Chalcedony Investments Ltd v Faroud No 9 Pty Ltd

[1990] FCA 509

C A T C H W O R D S

CONTRACT - damages for breach sought - sale of child care centre - vendor contracted to obtain requisite licence - whether implied term that in all respects objectively entitled to such a licence - loss of earnings alleged - breach of covenant in lease alleged - adjustment to sale price sought for relevant fees.

TRADE PRACTICES - alternative claim - damages for misleading statements sought - scope of s.52 in commercial transactions considered - assessment of damages.

Trade Practices Act 1974 s.52

Chalcedonv Investments Ltd
v. Faroud No. 9 Ptv Ltd & Ors

Qld. G32 of 1987

PINCUS J.
BRISBANE

14 SEPTEMBER 1990

IN THE FEDERAL COURT OF AUSTRALIA	)	QLD 632 of 1987
QUEENSLAND DISTRICT REGISTRY	1
GENERAt DIVISION	1

BETWEEN: CHALCEDONY INVESTMENTS LTD

Applicant

AND: FAROUD NO. 9 PTY LTD

First Respondent

AND: WILLIAM PATRICK COGAN and

KATHLEEN MARY COGAN

Second Respondent

AND: FAROUD NO. 9 PTY LTD

Cross-Claimant

AND: CHALCEDONY INVESTMENTS LTD

Cross-Respondent

MINUTE OF ORDER

JUDGE MAKING ORDER:	PINCUS J.
DATE OF ORDER:	14 SEPTEMBER 1990
WHERE MADE:	BRISBANE
THE COURT ORDERS THAT:

1.    The first respondent pay the sum of $2,527 to the applicant.

m:  Settlement and entry of orders is dealt with in
Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA	1	QLD G32 of 1987
QUEENSLAND DISTRICT REGISTRY	1
GENERAL DIVISION	1

BETWEEN:  CHALCEDONY INVESTI-IENTS LTD

Applicant

AND: FAROUD NO. 9 PTY LTD

First Respondent

AND: WILLIAM PATRICK COGAN and

KATHLEEN MARY COGAN

Second Respondent

AND: FAROUD NO. 9 PTY LTD

Cross-Claimant

AND: CHALCEDONY INVESTMENTS LTD

Cross-Respondent

C O N :  PINCUS J.

PLACE: BRISBANE

m: 14 SEPTEMBER 1990

REASONS FOR JUDGMENT

This is a claim for damages concerning the sale of a of the Trade Practices Act 1974, fraud and breach of contract.	child care centre. The applicant claims damages for breaches
On 30 July 1990, the matter was called on for trial. The respondents appeared by a solicitor, Mr. Kirmos, but he informed me that he came merely as a matter of courtesy to the Court and that he had no further instructions; 1 . Kirmos then withdrew. The applicant's solicitor, Mrs. Shirley, relying on affidavits which had been filed in the proceedings, asked for judgment in the sum of $342,499.46 or, alternatively, $395,548.55.
The Court's power to give judgment in circumstances of this kind is to be found in Order 32 Rule 2(l)(d).
The applicant's case is that it contracted to purchase a business of a child care centre, formerly carried on by the first respondent, at Sunnybank, Brisbane. It bought the centre by a contract made in June 1986 for a sum of $135,000, on the basis that $110,000 would be paid in the first place and a further $25,000 on the date that the centre was approved for registration for sixty-five children by the Brisbane City Council.
The core of the applicant's case, as presented, was that there was a breach on the part of the first respondent of its contractual obligations relating to this question of registration to take sixty-five children. Precisely what the breach was is not as clear as it might be on the face of the statement of claim.
The applicant's secondary case is that misleading statements were made by the respondent which induced it to enter into the contract, causing it loss.
If the applicant is entitled to substantial damages on its contractual claim, then it cannot recover, as it appears to me, damages in respect of the misleading conduct.

J

At all events, that was accepted by Mrs. Shirley, who explained to me at the hearing that if I should "find that the claim in breach of contract was made out" then the applicant would elect to have damages under that head, the implication being that, in those circumstances, the misleading conduct damages would not be pursued.

It should be added that there are other, lesser, aspects of the claim. Of those, the main point is that the applicant claims damages for breach of a covenant in a lease.

It is convenient before coming to the evidence relevant to the main claim (that concerning the registration for sixty-five children) to summarise what is said in the statement of claim on that subject. Paragraph 28(d) relies on clause 32(b) of the contract:

"The Vendor undertakes and agrees to construct such additional buildings and improvements as may be required to obtain registration by the Brisbane City Council for sixty-five (65) children."

The next sub-paragraph relies on clause 32(c):

"Such construction and registration shall be
solely at the Vendor's expense."

Then, paragraph 28(f) pleads an implied term that the obligations just mentioned were to be completed within a reasonable time after the date of the contract.

Then, paragraph 28(k) of the pleading says:

"On the true construction of the Contract, it was agreed that, or alternatively it was an implied term of the Contract that, the First Respondent would construct the additional buildings and improvements referred to in Clause 32(b) of the Contract, so that the Centre could lawfully accommodate 6 5 children."

It will be noted that this is not what clause 32(b) of the contract says. Under that sub-clause, the vendor is to construct such additional buildings and improvements as may be required to obtain registration for sixty-five children. Its natural reading is that if work is done which achieves that result, then the obligation is satisfied. The obligation which the applicant would have read into the contract, namely that the buildings and improvements constructed must be such that the centre could lawfully accommodate sixty-five children raises different questions - in particular, the effect of the Council in fact granting registration, despite some alleged deficiencies in the centre.

The statement of claim goes on to say (page 17):

"The First Respondent has not done all things necessary to comply with the requirements of the Brisbane City Council for registration of the Centre for 6 5 children."

The particulars complain of failure to obtain equipment set out in a list and costing $10,541.52 and failure to do some turfing costing $1,800. Then it is said (page 18):

"The First Respondent has not done all things necessary to comply with the requirements of the Brisbane City Council for registration of the Centre for 65 children within a reasonable time from the date of the Contract."

The material which is filed on behalf of the applicant shows that a licence was in fact issued by the Council on 7 October 1986 for sixty-five children. There is nothing in the material to suggest that this was unexpectedly late. What the facts disclose (and which would never be suspected from reading the pleading) is that the registration the contract mentioned was obtained. The applicant's case on this aspect seems to be wholly that, although registration was obtained, in some respects the Regulations were not complied with.

The first question to be determined appears to be whether it is correct, as pleaded, that the first respondent impliedly promised so to construct the additions as to make the accommodation of sixty-five children not only licensed but in accordance, in every respect, with the law - i.e. promised

thereby inducing it to issue a licence, but would, objectively	that the alterations would not only satisfy the Council,	speaking, totally comply with the regulations.
It appears to me that the question thus posed can be answered by studying the contract and the regulations, but it is desirable to give some factual background.

The centre was sold as licensed for forty children. However, on 19 June 1986, the applicant ascertained that the licence in fact only permitted twenty-five children to be cared for. After discussing the matter with the real estate agent (one Wright), Mr. and Mrs. Wade who control the applicant, decided to go ahead with the transaction. Shortly after that, plans for extensions to cater for sixty-five children were prepared and initialled by Mr. and Mrs. Wade. It appears that some alterations were made during the course of the building operations, as the extensions were thought to be too close to the fence line. Further (as appears from exhibit MW29), some alterations were made in the usage of rooms. In September, the Wades made representations to the Council to the effect that there was not sufficient floor area to accommodate sixty-five children. It appears that subsequently further changes were made and the Council measured the centre.

On 25 September 1986, the Council wrote to Mrs. Wade, asking for certain further changes and subsequently the	applicant's solicitor wrote to the Council querying the space	available for children.
The Council replied on 4 December, explaining that a licence had been issued on 7 October 1986 calculated "on the total floor space available and proposed as free and unencumbered area at the time of inspection". The letter went on :

"A variation of the conduct of the premises has since transpired. The new occupiers of the premises have elected to set aside certain areas as office space, reception areas and storage. It has also been observed that the recently completed extension to the premises is not available for use."

A similar letter was written to Mrs. Wade.

The applicant's solicitor replied to the Council on 9 January 1987 saying that it was proposed to measure and recalculate the amount of free and unencumbered indoor floor space available.

In March 1987, the applicant engaged consultants to calculate the space but the resulting information was apparently not transmitted to the Council at that stage. On 2 December 1987 the Council wrote to say, in effect, that the premises would be approved for fifty-six children only.

The relevant regulations are the Children's Services of a licence by a Local Authority to non-conforming premises.	form, regulation 14(2) gave rise to the possibility of issue (Day Care Centres) Requlations of 1973. In their initial
On 31 October 1974, the regulations were amended to allow licensing of premises which "substantially comply with the provisions of these regulations and where ... alteration to the premises would be impractical".
This introduced a measure of discretion in licensing; it was at relevant times possible to obtain a licence, under the regulations, without complying with them in all respects.
Apart from the 1974 amendment, there are other provisions in the regulations which illustrate the difficulty of implying such a term as is set up. Quite a number of the requirements set out in the regulations are expressly made dependent upon approval by the Council or satisfaction of the Council. Others - e.g. regulation 16(3) - use expressions ("adequate outdoor playing space") which introduce a subjective element. If the applicant is right, then the extensions had to be of such a kind as to meet the Council's requirements, but also such as to satisfy the Court in a case of this kind.
If the applicant is right, then it had the benefit of two rather different obligations. One, the express obligation, was to construct such buildings and improvements
obligation, was to make the premises comply in all respects as required to obtain registration. The second, the implied
with the regulations (whatever the Council's opinion might be).
I would interpolate that, apparently in accordance with this plea of an implied term, the applicant's pleading seeks to charge the first respondent with the cost of all equipment purchased to cater for the increased number of children; the nature of the equipment necessary is only very generally described in the regulations.
Superficially there may seem to be something to be said for the view that at least certain of the requirements of the regulations (e.g. those relating to minimum floor area) became by implication, contractual obligations. But this is not the way the matter is pleaded; the allegation is that it was an implied t e n that the centre "could lawfully accommodate sixty-five children", which seems to mean comply in all respects with the regulations pertaining to such a number. There seems to me no logical stopping place short of the implication in the pleading. As the pleader apparently did, I have come to the view that one should not discriminate between requirements of the regulations which are general and subjective and those which are more or less precise; if some are imported, all are imported.
In my opinion, the implication alleged should not be made. It must have been evident to the parties at the time
the contract was made that there might be room for contention as to whether or not all the multifarious requirements of the regulations were complied with, literally and in detail. It would have been a simple enough matter, had that been the true intention, to insert an appropriate expressed term. But the language used suggests a different intention, namely that the issue of the licence for sixty-five children would fulfil the vendor's obligation.
I should add that different considerations might arise if it were alleged that the Council had acted mala fide, especially if it had done so in collusion with the first respondent. However, nothing of that kind is pleaded.
According to the applicant's claim, the loss of earnings due to inability to accommodate sixty-five children was over $43,000, and the reduction in value as a result of inability to accommodate sixty-five children was $130,000. The conclusion at which I have arrived makes it unnecessary to consider either figure in detail, but some comment should be made as to the latter. The centre was purchased by the applicant for $130,000, of which only $110,000 was paid; it was sold for $150,000 on the basis that it would accommodate fifty-six, not sixty-five, children. It seems to me absurd to suggest that the work necessary to accommodate nine more children would almost double the value of the centre.
The next item in the claim relates to unavailability of a kitchen; a total of $46,159.25 is claimed under two heads. The basis of the claim is a covenant for quiet enjoyment - clause 3(b) of a lease which was given to the applicant.
It is said in the statement of claim (page 18) that the first respondent "altered the then existing kitchen area so that the same may no longer be used in conjunction with the said business".
In Mrs. Wade's affidavit, she says that the kitchen area was "very small and cramped". She also makes criticisms about storage space and says that "for the reasons set out above the applicant did not use the kitchen after 2 4 December
1986. "

I must say that this is an odd story. It seems that

the kitchen was in fact used for months, and precisely why the decision was made on, Christmas Eve, to use it no longer does not appear. The affidavit says that Mrs. Wade believed when the centre ceased to offer meals to children (as it had done up to 2 4 December 1986), it was necessary to make some allowance in the fees charged. One might have expected that the fees would be reduced; Mrs. Wade estimated the value of the meals at $1.00 per child per day.

According to page 19 of Exhibit RJM1, which is the document where one finds the principal damages calculations, the fees went from $11.00 for a full day attendance as at September 1986 to $13.00 as at March 1988. The table of fee structures there set out is inconsistent, in that the first column is headed "13 Sep 1986 to 13 Dec 1987" and the third is headed "l Jan 87 to 11 Mar 88". I am uncertain whether the

second period ended on 31 December 1986 or, on the other hand, the third period began on 1 January 1988. Leaving that difficulty aside, I am not satisfied on this exiguous material that there was any breach of the lease. The impression created by the affidavit is that the kitchen was less convenient than Mrs. Wade desired, not that it was, in a practical sense, unuseable.

Exhibit RJMl asserts (pages 28 and 29) that the deficiencies in the kitchen reduced the price at which the centre was resold by the applicant by $40,000. The basis of calculation is plainly erroneous. The test would have to be how much money needed to be spent to make the kitchen conveniently useable again; there is no evidence as to what that figure is.

It should be added that there is no evidence as to whether or not the purchaser from the applicant used the kitchen.

I would remark that the general credibility of the applicant's case is not assisted by making extravagant claims such as the $130,000 reduction in value due to the centre's being licensed only for fifty-six children, and the extra $40,000 reduction in value supposedly due to deficiencies in

the kitchen. It does not appear to me that the Court should, on account of the absence of the respondents, refrain from scrutinising the applicant's case closely and (in view of the inflated nature of the claim) with a degree of scepticism.

The next group of claims which I propose to consider is set out under Heading C in the particulars of damages supplied at the hearing. This is headed "Equipment Purchased to Meet Centre Licensing Requirements". The total amount set out at the foot of the long list of items is $13,411.26, but $4,282.84 has been credited, leaving $9,128.42. Mrs. Shirley informed me that the figure last mentioned is the amount claimed.

It is necessary to look again at the pleading. It is alleged (page 17 of statement of claim) that the first respondent -

l ' . . . has not done all things necessary to comply

with the requirements of the Brisbane City Council for registration of the centre for sixty-five children."

There follows a list not corresponding with that presently relied on and amounting to a different sum, namely

$10,541.52.

There is nothing in the contract expressly imposing an obligation on the first respondent to supply any equipment. Clause 32(b), which is quoted above, contains an agreement "to construct such additional buildings and improvements" and that does not, in my opinion, encompass the provision of toys, paint brushes and the like. The regulations dealing with this subject matter need not be quoted; it is enough to say that they give quite a general description of what is required. Presumably, the intention of the regulations is that the licensing authority (in this case, the Brisbane City Council) shall exercise a reasonable discretion as to what does and what does not comply with that general description. It is my opinion that there was no obligation on the first respondent to supply any chattels.

If (contrary to my opinion) what was required by the Council had to be supplied by the first respondent, it is not sufficiently proved, in my opinion, that the items set out in the most recent list were required by the Council. Exhibit MW23 is a letter from the Department of Children's Services (which is a State Government, not a Brisbane City Council, instrumentality), referring to equipment lists which the writer of the letter "found to be of an adequate minimum standard". I infer that the list there mentioned is Exhibit MW24; that is not the list currently relied on. The letter from the Department of Children's Services describes the list	as being "equipment you feel would be required to meet the
total licence for sixty-five children". The letter expresses
the opinion that the list was "of an adequate minimum standard".
There follows reference to another list of additional equipment required, to the ordering of further equipment and then to a list (MW27) which is said, in Mrs. Wade's affidavit, to be "Equipment . . . required to obtain registration of the centre for sixty-five children". This last list corresponds with the one reproduced in the submission made to me; it does not correspond with that set out in the pleading.
here is no explanation as to what it is which justifies the description of MW27 given in the affidavit of Mrs. Wade. It may be that the list represents the opinion of the Department of Children's Services or that of Mrs. Wade. The only opinion which could count, on the pleading, is that of the Brisbane City Council.
A further difficulty with this claim is that much of the equipment was bought in 1987 and 1988, well after the Council (in October 1986) issued a licence for sixty-five children.
One must harbour a suspicion that the list merely represents Mrs. Waders opinion as to what equipment would be
and or, perhaps, represents all the equipment which was in reasonable for the centre to have for the sixty-five children, fact purchased. The list includes building boards, paint and the like.

This claim seems to me one which plainly must fail.
The last contractual claim consists in two

relatively small sums, being adjustments on the sale of the centre to the applicant. Clause 34 of the contract has the effect that fees accrued prior to the date of completion are the property of the vendor and fees accruing after that date are the property of the purchaser. The fees set out in the particulars of claim presented are sworn to in such a way as to fall within that description. Although they do not correspond accurately with those in the statement of claim, and although the decision of the High Court in Banaue Commerciale SA v Akhil Holdinqs Ltd [l9901 92 A.L.R. 53 suggests the necessity of a strict attitude towards pleadings, even against an absent party, it is my opinion that these claims should be allowed.

In the result, the only contractual claims which are allowed are those just mentioned, amounting to $2,527.

I have discussed above the overlap between the claim

for damages for breach of contract and the misleading conduct

breach of contract rather than misleading conduct if the	claim. I was invited at the hearing to award damages for	former claim was made out. However, I should not take this invitation too literally, for the contract claim has very largely failed.
The misleading conduct claim raises a question concerning the scope of operation of s.52 of the Trade Practices Act 1974. It was held in Concrete Constructions /NSW) Ptv Ltd v. Nelson (unreported, 3 May 1990) that s.52 did not apply to every field -

"... into which a corporation might stray for

the purposes of, or in connection with, carrying on its trading or commercial activities. What the section is concerned with is the conduct of a corporation towards persons, be they consumers or not, with whom it

. . . has or may have dealings in the course of

those activities or transactions which, of their nature, bear a trading or commercial character".

The principal judgment (from which this quotation is taken) did not discuss the decision of the Full Court in Bevanere Ptv Ltd v. Lubidineuse (1984) 7 F. C.R. 325. It was held there that the sale of a business by a person conducting that business is something done in trade or commerce (331). Toohey J. in Concrete Constructions (above) commented upon the Bevanere decision at first instance, but without throwing doubt upon the correctness of the Full Court's ultimate conclusions; the same may be said of the reasons of McHugh	J. It therefore seems to me clear that I should follow	Bevanere.
It is also clear that there is evidence that incorrect statements were made by and on behalf of the first respondent in the period leading up to the sale. The question is what damages should be awarded. I have already mentioned
that the price actually paid was $110,000. Subsequently, a sum of $4,282.84 was received from the first respondent and it appears to me that should be taken into account in assessing the overall result of the transaction. Costs in connection with the purchase and resale, including stamp duty, and costs relating to the lease, amounted to $15,303.50. Since the price on resale was $150,000, it is at first sight difficult to see how one could support the proposition that entering into the venture produced an overall loss. The argument that it did so is dependent upon evidence that the value of the business, as at the date of purchase, was $97,500. It appears to me, however, that that is not the right figure for purposes of comparison. Under the contract, the vendor (the first respondent) undertook to do such construction work as necessary to obtain a sixty-five-child licence; that was done. It is true that, according to the applicant's case, the work was deficient in some respects, but there is no doubt that it substantially increased the value of the centre.
The only evidence as to the value of the centre as sold is the sale price and I adopt that figure - that is, in
my opinion, the prima facie difference between purchase and sale prices is $40,000. To that sum of $40,000 should be
added the figure of $4,282.84 which was later paid, making a total of $44,282.84.
It is my view that no deductions which can reasonably be made from that figure can reduce it to nil. I have mentioned that the total expenses on sale and resale were $15,303.50. One should then add in the sum of $13,411.26, spent on requirements for the centre during the applicant's occupancy of it, and the total becomes $28,714.76.
One could partly bridge the gap by making an allowance for interest on the monies expended. The applicant's claim for opportunity cost of money during the relevant period is put at two alternative rates, one 13.28% and another 18%. If one assumes, say 15% interest, and takes into account the tax liability which would have been incurred on interest earned, in my opinion, no overall loss is shown.
The result is that the applicant succeeds in contract only and in the sum of $2,527 only.
I have given some consideration to the question of costs. Had the respondents been present and asked for a positive order for costs in their favour, that must have been given serious consideration, since the applicant's substantial claims have failed. However, in all of the circumstances, it
costs. In the result, there will be judgment for the seems to me the proper course is simply to make no order as to
applicant in the sum I have mentioned, namely $2,527.

I certify that this and the

eighteen preceding pages are a true copy of the reasons for judgment herein of his Honour Mr. Justice Pincus.

-

C. .- - L

Associa

Date /4 **'&v 1740.

Solicitor for applicant:	Mrs. M. Shirley of Cooper, Grace & Ward
Respondents unrepresented.
Date of Hearing:	30 July 1990