whether individuals, national corporations, rental or car fleet operators. It was equally clear that many of these vehicles were not owned by Auto Group, and that they charged a set fee of $60 per car.
The second is that Auto Group, in some form or another, contracted or “outsourced” its “in-house” work of this nature, ultimately to Zollo Nominees, which it carried on over the following years. It was otherwise open to Bright ‘N’ Clean to bid for that work, had it known beforehand that it was available.
It must follow that a breach of the covenant is proved, against the second defendant as a primary contracting party, and against the first defendants, in their capacity as “(T)he Associated Persons” as defined therein. It must also follow that Mr Catalano, as the only relevant contracting party on his side of the transaction, is entitled to an award of damages against those parties for the loss of the alternative opportunity to retain the Auto Group “sub-contract”: Sellars v Adelaide Petroleum NL[58], The Commonwealth of Australia v Amann Aviation Pty Limited[59].
[58] (1994) 179 CLR 332.
[59] (1991) 174 CLR 64.
All the same, on the above findings, that chance was quite small, and pertained for a relatively short period of time. Nevertheless it was a possibility which must be taken into consideration: Malec v JC Hutton Pty Ltd[60].
[60] (1990) 169 CLR 638, 643.
In light of the lack of detailed or specific evidence as to the likely income this opportunity might have generated, and bearing also in mind that the work completed at Brighton Road for Auto Group represented only a proportion rather than “a big percentage” of the total work involved, damages can only be relatively small. Since there was a breach of an important condition of the Business Sale Agreement, more than a nominal amount is warranted, one in the end reflecting the degree of probability of the occurrence of the lost chance. The best the Court can possibly achieve in those circumstances is to take a “broad-axe” approach and attempt to estimate damages in light of the evidence, such as it is: The Commonwealth of Australia v Amann Aviation Pty Limited[61].
[61] Above at 83, 125, 153.
In all the circumstances, an award of $10,000 for the breach restraint of trade restriction is appropriate. Of course that amount would be one in favour of Tony Catalano. Once again the second plaintiff fails as she was not a party to the covenant. On the other hand such an award is to be entered as against all defendants jointly and severally as parties to the covenant.
Conclusion and Formal Orders.
In the final result the plaintiffs have proved a breach of the Act, the first plaintiff was prejudiced thereby and he is entitled to an award of damages on that account of $85,800 against the second defendant, representing the difference between the value of the business and the price paid. In addition he is entitled to damages of $58,372.80, as the amount of proven lost profits. In respect of the other claim in misrepresentation, those awards of damages would be identical, but as this would constitute double compensation, only one award need be entered. The claim for damages by the second plaintiff must fail for the reasons mentioned above.
The first plaintiff is also entitled to an award of $10,000 damages on account of breach of contract relating to deed of restraint, as against all defendants. The parties are entitled to be heard on the questions of interest and costs.
The formal orders of the Court therefore are:-
1.That damages be awarded in favour of Carl Antonio Catalano against Zollo Nominees Pty Ltd in the sum of $85,800.00, representing the difference in the price paid for the business Bright ‘N’ Clean and the true value thereof at the time of purchase.
2.That damages be awarded in favour of Carl Antonio Catalano against Zollo Nominees Pty Ltd in the sum of $58,372.80, representing the direct losses of profit sustained by him arising from the purchase of Bright ‘N’ Clean.
3.Damages be awarded in favour of Carl Antonio Catalano in the sum of $10,000 against Jerry Zollo, Julie Zollo and Zollo Nominees Pty Ltd jointly and severally.
4.The balance of the action by Carl Antonio Catalano is otherwise dismissed.
5.The action brought by Angela Margaret Zollo is dismissed.
6.The plaintiffs have liberty to bring into Court short minutes of order consistent with these reasons.
7.The question of interest and costs is adjourned for further consideration