Clarkson Williams Partners Pty Ltd v Vaughan
[2016] ACTCA 1
•29 January 2016
SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY
COURT OF APPEAL
Case Title: | Clarkson Williams Partners Pty Ltd v Vaughan |
Citation: | [2016] ACTCA 1 |
Hearing Date: | 11 November 2015 |
DecisionDate: | 29 January 2016 |
Before: | Penfold, Burns and Rangiah JJ |
Decision: | 1. The appeal is allowed and the judgment given on 26 February 2015 is set aside. 2. The cross-appeal is dismissed. 3. The parties have leave to file and serve, within 14 days, any written submissions they wish to make about the appropriate costs orders. |
Catchwords: | TRADE AND COMMERCE – TRADE AND COMMERCE GENERALLY – Statutes relating to misleading or deceptive conduct in trade – silence – where business sold at overvalue – whether reasonable and definite inference of actual knowledge of overvalue – no evidence establishing value of goodwill – competing inferences available – appeal allowed. TRADE AND COMMERCE – TRADE AND COMMERCE GENERALLY – Statutes relating to misleading and deceptive conduct in trade – conduct by silence – no finding as to whether non-disclosure was inadvertent or deliberate – whether non-disclosure can be inadvertent – inadvertent failure to disclose capable of misleading and deceiving – no finding necessary. |
Legislation Cited: | Fair Trading Act 1992 (ACT) ss 5 and 12 Trade Practices Act 1974 (Cth) |
Cases Cited: | Argy v Blunts & Lane Cove Real Estate Pty Ltd (1990) 26 FCR 112 CCP Australian Airships Ltd v Primus Telecommunications Pty Ltd (2005) ATPR 42-042 |
Parties: | Clarkson Williams Partners Pty Limited (Appellant) Sonja Vaughan (Respondent) |
Representation: | Counsel Mr G Ng with Mr Y Lusk (Appellant) Mr RL Crowe with Mr R Arthur (Respondent) |
| Solicitors Yeldham Price O’Brien Lusk Solicitors (Appellant) Donohue & Co Solicitors (Respondent) | |
File Number: | ACTCA 13 of 2015 |
Decision under appeal: | Court: ACT Supreme Court Before: Refshauge J Date of Decision: 26 February 2015 Case Title: Jardine v Vaughan; Clarkson Williams Partners Pty Ltd (Third Party) (No 3) Citation: [2015] ACTSC 33 |
THE COURT:
On 26 February 2015, a judge of this Court gave judgment for the respondent, ordering that the appellant pay the respondent damages of $130,500. The appellant appeals against that judgment.
The appellant is an accounting practice. The respondent, Sonja Vaughan, purchased a café business. The primary judge held that the appellant engaged in misleading or deceptive conduct in contravention of s 12 of the Fair Trading Act 1992 (ACT) by failing to disclose to Ms Vaughan that the fair value of the business was much less than the purchase price of $130,000.
One of the appellant’s grounds of appeal is that the primary judge erred in the assessment of damages. The respondent concedes that ground, but cross-appeals on the basis of a different error in the calculation of damages. The appellant concedes the cross-appeal. The parties are agreed that damages should have been assessed in the sum of $104,800.
The remaining grounds of appeal concern the primary judge’s finding that the appellant engaged in misleading or deceptive conduct.
The findings of the primary judge
Ms Vaughan and her then husband, Austin Vaughan, were friends with Coral Jardine and her husband. Ms Jardine operated a café called “Coral’s Café” at Belconnen in the Australian Capital Territory. Ms Vaughan had become disenchanted with her work as a school teacher. Ms Jardine wished to sell the café, as she was planning to return to South Africa.
On Christmas Day 2003, Ms Vaughan made a decision to purchase the business. She had been told by Ms Jardine that the business could not go wrong and was “extremely viable”. Ms Jardine told Ms Vaughan that she could earn $35,000 per year, equivalent to her salary as a teacher.
Mr Jardine provided Mr Vaughan with handwritten figures showing the monthly takings and expenses for the business. The Vaughans did not ask for, and were not provided with, the Business Activity Statements (“BAS”) for the business. As it turned out, the handwritten figures overstated the takings of the business in comparison with the BAS by approximately 40%.
Ms Jardine set a sale price of $130,000 plus stock valued at $1,000. Ms Vaughan agreed to pay that price. Ms Vaughan understood the price to have been calculated on the basis of the setup costs plus goodwill.
Ms Vaughan did not obtain professional advice at that stage as the Jardines had made it clear that it was not necessary, explaining that it would be costly, and, as they were friends, it could be done “in-house”.
10. Mr Vaughan’s evidence was that he had prepared a spreadsheet using the handwritten figures provided to him by Mr Jardine. The spreadsheet shows that Mr Vaughan calculated that the business made an average quarterly profit of $5,306.14.
11. Mr Vaughan discussed the figures with the Jardines, and they assured him that the business was viable. He was persuaded by their assurances, as they were close friends. He explained in evidence that he took the figures as “ball-parkish” as he did not know whether the figures were accurate or had been “vetted” by their accountant.
12. Mr Vaughan had done some research into the prices of cafes advertised for sale in Canberra. Those prices were in the range of $30,000 to $50,000. When he spoke to Ms Jardine about the discrepancy between those prices and her asking price, she simply said, “that is what it is worth and that is my final figure”.
13. Ms Vaughan visited a solicitor acting for Ms Jardine’s landlord to discuss assignment of the lease to her. The solicitor told her on several occasions that she should engage a solicitor in respect of the transfer of the lease, but Ms Vaughan did not heed that advice.
14. Ms Vaughan signed the contract on 25 February 2004 and took over the conduct of the business from 28 February 2004. Her takings in the first month were quite good, but in the second month there was a slight decline in income. After that, she was not able to meet all the expenses of the business.
15. Ms Vaughan paid Ms Jardine the first $90,000 of the $130,000 purchase price, but then refused to pay the remainder. Ms Jardine commenced proceedings against Ms Vaughan and Ms Vaughan counter-claimed. Apparently the proceedings have been abandoned by both parties.
16. Ms Vaughan eventually sold the business for $32,000.
17. Ms Jardine had engaged the appellant as her accountant. She dealt with Paul Clarkson. Mr Clarkson’s precise role with the appellant is unclear, but, as the primary judge noted, his name appears to be part of the appellant’s name. Mr Clarkson prepared the BAS documents for Ms Jardine’s business, as well as her personal income tax returns.
18. The respondent’s case against the appellant centred upon a meeting between the Vaughans, the Jardines and Mr Clarkson. On about 27 January 2004, the Vaughans and the Jardines went to see Mr Clarkson. Mr Vaughan had drawn up a contract for the sale of the business, which the parties took with them to the meeting.
19. Ms Vaughan assumed that Mr Clarkson would understand the financial aspects of the business and believed that if there was anything she might need to know about the business he would tell her about it. In particular, her evidence was that she would have expected Mr Clarkson to have told her at the meeting if the business was worth less than the sale price of $130,000.
20. The primary judge made the following findings concerning the meeting:
1.The meeting was organised by Ms Jardine because she suggested that Ms Vaughan should use Mr Clarkson as her accountant for the business. It was also in order that Mr Clarkson could provide professional advice on the contract that Mr Vaughan had drafted.
2.Mr and Ms Jardine and Mr and Ms Vaughan attended on Mr Clarkson at his office at 5pm in late January 2004, probably 27 January 2004.
3.After introductions, Ms Jardine explained that Ms Vaughan was taking over the business and that Mr Clarkson would be her accountant. There was no suggestion either in the evidence-in-chief or in cross examination that Mr Clarkson demurred to the suggestion.
4.Ms Jardine produced the draft contract which included the sale price of [$130,000] plus $1,000 for stock and gave it to Mr Clarkson. He read it. He made a suggestion for amendment. That amendment was said to be a minor one. After suggesting the amendment, Mr Clarkson said “It’s adequate”.
5.Ms Jardine also handed to Mr Clarkson the details required for the Business Activity Statements, the forms for which she appears also to have delivered.
6.It was discussed that Mr Clarkson would be preparing Ms Vaughan’s Business Activity Statements for the business. It is not clear who said what; that was not clarified in the evidence. There was, however, no suggestion in the evidence in chief or cross-examination that Mr Clarkson demurred from the comment.
7.Ms Vaughan gave Mr Clarkson her ABN, which he recorded. They also discussed aspects of record keeping and Business Activity Statements with a view to being able to present information to him if they were to retain Mr Clarkson as their accountant.
8.Mr Vaughan asked Mr Clarkson “Is there anything that we should know that you want to tell us? Is it a going concern?” Mr Clarkson said “You’ll be right”.
9.Neither Mr Vaughan nor Ms Vaughan actually retained Mr Clarkson as accountant for the business at that meeting (nor subsequently).
10.Mr Clarkson did not advise Mr and Ms Jardine nor Mr and Ms Vaughan to engage solicitors to prepare a contract and to advise them in relation to the contract. Indeed, Mr Clarkson said that they did not need to waste time and money on seeing a lawyer.
21. Mr and Ms Vaughan gave evidence at the trial. Unsurprisingly, neither party called the Jardines to give evidence. More surprisingly, Mr Clarkson did not give evidence. There was no explanation given for his failure to give evidence. The primary judge drew Jones v Dunkel (1959) 101 CLR 298 inferences against the appellant.
22. It is important to note that the respondent did not plead or run any case that the statements made by Mr Clarkson during the meeting directly misled her. Rather, her case was that Mr Clarkson had misled her by failing to disclose relevant information to her.
23. The respondent alleged that Mr Clarkson knew, and should have disclosed to her, that:
(a)the turnover for the business did not justify a sale price of $130,000;
(b)the profitability of the business did not justify a sale price of $130,000;
(c)$130,000 was not the fair value of the business; and
(d)the fair value of the business was much less than $130,000.
24. These four matters overlap substantially. They are four different ways of saying much the same thing. It is convenient to refer to these matters compendiously by reference to the fourth, that the fair value of the business was much less than $130,000.
The judgment of the primary judge
25. The respondent’s case was conducted on the basis that it required her to prove that:
(a)Mr Clarkson knew that the fair value of the business was much less than $130,000;
(b)Mr Clarkson failed to disclose to the respondent that the fair value of the business was much less than $130,000;
(c)the respondent had a reasonable expectation that Mr Clarkson would make that disclosure;
(d)the non-disclosure was not inadvertent; and
(e)the loss or damage claimed by the respondent was “by reason” of the non-disclosure.
26. His Honour found that Mr Clarkson was a qualified accountant. He had prepared the BAS for the business since it commenced in August 2001. He had actual knowledge of the turnover of the business and its profitability. In particular, at the time of the meeting he would have known that in the 2003 tax year the profit was $7,382, with Ms Jardine paying no wages to herself, even though she worked full time in the business. In addition, there was no suggestion that for the balance of the 2003 calendar year the profitability was increasing in any substantial way.
27. Over the objection of the appellant, his Honour received evidence from an expert valuer, Mr Lane, to the effect that the true value of the business when it was sold was between $32,000 and $35,000.
28. His Honour held that it was inconceivable that a competent accountant would not know, in the circumstances, that $130,000 did not represent a fair value for the business and that the fair value was much less. His Honour stated that he was able to draw this inference more confidently under the principles in Jones v Dunkel.
29. It was not in dispute that Mr Clarkson did not disclose to Ms Vaughan that the fair value of the business was much less than $130,000. However, despite noting that it was an issue in the case, his Honour did not address the question of whether the non-disclosure was inadvertent.
30. The primary judge next dealt with the question of whether Ms Vaughan had a reasonable expectation that Mr Clarkson would disclose that the fair value of the business was much less than $130,000.
31. His Honour said that it was important to recognise that the purpose of the meeting was to introduce the Vaughans with a view to them retaining Mr Clarkson as the accountant for the business and to provide professional advice on the draft contract. Hence, Mr Clarkson was asked to read the contract, which he did; and he provided advice upon the contract. His Honour inferred that Mr Clarkson knew of the purpose of the meeting, that inference being able to be more confidently drawn in the absence of his evidence.
32. His Honour accepted that Mr Clarkson owed no duty of care to Ms Vaughan. In fact, her counsel specifically disavowed reliance on any such duty.
33. In response to the appellant’s submission that Mr Clarkson was not obliged to volunteer information that would undermine what would be regarded as a good deal for his clients, the Jardines, his Honour pointed out that the meeting was not simply for the purpose of transacting business for the Jardines. Mr Clarkson was meeting Mr and Ms Vaughan with the express prospect that he would become their accountant. He also provided advice to both the Jardines and the Vaughans concerning the contract – and this would have raised, reasonably, in the mind of Ms Vaughan that he was giving her advice. His Honour noted that Mr Clarkson failed to take any of the other obvious alternatives that a professional person sensitive to the difficult position he was in could have taken in response to the Vaughans’ request for advice about the contract, such as stating that he could only advise his clients or suggesting that Ms Vaughan seek independent advice. His Honour said that the fact that he did not do so meant that he assumed some responsibility to Ms Vaughan, such that they must have had a reasonable expectation that Mr Clarkson would disclose to them anything they needed to know.
34. His Honour also held that Mr Vaughan’s question about whether there was anything they needed to know and whether the business was a going concern, strengthened his view that Ms Vaughan must have had a reasonable expectation that Mr Clarkson would disclose to them anything they needed to know.
35. The primary judge accepted that Mr Clarkson had a duty not to undermine his client’s position. While he should not have made any statements that did that without the consent of the Jardines, that did not require him to “make supportive statements that he could not justify professionally”. His Honour said that it was clear that Mr Clarkson was positioning himself to act for Ms Vaughan in the new business and it was inevitable in that situation that he would be wanting to show her how professionally he could meet their needs.
36. His Honour was satisfied that at the meeting Ms Vaughan had a reasonable expectation that Mr Clarkson would, if that were the case, disclose that the fair value of the business was much less than $130,000.
37. The primary judge held that Mr Clarkson knew that the fair value of the business was much less than $130,000, but failed to disclose that to the respondent (as well as the other matters in [23]).
His Honour rejected the appellant’s submission that there was no causative connection between the silence of Mr Clarkson and the loss and damage claimed by Ms Vaughan because of her lack of care for the protection of her own interests. The appellant pointed to Ms Vaughan’s failure to ask to see Ms Jardine’s income tax returns and BAS, the advice given by her prospective landlord’s solicitor that she retain a solicitor and Mr Vaughan’s research which pointed to the sale being overvalued. His Honour noted that Mr Clarkson had looked at the contract, gave advice about it and told Ms Vaughan that it was adequate. His Honour considered that this impliedly represented that there was no need to waste time and money seeking other advice. His Honour was satisfied that any lack of care that Ms Vaughan displayed in protecting her own interests was not such as to break the causal nexus between misleading or deceptive conduct of Mr Clarkson and the damage suffered by Ms Vaughan.
39. The primary judge accepted Ms Vaughan’s evidence that the comments made by Mr Clarkson at the meeting led her to sign the contract and proceed with the purchase. His Honour also accepted the evidence of Mr Vaughan that Mr Clarkson’s advice was critical. His Honour accepted that the loss and damage was suffered “by” the conduct of Mr Clarkson.
The statutory provisions
40. At the time when the conduct complained of by the respondent occurred, the Fair Trading Act mirrored provisions of the Trade Practices Act 1974 (Cth).
41. Section 12(1) of the Fair Trading Act provided:
12 Misleading or deceptive conduct
(1) A person shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.
42. Section 5(2) provided, relevantly:
(2)In this Act–
(a)a reference to engaging in conduct is a reference to doing or refusing to do any act …
(b)a reference to conduct, when that expression is used as a noun otherwise than as mentioned in paragraph (a), is a reference to the doing of or the refusing to do any act …
(c)a reference to refusing to do an act includes a reference to–
(i) refraining (otherwise than inadvertently) from doing that act;
…
The grounds of appeal
43. The grounds of appeal are too prolix to conveniently set out in full. The grounds, leaving aside the ground relating to the assessment of damages, may be summarised as follows:
(a)The primary judge erred in failing to reject the tender of the valuation report of Mr Lane in its entirety.
(b)His Honour erred in finding that Mr Clarkson knew that the fair value of the business was much less than $130,000.
(c)His Honour erred in finding that Ms Vaughan had a reasonable expectation that Mr Clarkson would disclose what he knew, relevantly, that the fair value of the business was much less than $130,000.
(d)His Honour erred in failing to decide the issue of whether Mr Clarkson’s failure to disclose relevant matters was inadvertent.
(e)His Honour erred in failing to find that Ms Vaughan had shown such a lack of care in protecting her own interests as to sever any causal connection between Mr Clarkson’s conduct and the loss and damage.
Whether the primary judge erred in failing to reject the tender of the valuation report
44. The respondent tendered the valuation report prepared by Mr Lane for the purposes of proving both that the value of the business was much less than $130,000 and the extent of Ms Vaughan’s loss. The appellant objected to the tender.
45. Mr Lane concluded that the value of the business was approximately $35,000 at the time of the meeting with Mr Clarkson and approximately $32,000 at the date Ms Vaughan sold the business. The report was based on a “capitalisation of future maintainable earnings” method and upon an “adjusted net assets” method of valuation. Mr Lane described the former as the “primary valuation methodology” and the latter as “an edit check measure”.
46. The primary judge rejected the tender of those parts of the report based on the primary valuation methodology. However, his Honour allowed the tender of those parts of the report based on the adjusted net assets methodology.
47. The appellant submits that his Honour erred in allowing the tender of any part of the report. The appellant submits that Mr Lane had not intended the net assets methodology to stand alone, and it was instead intended only as “an edit check measure”; and was not severable from the parts of the report that were rejected.
48. The question of whether the net assets methodology could stand alone as an available method of valuation fell to be determined from the report itself. The “adjusted net assets” methodology involved adding up the depreciated value of the tangible assets of the business. Mr Lane’s approach was that the value of the business was reflected in the value of its tangible assets. The appellant has not explained why that was not an available approach. It was open to his Honour to conclude that the adjusted net assets methodology could stand alone as a method of valuing a business. The description of the method as “an edit check measure” went to the weight to be given to the report, rather than its admissibility.
49. The appellant next submitted, relying on Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705 at [59], that his Honour should have rejected the adjusted net assets valuation part of the report because it failed to “furnish the trier of fact with criteria enabling evaluation of the validity of the expert’s conclusions”. However, the difficulty for the appellant is that it did not object to the admission of the parts of the report dealing with the adjusted net assets method of valuation on such a basis at the trial. The appellant should not be permitted to rely on this ground of objection in the appeal.
50. Therefore, we would reject the submission that his Honour erred by failing to rule that the whole of Mr Lane’s report was inadmissible.
Whether the primary judge erred in finding that Mr Clarkson knew that the fair value of the business was much less than $130,000
51. The respondent’s case was one of misleading or deceptive conduct through silence. It is well established that a party can engage in misleading or deceptive conduct through a failure to disclose information known to that party.
52. In Semrani v Manoun [2001] NSWCA 337, Beazley JA (with whom Mason P and Ipp AJA agreed), speaking of provisions indistinguishable from ss 5 and 12 of the Fair Trading Act, said at [61]–[62]:
[61] Although an intention to deceive is not necessary for the purposes of s 42 a person cannot engage in conduct in contravention of the section unless the person has actual knowledge of the matter said to be misleading or deceptive.
[62] The combined effect of the Act and the authorities therefore, is that for Williams' silence to be actionable, he must have had actual knowledge of a matter which he intentionally refrained from telling Manoun in circumstances where there was either a duty to disclose or where Manoun had a reasonable expectation that such information would be disclosed to him.
(Citations omitted.)
53. Ms Vaughan alleged that Mr Clarkson failed to disclose to her that the fair value of the business was much less than $130,000. It was therefore necessary for her to prove that he knew that the fair value of the business was much less than $130,000.
54. In concluding that Mr Clarkson did know that the fair value was much less than $130,000, the primary judge reasoned in the following way:
(a)Mr Clarkson was an experienced accountant;
(b)he had prepared Ms Jardine’s income tax returns and BAS, which meant that he had actual knowledge of the turnover of the business and its profitability;
(c)he knew that in the 2002/2003 year, the profit was $7,382 with Ms Jardine paying no wages to herself even though she worked full time in the business;
(d)there was no suggestion that the profitability was increasing in any substantial way for the second half of the 2003 calendar year;
(e)the purchase price of $130,000 would mean a return of approximately 5% on capital with no wages for full time work paid to the owner;
(f)the actual value of the business was between $32,000 and $35,000;
(g)it is inconceivable that a competent accountant would not know that $130,000 did not represent a fair value for the business;
(h)an inference should be drawn that Mr Clarkson knew that a sale price of $130,000 was significantly higher than the fair value of the business; and
(i)that inference was more confidently able to be drawn from Mr Clarkson’s unexplained failure to give evidence.
55. It may be noted that Ms Vaughan did not call any expert accountant to give evidence as to what a reasonably competent accountant ought to have known about the value of the business in the circumstances of the case. His Honour appears to have inferred that Mr Clarkson knew that the fair price of the business was much less than $130,000 from two factors, namely:
(a)a conclusion that the matter must have been obvious to Mr Clarkson from the turnover and profitability of the business; and
(b)Mr Lane’s expert evidence as to the actual value of the business.
56. It is not entirely clear what use the primary judge made of Mr Lane’s valuation. It was not open to his Honour to rely on the fact that Mr Lane valued the business at $32,000 to $35,000 to infer that Mr Clarkson must have known that the value was of that order. The report was prepared by a valuer, not an accountant. The fact that Mr Lane was able to arrive at that valuation could not, of itself, lead to an inference that Mr Clarkson must have known that the value of the business was of that order.
57. However, it may be that his Honour instead had in mind the methodology for the valuation given in the report of Mr Lane, rather than the figures he arrived at. That is, Mr Lane used the adjusted net value of the tangible assets of the business, and it may be that his Honour considered that Mr Clarkson, knowing the value of the tangible assets, ought to have, and did, arrive at the same valuation by the same method. Although his Honour did not explicitly say he reasoned in that way, that much may be assumed in favour of the respondent for the moment.
58. Accordingly, his Honour may be taken to have considered that it was relevant that Mr Clarkson knew that the adjusted net value of the tangible assets was about $35,000. His Honour also relied upon a calculation that by reference to the profit in the 2002/2003 year of $7,382, the purchase price of $130,000 reflected an annual return of about 5%, with no wages factored in for full time work. Further, his Honour also took into account the turnover of the business.
59. His Honour inferred that it must have been obvious to a competent accountant in Mr Clarkson’s position that the fair value of the café was much less than $130,000. His Honour illustrated his reasoning by pointing out that it would have been obvious to a non-expert that it would not be a fair price to sell the Sydney Opera House for $10, although acknowledging that greater experience may be required for less gross differences to be detectable.
60. The appellant did not contend that it was not open to his Honour to draw an inference as to Mr Clarkson’s state of knowledge based upon the application of common experience of life to the evidence before the Court. In G v H (1994) 181 CLR 387, Brennan and McHugh JJ said at 390:
An inference is a tentative or final assent to the existence of a fact which the drawer of the inference bases on the existence of some other fact or facts. The drawing of an inference is an exercise of the ordinary powers of human reason in the light of human experience; it is not affected directly by any rule of law.
61. What is controversial is whether his Honour ought to have drawn the inference that Mr Clarkson knew that the fair value of the café was much less than $130,000.
62. His Honour’s reasoning assumed that the only factors that could be relevant to Mr Clarkson’s assessment of the value of the business were the adjusted net tangible assets of the business, the turnover and the profit in the 2002/2003 financial year. There was, however, at least one other factor that was relevant to the value of the business, about which Mr Clarkson was provided with no information by either the Vaughans or the Jardines. That factor was goodwill.
63. In Commissioner of Taxation v Murry (1998) 193 CLR 605, the majority judgment pointed out that “goodwill” is notoriously difficult to define and may have different meanings and different contexts. The majority referred at [15]–[22] to a number of cases which have attempted to define goodwill, including in Inland Revenue Commissioners v Muller & Co’s Margarine Ltd [1901] AC 217 where Lord Lindley said at 235:
Goodwill regarded as property has no meaning except in connection with some trade, business, or calling. In that connection I understand the word to include whatever adds value to a business by reason of situation, name and reputation, connection, introduction to old customers, and agreed absence from competition, or any of these things, and there may be others which do not occur to me. In this wide sense, goodwill is inseparable from the business to which it adds value, and, in my opinion, exists where the business is carried on.
64. In Murry, the majority continued at [24]:
The goodwill of a business is the product of combining and using the tangible, intangible and human assets of a business for such purposes and in such ways that custom is drawn to it. In Federal Commissioner of Taxation v Williamson (1943) 67 CLR 561 at 564, Rich J described the goodwill of a business as referable “in part to its locality, in part to the way in which it is conducted and the personality of those who conduct it, and in part to the likelihood of competition, many customers being no doubt actuated by mixed motives in conferring their custom”. It is common to describe goodwill as being composed of elements. However, goodwill is a quality or attribute that derives inter alia from using or applying other assets of the business.
It is clear that the value of a business may exceed the value of its tangible and independent intangible assets, and that the difference can be described as “goodwill”. That goodwill was a factor relevant to the value of the business in the present case is demonstrated by Ms Vaughan’s evidence that she understood the sale price to have been calculated on the basis of the setup costs plus goodwill. It is also demonstrated by Mr Vaughan’s evidence. His evidence was that his research showed that coffee shops in and around Canberra tended to sell for $30,000 to $50,000, but when he asked Ms Jardine about the discrepancy, her response was that the price of $130,000 was what the café was worth. Mr Vaughan’s evidence, in the context of how that discrepancy could be accounted for, was that he thought the business was in a “growth phase” and that his wife was “a capable woman” who could grow the business. Mr Vaughan’s evidence was that the value “depends on a lot of factors”, including location, turnover, profit margin and goodwill.
66. The point is that Ms Vaughan, and her husband, who was her advisor, believed that part of the value of the business was its goodwill. There was no evidence that Mr Clarkson knew of all the factors known to the Vaughans that might go towards the goodwill component of a price, such as location, competition and the potential for growth. There was no evidence before the Court that would establish that the value of the goodwill was nothing or was negligible. Mr Lane’s valuation did not refer to goodwill, but this demonstrates only that he did not consider it, not that goodwill had no value. While Ms Vaughan’s counsel submitted that there could be no goodwill because the business was loss-making, it was in fact turning a profit, albeit one that was fairly small. In addition, there was no suggestion that Mr Vaughan told Mr Clarkson of his research which indicated that cafés were usually sold for $30,000 to $50,000 in Canberra, or that Mr Clarkson was aware of that from his own knowledge.
67. Mr Clarkson could only have made a proper estimate of the value of the business if he had been given information that would allow him to value the goodwill component. In the absence of such information, he could not have known the value of the café business.
68. There are competing inferences that can be drawn from the evidence concerning Mr Clarkson’s state of knowledge. The first is that Mr Clarkson had actual knowledge that the fair value of the business was much less than $130,000. The second is that he did not know. Ms Vaughan was required to establish that the circumstances appearing from the evidence give rise to a reasonable and definite inference that Mr Clarkson had the knowledge she alleges, not merely to conflicting inferences of equal degree of probability: see Trustee of the Property of Cummins (a bankrupt) v Cummins (2006) 227 CLR 278 at [34].
69. It might be inferred that Mr Clarkson must have suspected that the fair value of the business was much less than $130,000. It might be inferred that he knew that the fair value of the business might be much less than $130,000. However, what the respondent was required to prove was that he had actual knowledge that the fair value of the business was much less than $130,000. In our opinion, even allowing for the fact that Mr Clarkson failed to give evidence, a definite inference of actual knowledge was not available when it was not proved that Mr Clarkson had knowledge of the facts that would allow him to value the goodwill component of the sale price.
70. For completeness, the primary judge was correct to find that Mr Clarkson knew of the first two matters set out in [23], namely that the turnover for the business did not justify a sale price of $130,000 and the profitability of the business did not justify a sale price of $130,000. However, that does not assist the respondent because the crucial component of the respondent’s case was that Mr Clarkson knew that the sale was at a substantial overvalue. That depended on the value to be ascribed to goodwill, and was not solely a function of turnover and past profitability.
71. We consider that the primary judge erred in finding that Mr Clarkson had actual knowledge that the fair value of the business was much less than $130,000. The appeal should succeed on this basis.
Whether the primary judge erred in failing to rule whether Mr Clarkson’s non-disclosure was inadvertent
72. It was common ground before the primary judge that the respondent was required to prove that Mr Clarkson’s non-disclosure of the fact that the sale price was at a significant overvalue was not inadvertent. The respondent acknowledged this by relying on the passage at [61] in the judgment of Beazley JA in Semrani (quoted at [52] above). In an exchange with the primary judge, the respondent’s counsel confirmed that its case was that there had to be evidence of an intentional refraining from disclosing the relevant matters.
73. The primary judge acknowledged in his reasons that the respondent was required to satisfy the Court that Mr Clarkson “deliberately refrained” from disclosing the relevant matters to Ms Vaughan. However, as the respondent accepts, the primary judge did not then go on to explicitly make any finding as to whether the non-disclosure was inadvertent or deliberate.
74. The respondent now submits that in a case of misleading or deceptive conduct by silence, it is not a necessary requirement that the failure to disclose be deliberate. The respondent submits, in the alternative, that it is to be implied from his reasons that his Honour inferred that Mr Clarkson deliberately refrained from disclosing to Ms Vaughan that the sale price was at a substantial overvalue.
75. It will be recalled that s 5(2)(c) of the Fair Trading Act provides that “a reference to refusing to do an act includes a reference to…refraining (otherwise than inadvertently) from doing that act…”. It will also be recalled that in Semrani, Beazley JA held at [62] that the defendant must have actual knowledge of a matter “which he intentionally refrained” from telling the plaintiff. The same view has also been taken in a number of other cases, for example: Costa Vraca Pty Ltd v Berrigan Weed & Pest Control Pty Ltd (1998) 155 ALR 714 at 722 per Finkelstein J; Johnson Tiles Pty Ltd v Esso Australia (1999) 45 IPR 453 at 455 per Merkel J; and D’Souza v Wedgewood Road Hallam No. 1 Pty Ltd [2010] FCA 765 at [69] per Gordon J.
76. However, in CCP Australian Airships Ltd v Primus Telecommunications Pty Ltd (2005) ATPR 42-042, Nettle JA (with whom the other members of the Court agreed), said at [34]:
The second argument is both wrong in law and contrary to the evidence and the findings below. As to the law, the misleading and deceptive quality of remaining silent inheres in the non-disclosure of information; not in any refusal to provide it. Consequently, it does not follow from the fact that a failure to act must be intentional in order to be actionable, that silence must be intentional in order to be actionable. It is plain in principle and authority that it is not necessary that silence be intentional in order that it may constitute misleading and deceptive conduct for the purposes of s 52.
77. In Owston Nominees No 2 Pty Ltd v Clambake Pty Ltd (2011) 248 FLR 193 at [228], the Full Court of the Western Australian Supreme Court adopted the view taken in CCP Australian Airships. The Court referred to the observation of Gummow J (with whom Black CJ and Cooper J agreed) in Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31 at 40:
But in any case where a failure to speak is relied upon the question must be whether in the particular circumstances the silence constitutes or is part of misleading or deceptive conduct. The expanded meaning given by s 4(2) to 'conduct' should not distract attention from the fundamental issue in the case at hand.
78. The issue is fairly arguable either way, but we respectfully agree with the view taken in CCP Australian Airships and Owston. An inadvertent failure to disclose relevant information is capable of being just as misleading or deceptive as the deliberate withholding of the same information. It seems unlikely that there was a legislative intention to restrict the reach of s 12(1) to the latter situation.
79. Therefore, his Honour’s failure to rule upon the parties’ arguments concerning whether Mr Clarkson’s omission was intentional or inadvertent did not affect the outcome of the case.
Whether the primary judge erred in finding that the respondent had a reasonable expectation that Mr Clarkson would disclose his knowledge
80. Having found that Mr Clarkson knew that the sale price of $130,000 was substantially greater than the fair value of the business, the primary judge considered whether Ms Vaughan had a reasonable expectation that Mr Clarkson would disclose that knowledge.
81. The appellant points out that the primary judge found that Mr Clarkson’s clients were the Jardines. His Honour found that Mr Clarkson had a duty not to undermine his clients’ position and that he should not have made any statements that did so without the consent of the Jardines. The appellant submits that having reached this conclusion, the primary judge should not have found that Ms Vaughan had a reasonable expectation that a relevant matter would, if it existed, be communicated.
82. The appellant relies on Kabwand Pty Ltd v National Australia Bank Ltd (1989) ATPR 40-950 at 50,377 where the Full Court of the Federal Court concluded that there was no reasonable expectation that the bank, bound by the banker’s duty of confidence in favour of the seller, would disclose the parlous financial condition of a business to the purchaser.
83. The appellant also relies on the judgment of Hill J in Warner v Elders Rural Finance Limited (1993) 41 FCR 399 at 405:
For where there is a duty to disclose, a fortiori there will exist in the person who suffers damage the necessary reasonable expectation of disclosure. That is to say, a person in that person's position would reasonably expect the making of a disclosure, where the law imposes a duty of disclosure. Where no such duty is imposed, but, as in Kabwand (supra), is in fact excluded such as by virtue of a duty of confidence owed to another, there could be no reasonable expectation that a disclosure would be made.
84. The appellant submits that these cases establish a principle that where there is a duty of confidentiality owed by one party to another, there can be no reasonable expectation by a third party that a disclosure of confidential information will be made to the third party.
85. We do not think that the cases establish any such principle. The question of whether a party has a reasonable expectation that a disclosure will be made is a question of fact that must depend upon the circumstances of the case.
86. In Miller v BMW Australia (2010) 241 CLR 357, French CJ and Kiefel J said:
19The language of reasonable expectation is not statutory. It indicates an approach which can be taken to the characterisation, for the purposes of s 52, of conduct consisting of, or including, non-disclosure of information. That approach may differ in its application according to whether the conduct is said to be misleading or deceptive to members of the public, or whether it arises between entities in commercial negotiations. An example in the former category is non-disclosure of material facts in a prospectus.
20In commercial dealings between individuals or individual entities, characterisation of conduct will be undertaken by reference to its circumstances and context. Silence may be a circumstance to be considered. The knowledge of the person to whom the conduct is directed may be relevant. Also relevant, as in the present case, may be the existence of common assumptions and practices established between the parties or prevailing in the particular profession, trade or industry in which they carry on business. The judgment which looks to a reasonable expectation of disclosure as an aid to characterising non-disclosure as misleading or deceptive is objective. It is a practical approach to the application of the prohibition in s 52.
(Citations omitted.)
87. This passage shows that determining whether a party has a reasonable expectation that a disclosure will be made is an aid to deciding whether conduct is misleading or deceptive. That determination depends on the circumstances and the context. There is no legal principle such as that contended for by the appellant.
88. The primary judge pointed to factors which generated a reasonable expectation in Ms Vaughan that Mr Clarkson would disclose relevant information. Mr Clarkson was asked to and did provide advice to both the Vaughans and the Jardines as to the adequacy of the contract. In addition, when Mr Vaughan asked Mr Clarkson “Is there anything that we should know that you want to tell us? Is it a going concern?”, Mr Clarkson said “You’ll be right”. His Honour pointed out that instead of refusing to answer the question, Mr Clarkson volunteered an answer which was in the nature of advice. His Honour considered that this statement was supportive of the Jardines’ position as to the sale price.
89. Ms Vaughan’s evidence was that she assumed that Mr Clarkson would understand the financial aspects of the business and believed that if there was anything she might need to know about the business he would tell her about it. Her evidence was that she would have expected Mr Clarkson to have told her at the meeting if the business was worth less than the sale price of $130,000.
90. His Honour was entitled to conclude that Ms Vaughan had a reasonable expectation that Mr Clarkson would volunteer relevant information. We cannot see that his Honour made any error in reaching that conclusion.
Whether the primary judge erred in failing to find that the causal connection between the conduct and the loss and damage had been severed
91. The appellant argues that the primary judge erred in failing to find that Ms Vaughan had shown such a lack of care in protecting her own interests as to sever any causal connection between Mr Clarkson’s conduct and the loss and damage.
The appellant points to Ms Vaughan’s failure to do anything to confirm the veracity or accuracy of the handwritten figures she was given by the Jardines, failing to heed discrepancies in the Jardines’ descriptions of the set-up costs, failing to heed Mr Vaughan’s own analysis that showed that the business was making only a small profit, and failing to act on Mr Vaughan’s own research concerning the sale prices of cafes. The appellant also points to Ms Vaughan’s failure to engage a solicitor, despite being advised to do so by the landlord’s solicitor. The appellant submits that if it should have been apparent to Mr Clarkson that the fair value of the café was much less than $130,000, that should have been readily apparent to Ms Vaughan as well.
93. In a given case, it may be that the plaintiff’s conduct discloses such a want of care for his or her own interests that whatever causal connection might otherwise have existed as between the alleged misleading conduct of the defendant and the loss suffered by the plaintiff will have been severed: Argy v Blunts & Lane Cove Real Estate Pty Ltd (1990) 26 FCR 112 at 138.
94. The primary judge found that there was not such a gross failure on the part of Ms Vaughan to care for her own interests as to break the link between misleading or deceptive conduct and the damage. His Honour pointed out that Ms Vaughan was a close friend of the Jardines and had been misled by them. His Honour said that it was not essential that a reasonable person should not trust a friend, nor should a reasonable person be required to be sceptical about claims that they make about matters of which they have personal knowledge. His Honour considered that in the context of friendship, it was not unreasonable for Ms Vaughan not to have asked for Ms Jardine’s income tax returns and BAS documents when she had already been provided with the handwritten financial statements. Further, Mr Vaughan did make enquiries of the Jardines as to his concerns about the value of the business.
95. The appellant stridently criticises these findings by the primary judge. There would be validity in the criticism if this was as far as the findings went. However, the appellant’s arguments ignore a further, critical, finding by the primary judge. His Honour found that Ms Vaughan did in fact seek professional advice. She sought advice from Mr Clarkson. Mr Clarkson advised her upon the contract. Ms Vaughan’s evidence was that comments made by Mr Clarkson at the meeting led her to sign the contract and proceed with the purchase.
96. Once his Honour reached the conclusion that Ms Vaughan had consulted Mr Clarkson for the purpose of obtaining advice upon the contract, with reasonable expectation that he would disclose any relevant matters to her, it could not be concluded that she failed to take adequate care for her own interests. His Honour was entitled to conclude that any lack of care that Ms Vaughan had displayed was not as such to break the causal nexus between the misleading or deceptive conduct of Mr Clarkson and the damage suffered by Ms Vaughan.
Conclusion
97. The appellant has succeeded on the ground that the primary judge erred in finding that Mr Clarkson knew that the fair value of the business was much less than $130,000. The consequence is that the appeal should be allowed and the judgment set aside.
98. The appellant has also succeeded on its ground that his Honour erred in the assessment of damages (at [3] above), although in the event that error is of no consequence since the judgment will be set aside. The respondent has made out the ground in her cross-appeal that his Honour made a different error in the assessment of quantum, but that error is for the same reason of no consequence. Therefore, the cross-appeal will be dismissed.
99. Having regard to the fact that the appellant has been successful on only two grounds and to the respondent’s success in establishing the error underlying the cross-appeal, our preliminary view is that there should be no order as to the costs of the appeal. However, the parties have leave to file and serve, within 14 days, any written submissions they wish to make about the appropriate costs orders.
| I certify that the preceding ninety-nine [99] numbered paragraphs are a true copy of the Reasons for Judgment of the Court. Associate: Date: 29 January 2016 |
Key Legal Topics
Areas of Law
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Commercial Law
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Contract Law
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Civil Procedure
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Appeal
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Breach
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Reliance
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Costs
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