Contractor Services Pty Ltd v Esanda Finance Corporation Ltd

[1990] FCA 514

Re: CONTRACTOR SERVICES PTY LTD; BERYL FRANCES WILLOUGHBY; JOHN FRANCIS
WILLOUGHBY; MICHAEL STEPHEN WILLOUGHBY; DONNA MARGARET WILLOUGHBY; MARK ROBERT
WILLOUGHBY; WILLOUGHBY INVESTMENTS PTY LTD and KALGOORLIE CONCRETING PTY LTD
And: ESANDA FINANCE CORPORATION LTD; VENETIA HOLDINGS PTY LTD; COUGAR HOLDINGS
PTY LTD and GARY JAMES JOHNSON
No. WA G14 of 1990
FED No. 514
Trade Practices

COURT

IN THE FEDERAL COURT OF AUSTRALIA

WESTERN AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
French J.(1)

CATCHWORDS

Trade Practices - misleading or deceptive conduct - sale of hotel - alleged misrepresentations as to turnover, profitability and ability to service loan - vendors and financier sued - no misleading conduct - no reliance - cross - claim for sums due under mortgage and related securities.

Trade Practices Act 1974

HEARING

PERTH

#DATE 18:9:1990

Mr John Willoughby appeared on behalf of the Applicants.

Counsel for the first respondent: Mr R. Ainslie

Solicitors for the first respondent: Mallesons Stephen Jaques

Counsel for the second, third and fourth respondents: Mr K.J. O'Toole

Solicitors for the second, third and fourth respondents: Mr K.J. O'Toole

ORDER

The application by the first, second and third applicants is dismissed.

There be judgment on the first respondent's cross-claim in favour of the first respondent against the first, second and third applicants in the sum of $4,130,062.48.

There be judgment on the second respondent's cross-claim in favour of the second respondent against the first, second and third applicants in the sum of $998,890.89.

The first, second and third applicants to pay the respondents' costs of the application and cross-claims.

Liberty to apply within 7 days on any arithmetical error in the calculation of the judgment sum.

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

JUDGE1

In this action five members of the Willoughby family and two of their companies sue the vendors of the freehold and business of the Leederville Hotel and their financier, Esanda Finance Corporation Pty Ltd ("Esanda"). The action is based on misrepresentations as to turnover and profitability said to have induced the Willoughby company, Contractor Services Pty Ltd ("Contractor") to purchase the hotel. Although their statement of claim was settled by counsel, the applicants were not legally represented at trial. Mr John Willoughby appeared by leave for Contractor and Willoughby Investments and for himself and the other second applicants. Kalgoorlie Concreting Pty Ltd took no part in the proceedings. The trial on the applicants' claims was as to liability only. Esanda and Venetia Holdings cross-claim for advances made in respect of the sale and earlier transactions.

1. In the course of the hearing, Mr Willoughby called some persons as witnesses who were associated with the respondents. He did this after being warned by the Court that persons called by him as witnesses were called as witnesses to be believed and accepted by the Court and that he could not cross-examine them. In spite of the obvious difficulties to which his decision gave rise, I have not applied any principle that the witnesses so called are to be believed when their evidence lies against the Willoughbys' case merely because it was the Willoughbys who called them. I have endeavoured to assess their evidence by reference to substantive criteria of credibility.

2. The conduct of the hearing was assisted by the admission without objection of a number of exhibits, including witness statements, that might otherwise not have been admissible. Nevertheless the presentation of the case for the applicants did not lend itself readily to a coherent and connected account of the history of the matter. There was on the applicants' part confusion over the sequence of some important events.
   First Dealings with Esanda

3. Sometime prior to 1973 the Willoughby family moved to Kalgoorlie and acquired a hotel called the "Golden Eagle". The Willoughby sons commenced a concrete contracting business which was eventually operated through the company, Kalgoorlie Concreting Pty Ltd. Although that business continued the family sold the hotel and moved to Bunbury for a time. In 1981 they returned to Kalgoorlie and acquired the Glen Devon Private Hotel. Through family companies they purchased other properties in Kalgoorlie and Coolgardie including residences occupied by Michael and John Willoughby and their families, the Railway Lodge, three shops and several vacant lots located in Coolgardie, the old Post Office and Police Station in Fimiston Street, Boulder and properties adjoining the Glen Devon. In their pursuit of real estate it seems that they left themselves short of working capital. As of December 1988 however, they were described in an Esanda financial assessment as "...good working people suited to the hotel industry where they have enjoyed past owner/operator experience."

4. The Willoughbys had their first significant dealings with Esanda in December 1987. They applied for a loan of $385,000 to pay out a $150,000 mortgage over the Glen Devon Hotel in favour of the Goldfields Credit Union and mortgages over other properties in Egan Street, Kalgoorlie to enable them to develop those blocks. The security offered was a first mortgage on the Glen Devon Hotel. Johan ("Hans") Gerritsen, the State Manager, Property Finance for Esanda, was introduced to the family by Brian Hartley then Senior Finance Officer, Property Finance, who was processing their loan application. He suggested that they consolidate their debts with one loan of $865,000 to be borrowed from Esanda and secured by mortgages against each of their properties. The loan of this amount to Willoughby Investments Pty Ltd and Kalgoorlie Contracting Pty Ltd was approved in a letter from Esanda dated 14 December 1987. Its expressed purpose was "to assist with the refinance and purchase of various properties in Kalgoorlie, Coolgardie and Boulder". In March 1988 the advance was approved in the increased amount of $965,000.

5. On 9 February 1988 the Willoughbys executed deeds of guarantee and indemnity in favour of Esanda in respect of the obligations of Willoughby Investments and Kalgoorlie Concreting. They also executed a deed of charge with Willoughby Investments as mortgagor and Esanda as mortgagee. On 20 April 1988 first registered mortgages were executed over most if not all the lands held by the applicants and a loan contract made between Esanda as vendor and Willoughby Investments and Kalgoorlie Concreting as borrowers. It was common ground that the various securities were drawn in such a way as to secure the indebtedness of the applicants to Esanda generally. The various security documents also contained cross linking default clauses so that a default on any loan would be a default in respect of all loans and mortgages.

6. Negotiations with Esanda were carried on by James Meckelberg, a relative of the Willoughby family who was a business consultant with experience in the finance industry. He was also later involved in negotiations with the Bond Group of companies for the sale by Michael and John Willoughby of 1 Fimiston Street, Boulder for some $1.6 million. The land was wanted in connection with a major open cut mine operation to be known as the Superpit. The sale was settled on 9 September 1988. Esanda lifted its mortgage over the property to allow settlement to proceed on payment to it of $66,231 representing a principal reduction of $35,000 with the balance credited against outstanding interest. The repayment rates on the loan were reduced with effect from 27 November 1988. While the settlement of the Bond transaction was pending there had been some difficulty on the part of the Willoughbys in keeping up repayments on the Esanda loan. This was the subject of some discussion between Meckelberg, Hartley and Gerritsen in June 1988.

7. Mrs Beryl Frances Willoughby, known as "Fran", and her son, John, regarded Esanda as having come to their aid with the refinancing when no other lender would. And it was Meckelberg's opinion that the Willoughbys would have been in a difficult financial position but for that accommodation. Mrs Willoughby described her relationship with Gerritsen as one of "total trust". John Willoughby said that he and his mother had been up and down St. George's Terrace in search of finance and nobody would help them until they approached Esanda. The Bond settlement was delayed and they were at least three interest payments behind by the time they got their money. Gerritsen, he said, was "probably the only person outside of my family who believed we would get the Bond money...Mr Gerritsen was a man I liked".
   Initial Inquiries

8. Following the successful conclusion of the Bond transaction, the Willoughbys, in about November 1988, turned their minds to the possibility of buying an hotel in Perth. Their general attitude at the time was described by John Willoughby in his evidence when he said:
   

"...I was quite entrepreneurial at that stage...our family had been through quite a struggle - a financial struggle as well... without

(having) to refinance we had got the Bond money if you like, ... There was a general feeling of euphoria in our family in the period referred to."

Their purpose as explained by Fran Willoughby, was to purchase an hotel that would service itself so they could later redevelop the land.

1. They saw a newspaper advertisement for the sale of the New Beaufort Hotel. The agent handling it was Peter Agostino of Jones Lang Wootton. The owner was New Beaufort Hotel Pty Ltd, a company controlled by Perth businessman Rod Evans. Between them the Willoughbys inspected this hotel on a number of occasions. Fran Willoughby visited it 5 times and John Willoughby at least twice. Evans was offering vendor finance of $500,000 for 12 months with no repayment until the expiry of that time when the principal and interest of 15% would fall due.

2. In the week prior to 25 November Fran Willoughby had been in touch with Colliers International Property Consultants a firm of licensed estate agents. Kieran Glynn who worked with that firm became aware of her interest, contacted her, and undertook to make inquiries about what was on the market in Perth. At that time the Leederville Hotel was for sale. It had been listed with agents Ellis and Partners for some months but that listing had been revoked and the owners were trying to sell it themselves. The owners were the family of Mr Lawrence Johnson who held the freehold and the business through their companies Venetia Holdings Pty Ltd and Cougar Holdings Pty Ltd respectively. Mr Johnson's son, Gary, supervised the management of the hotel on a parttime basis and had run it fulltime from November 1987 until about February 1988. Glynn made an appointment to see Lawrence Johnson on 25 November. He was told that the property was on the market, that it had been with another agent, that they did not have any accounts ready and that the hotel was turning over $40,000 per week.
   Lunch with Glynn at Julio's - 29 November

3. On or about 29 November Fran Willoughby and her son Michael had lunch with Glynn at a restaurant called Julio's. Representations allegedly made at that lunch were the subject of paras 9 and 10 of the statement of claim in which it was said:
   "9. At all material times one Kieran Glynn
   

was an agent or representative of Collier International duly authorised to offer the hotel for sale on behalf of the Second and Third Respondents.

10. In or about November, 1988 at the

premises of Julio's Restaurant, Perth, the said Kieran Glynn orally represented to the three first named Second Applicants that:

10.1 the hotel was turning over

$40,000.00 per week;

10.2 the vendors, being the Second and

Third Respondents, had a $2,000,000.00 loan which required payment of interest only to the lender;

10.3 the hotel was sufficiently

profitable to service the interest payments on the $2,000,000.00 loan after payment of overheads."

1. The lunch was evidently characterised by the consumption of considerable quantities of alcohol. Mrs Willoughby said of it:
   

"As a matter of fact, I have to tell you the truth, I cannot remember very much about that lunch at all. I imbibed very - it was a very pleasant lunch in which we consumed if I recall, some ridiculous amount of money's worth of Moet champagne."

She went on to say that she had no recollection of what Glynn had said. He had not impressed her as anything special. Asked whether she was claiming that Glynn had said anything of significance in relation to the Leederville Hotel in the course of that lunch she replied:

"I do not know that I ever did claim that Kieran Glynn said anything".

Asked whether it was correct to say that if he had said anything she would not have put much store by it, she agreed. Michael Willoughby recalled that Glynn had told them the weekly turnover of the hotel was $40,000, half of which came through the bottle shop and half through the bars. He said there was also some discussion about how that money could be used to finance interest payments. Glynn was called as a witness by the Willoughbys. The luncheon at Julio's on 29 November was never put to him nor the allegations that he had made any representations at that luncheon in relation to the turnover of the hotel or its profitability. And it is clear that at that time he was acting on behalf of the Willoughbys in looking for an hotel for them to purchase. He had no authority to offer the hotel for sale on behalf of the Johnsons or their companies or to make representations on their behalf.

Inspection of Leederville Hotel - Johnsons' Turnover Representations - 30 November

1. An inspection of the Leederville Hotel was arranged for 30 November. Fran and John Willoughby attended the premises shortly after 8.30 am and were met there by Glynn and Gary Johnson. Glynn left them with Johnson who explained the family's previous involvement with the hotel. According to para 14 of the statement of claim it was in the course of this inspection that Johnson made the following representations:
   "14.1 the hotel was turning over an
   

average of $40,000.00 per week summer and winter;

14.2 the hotel was for sale because the

Fourth Respondent's father was dying of cancer and the Johnson family was unable to realise the hotel's full potential."

Johnson told them his father had had two heart attacks and had suffered from cancer some years before. He said this was the main contributing factor to the sale of the hotel. As to that the evidence is clear that the statements about his father's health were true and that this was a major factor in their decision to sell the hotel. According to Johnson's oral evidence, he was asked what the hotel was turning over and replied that they had anticipated to do $40,000 or better that week. He denied the suggestion that he had used the term "average" to describe the turnover. Mrs Fran Willoughby, on the other hand, gave evidence in cross-examination that during the tour of inspection he represented that the hotel was turning over $40,000 summer and winter. When pressed on this she conceded that he probably did not say "summer and winter" but did say "$40,000 a week". This she took to mean an annual average weekly taking calculated by dividing gross takings for the year by 52. In my opinion it is improbable that Johnson limited himself to a description of that week's takings. Indeed, in his affidavit sworn 12 March 1990, which was received in evidence, he said it was his recollection that in answer to Fran Willoughby's inquiry about turnover he replied with words to the effect that they were turning over some $40,000 per week. On the other hand I am not satisfied that he could reasonably be taken as stating an annual average. His representation was to be taken as no more than an indication of an approximate level of turnover at about that time. It could not be relied upon by any serious purchaser and in the event on the evidence, to which reference is made later in these reasons, no reliance was placed upon it.

Offer for the New Beaufort Hotel - 1 December

1. On 1 December 1988, the day after their inspection of the Leederville Hotel, Fran and John Willoughby had breakfast at the New Beaufort Hotel. On that day John signed an offer on behalf of Contractor Services to purchase the hotel for $1,500,000. It was expressed to be conditional upon approval of a $1,000,000 loan by Esanda secured by a first mortgage and the provision of vendor finance for the amount of $500,000 for a period of 12 months at 15% per annum. The offer was passed on to Peter Agostino for submission to Rod Evans. Evans did not sign it until 14 December and then did so after making amendments to the terms so that the vendor finance would be secured by a first mortgage over the property and Esanda deferred to a second mortgage security. His action constituted at best a counter offer. It was never accepted and the transaction did not proceed.
   Meeting with Gerritsen - Northbridge Cafe - Late November, Early December 1988

2. At some time, and probably before they signed the New Beaufort Hotel offer, Fran, John and Michael Willoughby accidentally encountered Gerritsen while he was having coffee with his wife and daughter at an outdoor cafe in Northbridge. Gerritsen thought it was Saturday 10 December, but, having regard to his account of the content of their conversation it seems more likely that it was in late November or early December. The Willoughbys told Gerritsen that they had sold the land wanted by the Bond Group for its Superpit mining operation. He of course already knew that the sale had gone through. They told him they were in town with a view to buying an hotel and that they were interested in either the New Beaufort or the Leederville Hotel. John or Fran asked whether Esanda would be interested in providing finance. Gerritsen replied that it was not something in his area but that they should speak to one of his officers, Greg Smith.
   Esanda's Office - Early December 1988 The Smith Representations

3. Paragraph 13 of the statement of claim alleges that in or about December 1988 Greg Smith made oral representations to Fran and John Willoughby after declining to finance the purchase of the Beaufort Hotel. These representations were said to have been:
   1. That he had an intimate knowledge of the
   

current performance of the Leederville Hotel as the subject of a client relationship with Esanda.

2. The vendors of the Leederville Hotel had

been servicing a $2,000,000 loan from Esanda for over three years.

3. The hotel was turning over an

average summer and winter of $40,000 per week.

4. The hotel was sufficiently profitable to

service a $2,000,000 loan from the first respondent to the first applicant after payment of overheads.

5. At the asking price of $2,750,000 the hotel

was "a steal".

As the trial was conducted, it was alleged that these representations were made on two occasions, one in a meeting at Esanda's office on or about 1 December 1988 and on the other at a luncheon at Julio's Restaurant on 15 December 1988. The evidence and its presentation was confused and confusing.

1. According to John Willoughby, shortly after sending their offer for the New Beaufort Hotel to Agostino, that is on or about 1 December, he and his mother went to see Gerritsen at the Esanda offices. They told him that they had made an offer on the hotel. He said "why do you bastards want a hotel for? You have got your money, sit on it". They told Gerritsen they liked the land and felt they could make a go of the hotel. It was Willoughby's evidence that Gerritsen then introduced them to Greg Smith, the District Manager. According to Willoughby this was the first time he met Smith. They sat in Gerritsen's office and discussed the New Beaufort Hotel. Gerritsen asked whether it was the only one they had looked at. They told him they had looked at the Leederville Hotel the day before. According to John Willoughby, Smith then said that the Leederville Hotel was a hotel he had financed and when Willoughby told him of the represented turnover of $40,000, Smith replied:
   

"That would be right, it's servicing a $2 million mortgage."

John Willoughby said that they subsequently discussed the New Beaufort Hotel with Smith in another office and showed him the offer executed by Evans with the amendments requiring first mortgage security for the vendor finance. Given that the offer with amendments was not signed by Evans until 14 December, this evidence cannot be correct.

1. John said that Smith could see no problem with financing the New Beaufort Hotel provided Evans dropped his requirement for a first mortgage. Discussion then turned to the Leederville Hotel and according to John Willoughby, Smith left the room for two or three minutes and brought back a thick file apparently relating to the Leederville Hotel. He was said to have leafed through it, turned to Fran and John Willoughby and said:
   

"Yes, that is right; no problem with that mortgage."

And further:

"Nobody knows the Leederville Hotel like I do".

Further, according to John's evidence, when he mentioned Johnson's statement about $40,000 turnover, Smith looked through his file and said:

"They have had no trouble with their mortgage payments. They would have to be doing $40,000 a week, right, to make their payments."

It was made clear by Willoughby in answer to questions from the Court that he did not understand Smith to be saying that his records showed a weekly turnover of $40,000. Rather his statement was to the effect that the hotel's ability to service its commitments to Esanda suggested the turnover figure which Willoughby had mentioned already. Willoughby said that after the meeting he returned to Kalgoorlie as he was a member of the local authority and wanted to attend meetings of the Council to discuss the amalgamation of the Town of Kalgoorlie and the Shire of Boulder.

1. The applicants called Smith as their own witness although he was one of the persons alleged in the statement of claim to have made misleading representations which induced them to purchase the hotel. It was not until the end of his evidence-in-chief that any questions were put in relation to them and then only after the omission was pointed out by the Court. The following exchange took place:
   "Q. Did you possess an intimate knowledge
   

of the performance of the Leederville Hotel at the time it was sold to Contractor Services? A. No, I did not.

Q. Did you make statements to Contractor Services that the vendors of the Leederville Hotel had been servicing a $2 million loan from the first respondent for over 3 years? A. No, I did not but with clarification in our negotiations I said that they had made me feel comfortable that they were servicing a debt to an equivalent level.

Q. Okay. Did you make statements that the hotel was turning over an average sum of a minimum of $40,000 per week?

A. No, I did not.

Q. That the hotel was sufficiently profitable to service a $2 million loan from the first respondent to the first applicant? A. No, I did not.

Q. That at the asking price of $2,750,000 the hotel was a steal?

A. No, I did not."

In his affidavit sworn 12 March 1990, which was tendered by consent for Esanda in the course of cross-examination, Smith said he first met Fran and John Willoughby after being introduced to them by Gerritsen "sometime in or about early to mid December 1988". In the course of that meeting he had said words to the effect that Venetia Holdings was satisfactorily servicing a loan for an amount similar to that sought by Contractor Services. Otherwise, he said, he made no statements or representations concerning the turnover or profitability of the Leederville Hotel or its capacity to generate enough profit to service a loan. He specifically denied saying that he had an intimate knowledge of the current performance of the hotel. He did not know its turnover or profitability and did not say that the asking price of $2 million was a steal.

1. According to Fran Willoughby, Smith had come back to them at some stage and said that Hans Gerritsen would not let him finance the New Beaufort Hotel but would finance the acquisition of the Leederville Hotel. It was this comment, she said, which changed her mind about proceeding with the New Beaufort purchase. It gave her every encouragement to buy the Leederville Hotel. Asked in her evidence-in-chief to be more specific about what influenced her to buy the Leederville Hotel she said:
   

"Well because our financiers told us it was...after all you know, I had never lived in the city since 1965, these people at Esanda had been good to us and had in effect, stopped us going bankrupt in 1988 - why would we dare to question their judgment and ability on something that was happening in Perth about which we knew nothing."

1. Smith's evidence-in-chief did not touch on the question of an application for finance for the New Beaufort Hotel because it was not put to him by John Willoughby. He was recalled by counsel for Esanda, later in the trial, after Fran Willoughby had given her evidence and was shown the offer to purchase the New Beaufort Hotel signed for Contractor Services on 1 December 1988. It was his evidence that the first time he had seen the document was in March 1990 in connection with these proceedings. He had received no application for finance in relation to that hotel and had no discussions with either Mr or Mrs Willoughby about it apart from some mention at a luncheon at Julio's Restaurant on 15 December to which reference will be made later. His evidence in this regard was not effectively contradicted. In light of the internal inconsistencies in the testimony of Fran and John Willoughby on the question of discussions of finance for the New Beaufort Hotel with Smith, I am not satisfied that substantive negotiations took place in relation to that hotel. By some process of confusion and reconstruction they seem to have misled themselves as to what actually happened. I accept however that at some point in the process of seeking finance for the acquisition of the Leederville Hotel they met with Smith, that there was some passing discussion of the New Beaufort Hotel and that they were told that the Leederville Hotel was servicing its commitment to Esanda. I will return to these representations shortly in relation to the luncheon at Julio's Restaurant on 15 December.
   Offer for Leederville Hotel - 7 December 1988

2. Shortly after John Willoughby returned to Kalgoorlie, in the first week of December 1988, he received a call from Kieran Glynn who asked him about the New Beaufort Hotel. He told Glynn that they had signed an offer but that Rod Evans was away for a week. Glynn then suggested he put in an offer on the Leederville Hotel. He asked Glynn what would happen if both offers were accepted and, according to his evidence, Glynn laughed and said:
   "Esanda are your financier. Do you think
   

they are going to buy both hotels for you?"

John told Glynn that they might be prepared to consider making an offer for the hotel if the Johnson family would agree to vendor finance of $750,000 on a second mortgage security. He then went and talked to his brother Michael. According to John he told his brother that they had "first hand knowledge that the Leederville Hotel was servicing its mortgage". They argued "quite heatedly" on the question. In the end John prevailed. His attitudes, and I think those of Fran Willoughby, were well summed up in his own evidence when he said:

"Now, we are a family with - an over confident family, if you like...we had no doubt as to our ability to pick up either of these businesses. The businesses were neglected by the owners as far as I could see, both of them. And our aim, when we talked as a family in Kalgoorlie, to run the original offer at the Beaufort Hotel was to try and run a country hotel in the city."

1. In the event and at some time prior to 7 December, Glynn sent up a standard form of offer and acceptance to the Willoughbys at Kalgoorlie. John Willoughby signed it on behalf of Contractor Services on 7 December 1988. The proposed purchase price was $2.75 million. The offer was subject to finance of $2 million to be provided by a lender "suitable to purchaser" 30 days from acceptance and a special condition for vendor's finance of $750,000 secured by a second mortgage.
   Effect of the Johnson Representations as to Turnover

2. The effect of the representations allegedly made by Gary Johnson during the inspection of the Leederville Hotel on 30 November was dealt with in John Willoughby's evidence under cross-examination by counsel for the vendors of the hotel. He accepted the proposition put to him by counsel that it would be absurd to say that he committed himself to paying $2.75 million for the hotel because Gary Johnson had said it was taking $40,000 weekly. He agreed with his mother's evidence that it would not have made any difference to their purchase of the hotel if Gary Johnson had been a deaf mute:
   

"...If I may, I had to think at that stage on where I rested, who was saying what. Mr Johnson's interest was to sell his father's hotel and Mr Glynn's interest was to get a commission for himself. I mean not that you expect people to lie but if there is going to be some embellishment it is going to be by people that are either selling or commissioning."

He was asked by the Court:

"...the effect of your evidence as I understand it is that you would not - you did not rely upon anything that Mr Johnson said about turnover in making your decision to buy the Leederville Hotel."

And he answered:

"No Sir, I certainly took what Mr Johnson said into account but the fact that I would see no figures of the hotel and that he had told us it was turning over $40,000 a week certainly was not enough to...

It would not induce you to buy the hotel? Not at all Sir. Well, as Mr O'Toole made the comment that it is absurd almost and I would agree, yes."

And it is also indicative of Fran Willoughby's attitude to the represented takeover that both Gary Johnson and his bar manager, Tim Gill, recalled her saying, during a visit to the hotel on 11 January 1989, that she was not buying the business on past figures but on the figures that she could produce. I accept their evidence on that point. It was entirely consistent with Mrs Willoughby's very confident approach to her own abilities and those of her family.

1. Kieran Glynn presented the Contractor Services' offer to Laurie Johnson at home on 10 December and on that day Johnson accepted it on behalf of Venetia Holdings. He also signed an "Authority to Sell" in favour of Colliers International. Although that document was dated 7 December, it was either pre-dated by Glynn or backdated at the time of signing to protect Colliers' entitlement to a commission.
   Lunch at Julio's Restaurant - 15 December 1988

2. Neither Fran nor John Willoughby had recalled until after the commencement of the hearing that they had made an offer for the Leederville Hotel as early as 7 December. For the contracts on which they went to settlement were dated 22 December. The reason for this was that as Venetia Holdings had the freehold and Cougar Holdings the business, it was necessary to have contracts with each. Those which were eventually made on 22 December reflected a sale of the land to Contractor by Venetia for $2 million subject to first mortgage finance in that amount and the sale of the business by Cougar for $750,000 plus stock.

3. Evidence was given of a lunch at Julio's Restaurant on 15 December attended by Fran and John Willoughby, Gerritsen, Smith and Meckelberg. Fran Willoughby testified under the impression that the contract to purchase the Leederville Hotel had not been signed until 22 December, a week later. She said that they discussed "the goods and bads of the Leederville and Beaufort hotels". Much of the discussion related to the Leederville Hotel and, she said, Smith again told them it was currently servicing a $2 million facility. She took this to mean that the facility was being serviced out of the hotel's takings. Some reference was made to the fact that Laurie Johnson was ill. Mrs Willoughby had difficulty in recalling all the conversation but said that Smith had claimed that no-one knew the Leederville better than him, that he had long experience with it and that they would have no trouble making a success of it.

4. Meckelberg recalled Smith saying that the New Beaufort Hotel was not a good prospect because of the possibility that it would be affected by land resumption for road widening purposes. Smith was however prepared to consider a submission for finance for the purchase of the Leederville Hotel. Meckelberg did not recall any comparison made between the turnovers for the two hotels.

5. John said in his evidence that he was aware, by 15 December, that the New Beaufort Hotel acquisition would not be going ahead. It was discussed at that lunch but the main focus of attention was the Leederville Hotel. Smith, he said, "made no secret of the fact that the Leederville Hotel was servicing a $2 million payment. Asked about the other alleged representations in para 13 of the statement of claim, Willoughby said:
   

"...the only one of those representations I would not swear to being Greg Smith's is that it is a steal. I believe that was said by Kieran Glynn..."

Gerritsen's evidence was that the lunch meeting was probably on Wednesday, 14 December following a preliminary discussion at his office on the same day at which time he had introduced Smith to the Willoughbys. He could not be certain however that they did not meet in his office on 14 December and had lunch on the 15th at Julio's. This, it should be noted, is in direct conflict with the evidence of the Willoughbys who thought they had met Smith for the first time in Esanda's offices on or about 1 December in circumstances which have already been mentioned. Gerritsen said that in the preliminary discussion there was some talk of Esanda providing finance but this was dealt with more extensively over lunch. He could only recall the conversation in his office and at lunch in fairly general terms. He had the impression that the Willoughbys had already purchased the Leederville Hotel. And if the discussion in his office had taken place on 14 December that of course would have been correct, for their offer had been made on 7 December and accepted on 10 December. Gerritsen conceded that there may have been some mention of the New Beaufort Hotel but said the focus of the conversation was definitely on the Leederville Hotel. He recalled a comment by the Willoughbys either in his office or at lunch to the effect that they thought the hotel was a steal. He also believed, although he could not recall with certainty, that they mentioned what they thought the turnover of the hotel was. Smith made no statements in Gerritsen's presence as to the turnover of the hotel or its profitability. Gerritsen's recollection was that the Willoughbys said they had got a bargain in purchasing the hotel and that by operating it as a family and creating the right sort of atmosphere they should be able to boost its takings substantially. Gerritsen would have remembered if Smith had made any statement as to profitability or turnover. It would have stuck in his mind for two reasons:

1. He would have assumed such statement could

only have been made on information contained in the Johnsons' file and would have been a breach of client confidentiality.

2. He was well aware of the risks involved in

making positive statements concerning businesses in the negotiating stage and would have noted any such representation.

He remembered the Willoughbys saying that they had persuaded the vendors to carry $750,000 of the purchase price and that they were asking Esanda to finance the balance. In that context Smith made a comment that there should be no problem as Esanda was already carrying a loan for the amount being sought by the Willoughbys and were currently servicing that amount.

1. Smith's evidence was broadly consistent with this account. He agreed that he had given some encouragement to the Willoughbys by saying that the Johnsons were satisfactorily servicing a loan for an amount similar to that being sought by them. I accept the evidence of Gerritsen and Smith in this regard and am satisfied that at the luncheon at Julio's on 15 December Smith made no representations as to turnover or profitability or whether or not the hotel was "a steal". And without going to the evidence of Cougar's bank statements in detail they demonstrate by reference to the payment of instalments due to Esanda from time to time that the company was servicing the loan and doing so out of hotel turnover.
   Purchase of the Leederville Hotel

2. Following their meeting of 15 December with Gerritsen and Smith the Willoughbys submitted background material in support of their application for finance through Meckelberg. He wrote to Esanda on 19 December enclosing an unexecuted copy of the offer and acceptance of 7 December, a schedule of properties and valuations as at December 1987 and a schedule of budgets for the three family companies. On the same day Smith wrote to Mr E. Tait of Ballieu Knight Frank (WA) Pty Ltd confirming his appointment to carry out a valuation of the Leederville Hotel. In that letter he advised Tait that the business had been sold for $2,750,000 inclusive of freehold. It was suggested by John Willoughby in questions put to Mr Tait, whom he called as his own witness, that there was something unusual or inappropriate about that disclosure. Tait maintained however that it was normal procedure in such circumstances to be told the purchase price of the property. If he had not been told he would have made inquiries to find out what the price was. Mr Willoughby expressed his amazement in questioning Tait that somebody would commission a sworn valuation on a hotel and disclose the price. Tait replied:
   

"No. It is part of the evidence that the valuer - if he was able to gain that evidence - would take into consideration. A valuation is not, as a number of people think, a guessing game. It is, in fact, a method of getting together all the evidence, of which the purchase price is a piece of evidence, and - taking that into consideration - coming to the conclusion."

1. On 21 December Smith was given a memorandum from Hartley on the status of the $965,000 loan. The memorandum noted that there had been problems early in the loan repayment period due to the fact that Fran Willoughby was more involved in running the business than in attending to administrative and associated finance matters. He reported however that the situation had improved due to the involvement of Meckelberg who was running the financial side of the business. The account, he said, was now conducted satisfactorily. The memo concluded with the observation that:
   

"Whilst some initial problems with payments the Willoughbys are excellent people and with the increase in values of the secured properties we would assess our overall exposure at approximately 70%."

Tait furnished the valuation dated 22 December 1988 in which he assessed the value of the hotel freehold and business at $2,710,000. This was assessed by reference to actual and projected turnover and profits and the assumption of liquor sales at $1,970,000 for the 12 months to 30 June 1989. This would represent a weekly average of $37,884. Tait operated on the basis that other sales i.e. food, cigarettes, pool table takings, soft drinks and sundries were budgeted at $195,000 representing an additional weekly average of $3,750. He noted in his report:

"The present level of management appears above average but the unavailability of trading profit and loss accounts for the last financial year would require a prudent purchaser to exercise some caution in relating performance to capital value. The approach to value has been to estimate liquor sales for the current financial year by projecting the trading results for the first five months (July - November 1988) to the end of the year. The recently erected bottle shop on the Vincent Street frontage is a major revenue outlet with an increasing level of trade and the increase in volume of liquor sales is encouraging. The present proprietors have provided a budget forecast for the remaining 7 months of the financial year and these projections have been compared with the actual performance in 1987. The projected increase for the months January and February 1989 are 22.5% and 38.6% respectively higher than achieved in the same months in 1987 but this can be supported by the growth in price and volume which for the first five months of this financial year was 30.8% up on 1987/88."

Smith prepared an internal application for approval for the finance on 23 December 1988 and submitted it to the Acting State Manager, Commercial Finance, who in turn passed it on to the General Manager for Esanda in Western Australia, whence it was forwarded to the General Manager of Operations at Esanda's head office in Melbourne. Under the heading "Ability to Service" the submission noted that the concreting business carried on by Kalgoorlie Concreting Pty Ltd was generating sufficient income to service the day to day requirements of the three Willoughby sons and their families, while Donna Willoughby was employed as a ministerial officer working with the Minister for Police. Mrs Fran Willoughby's needs would be serviced from the Glen Devon Hotel. Attached projected cash flow budgets were said to reveal a substantial surplus of $384,415 which if needed would provide additional comfort for servicing the hotel debt. It was noted that the vendors' accountants had not completed trading figures for the year ended 30 June 1988, but the Ballieu Knight valuation and the sales figures contained in it were said to demonstrate that the business had the capacity to service the $2 million debt to a level at a maximum rate of 21.65% per annum. Smith's submission went on:

"In addition the vendor Venetia Holdings Pty Ltd currently enjoy interest only facility of $2 M (Commercial Bill Finance) with ourselves and have conducted their affairs in an exemplary manner, this being a clear demonstration of the capacity of the hotel to service the debt to this level."

The submission concluded with general remarks including the following:

"Asset position is strong and the taking of first class security as tabled ensures Esanda is not at risk with this transaction. Valuation clearly demonstrates the ability to service this commitment on the business to be acquired which is well known to ourselves."

1. On 28 December 1988 in Smith's absence on holidays, Mr Jim Payne, a loans officer with Esanda, prepared a letter to Contractor Services Pty Ltd which was signed by Reno Camarri, the Acting State Manager, Commercial Finance for Esanda. That letter confirmed approval of a loan of $2 million to assist with the purchase of the freehold and business of the Leederville Hotel. The loan was expressed to be for 12 months with further extensions subject to negotiation. The interest rate range was 18.25% to 21.25%. The corresponding repayment interest range over the first 12 months was $30,416.67 to $35,416.67. Lump sum principal reductions were to be negotiated on an annual basis thereafter.

2. Subsequently on 20 January 1989 and 23 January 1989 loan contract and security documents were executed in relation to the loan. These comprised:
   (a) Loan Contract between Esanda as lender and
   

Contractor Services as borrower;

(b) Mortgage granted by Fran Willoughby in

respect of Unit 7, 65 Mount Street, Perth;

(c) Mortgage granted by Contractor Services over

the Leederville Hotel land and land known as Unit 9, 42 Goderich Street, East Perth;

(d) A fixed and floating equitable charge and

chattel mortgage between Contractor Services as chargor/covenantor and Esanda as chargee;

(e) A deed of priority between Esanda as first

mortgagee and Venetia as second mortgagee and Contractor Services as mortgagor.

The terms of the loan contract are not in dispute. And in addition to the specific securities for which it provided there were already in place the securities granted in relation to the $965,000 advance made in April 1988. These, it will be remembered, covered not only that advance but the general indebtedness of the applicants to Esanda.

1. The advance was made, settlement proceeded and the Willoughbys took possession on 6 February 1989.
   The Operation of the Hotel

2. According to John Willoughby's affidavit he and his brother Michael immediately began working at the Leederville Hotel on a fulltime basis. It was agreed that Tim Gill, the Johnson's former bar manager would remain with the hotel for a month to ease the transition of ownership.

3. In the first week, according to John, they grossed $29,000. Tim Gill, he said, told them that this was a great week as the hotel had not been grossing any more than $25,000 per week prior to that. Gill could not recall saying that figure and believed that the takings had been greater than that in previous weeks. It was his evidence that although there had been a simple process of keeping records prior to the change over, the Willoughbys did not keep it up. He described the condition of the hotel office after 3 weeks from settlement as "a shambles". Meckelberg prepared a table of bar and bottle shop takings for the hotel for the period from 6 February 1989 until 28 May 1989, a total of 16 weeks. The average over that time was $39,153. The highest figure was $44,760 for the week commencing 1 April. The lowest was $32,856 for the week commencing 22 May. The first week commencing 6 February showed, contrary to John Willoughby's evidence, takings of $35,624. These figures did not include revenue from food sales, rents, public telephones and cigarette vending machines.

4. Contractor Services made a first instalment payment of interest to Esanda in the sum of $30,416.67 on 14 March 1989. According to John Willoughby's affidavit, he arranged a meeting with Smith about 2 weeks after they had taken possession of the hotel. At the meeting he expressed concern at the income of the hotel and the possibility that the Johnsons had not accurately represented the position to them. He told Smith that the hotel was going to be struggling to service its debt. Further discussions ensued over the next two months according to Willoughby and as an interim measure Esanda advanced Willoughby Investments and Kalgoorlie Concreting a sum of $100,000 to enable Contractor to meet interest payments on its loan. By a letter dated 27 April, Esanda wrote to Willoughby Investments and Kalgoorlie Concreting advising approval of an advance of $100,000 under existing securities:
   

"To provide temporary accommodation on existing Esanda loans and sundry payments pending settlement of the Railway Lodge, Coolgardie."

A payment on account of interest of $66,111.53 was received from Contractor Services on 5 May 1989. It does not appear that any further payments were made after that date.

1. The applicants consulted a firm of solicitors, Michael, Whyte and Co., who wrote to Esanda on 13 April 1989 indicating that representations were made "by the Vendor as to average weekly turnover which were not supported by the post take over figures". The letter asked Esanda "to advise us as to any representations made by the Vendor to Esanda with respect to the past trading figures". It is surprising, in view of the weight attached by Fran and John Willoughby to statements made by Smith in the course of pre-finance discussions, that no complaint was made of him until about August 1989. It was Gerritsen's evidence that the first time he heard any complaint from the Willoughbys about Smith's conduct was at a meeting on 7 August.

2. On 9 August 1989 Venetia appointed a receiver over Contractor Services under its second mortgage security.
   Pre-Sale Performance of the Leederville Hotel

3. Having regard to my view of the facts to this point, it is not really necessary to consider in any depth the performance of the hotel as a business prior to its sale to Contractor Services. The profit and loss statements of Cougar Holdings for 1986, 1987 and 1988 showed net losses, that in 1988 being $343,837. To 30 April 1989 the figure showed a profit of $253,236. This, it must be said, included two special items namely profit on sale of goodwill and licence of $186,903 and profit on sale of plant and equipment of $204,919. Alan Ginks, an accountant who supplied accounting services to the Johnsons from 1 July 1988, said, and was not contradicted, that in the six months prior to the sale of the hotel to the Willoughby family it was trading profitability. He had prepared a list of the weekly takings from drinks and bottle sales of the hotel. This showed figures from the week commencing 2 May 1988 to the week commencing 23 January 1989. They ranged from a low of $25,108 for the week commencing 30 May to $63,302.12 in the week commencing 19 December 1988. The figures for November and December were:
   Week Commencing Amount
   

28/11/88 $46,000.17 5/12/88 $42,399.64 12/12/88 $45,746.10 19/12/88 $63,302.12 26/12/88 $33,545.54

Ginks also prepared a handwritten summary of takings for the 30 weeks commencing 3 July 1988 and ending 22 January 1989 in respect of foods, room rent and a bottle delivery service called the Beverage Bus. Food sales were $63,508 and room rents were $11,706. The Beverage Bus returned $79,793. This was an average, taken over 30 weeks, of $5,166.90.

1. In all the circumstances, I am satisfied that at the time and in the circumstances in which Gary Johnson made his statement as to turnover there was no misleading or deceptive conduct in indicating a figure of $40,000.
   The Case Against Esanda

2. The case against Esanda turns on representations allegedly made by Greg Smith in his office and at Julio's Restaurant in December 1988. I am satisfied on the evidence that on neither occasion did he go any further than to indicate that the Johnsons were servicing their commitment to Esanda. This was a true statement and there was no misleading or deceptive conduct arising out of it.

3. The second limb of the case against Esanda depends on allegations of unconscionable conduct. These involve, inter alia, an allegation that Esanda acted with the object of securing the effective substitution of the applicants and their companies for the second and third respondents as borrower. I am satisfied however that there is nothing in the evidence to support this contention.

4. In the circumstances the claim against Esanda will be dismissed.
   The Case Against Venetia, Cougar and Gary Johnson

5. So far as the case against the Johnson companies and Gary Johnson turns upon Kieran Glynn's statements made at Julio's on 29 November, it cannot succeed. He had no authority to speak or act for the Johnsons or their companies.

6. So far as the case relied upon representations made by Gary Johnson it is equally insupportable. It appears that what he said was substantially correct both as to turnover and as to the reasons behind the sale of the hotel. Even if it were not, no reliance was placed upon his statements.

7. The claim against Venetia, Cougar and Gary Johnson will be dismissed.
   Cross-Claims by Esanda and Venetia Against Applicants

8. Terence Anthony Healy, the Manager, Commercial Finance for Esanda in WA, gave evidence of the amounts outstanding on Esanda's loans to the applicants, which evidence was not effectively challenged. As at 20 August 1990 the sum owing under the original advance of $965,000 was $1,179,098.71. The sum owing under the advance of $2 million inclusive of interest as at 20 August 1990 was $2,761,552.22. The loan of $100,000 made in May 1989 to Willoughby Investments and Kalgoorlie Concreting gave rise to a liability of $124,809.71 as at the same date.

9. Putting Kalgoorlie Concreting Pty Ltd to one side, Esanda is entitled to judgment of $1,179,098.71 on the first loan against Willoughby Investments Pty Ltd as joint borrower and Contractor Services and the Willoughbys as guarantors. It is entitled to judgment of $2,761,552.22 against Contractor Services as borrower and Willoughby Investments and the Willoughbys as guarantors. It is also entitled to judgment on the May 1989 advance in the sum of $124,809.71 against Willoughby Investments as borrower and Contractor Services and the Willoughbys as guarantors.

10. On this basis Esanda is entitled to judgment against each of Contractor Services Pty Ltd, Beryl Frances Willoughby, John Francis Willoughby, Michael Stephen Willoughby, Donna Margaret Willoughby and Mark Robert Willoughby in the sum of $4,065,460.64. I will allow interest on this sum at 20% from 20 August to judgment which is a further amount of $64,601.84. The total judgment in favour of Esanda is therefore $4,130,062.48.

11. Venetia Holdings Pty Ltd also cross-claims under its mortgage made with Contractor Services as borrower and with the Willoughbys, Willoughby Investments Pty Ltd and Kalgoorlie Concreting Pty Ltd as covenantors on 20 January 1989. The sum borrowed was $750,000 due and payable on 6 February 1990 and carrying interest at 19% per annum. The total sum payable at 6 February 1990 was $892,500. Venetia is entitled to judgment in that amount and interest at the rate of 19% from 6 February until today, an amount of $106,390.89, making a total of $998,890.89.

12. The orders will be:
    1. The application by the first, second and third
    

applicants is dismissed.

2. There be judgment on the first respondent's

cross-claim in favour of the first respondent against the first, second and third applicants in the sum of $4,130,062.48.

3. There be judgment on the second respondent's

cross-claim in favour of the second respondent against the first, second and third applicants in the sum of $998,890.89.

4. The first, second and third applicants to pay

the respondents' costs of the application and cross-claims.

5. Liberty to apply within 7 days on any

arithmetical error in the calculation of the judgment sum.