Cookson v Khneiger
[2008] SADC 97
•30 July 2008
DISTRICT COURT OF SOUTH AUSTRALIA
(Civil)
COOKSON v KHNEIGER & ANOR
[2008] SADC 97
Judgment of His Honour Judge Barrett
30 July 2008
CONTRACTS - PARTICULAR PARTIES - VENDOR AND PURCHASER - DISCLOSURE OF MATERIAL FACTS
Plaintiff purchased a Snack Bar from defendants. Defendants did not disclose proposed adjacent building works which adversely affected trade. Held: defendants did know of proposed building works and were obliged to disclose that fact. Held: liable to recompense plaintiff for purchase price and unpaid labour.
Land and Business (Sale & Conveyancing) Act 1994 s 8; Fair Trading Act 1987 s 56(1); Trade Practices Act 1974 s 52 and s 82, referred to.
Marks v GIO Australia Holidings (1998) 196 CLR 494; Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1; I & L Securities v HTW Valuers (2002) 210 CLR 109; Tomlinson V Cut Price Deli Pty Ltd [1995] FCA 1371; Cut Price Deli Pty Ltd and Ors v Jacques and Ors (1994) 126 ALR 413; Netaf Pty Ltd v Bikane Pty Ltd (1990) 92 ALR 490, considered.
COOKSON v KHNEIGER & ANOR
[2008] SADC 97Background
The plaintiff alleges that when the defendants sold her their snack bar business they failed to disclose that, to their knowledge, a major building project was to take place next door. When the project was underway the amenity of the snack bar was severely diminished and access to it was compromised so that the takings dropped noticeably. As a result, the plaintiff accumulated arrears of rent and the landlord evicted her. She sues for the loss arising from the failure of the defendants to disclose the impending building work.
The defendants deny that they knew anything of the proposed building work next door. They did not suggest that if they did know of the building work they were not obliged to disclose it. Disclosure of the proposed building work would have warned the purchaser of the potential of the works to adversely affect the trade of the business. The defendants say that they heard nothing about the project at all. Further, they allege that the plaintiff mismanaged the business. They say she was not friendly towards customers, that the quality and quantity of food fell off under her management and she failed to follow up potential customers suggested to her by the defendants. In that way she contributed substantially to her own loss. After the plaintiff was evicted from the business, the landlord invited the defendants to resume the tenancy. They say that, despite the building work continuing, they managed to make a profit.
Issues at Trial
1.Did the defendants know of the proposed building work?
2.If they did know of it, were they legally obliged to disclose that knowledge?
3.If they failed to fulfil their legal obligations, to what extent did the plaintiff’s losses in the business flow from the defendants’ failure to disclose?
4.What, if any, of the plaintiff’s losses were caused by mismanagement on her part?
The Plaintiff’s Case
The plaintiff is aged 42. She bought the business called Café Purple in December 2002. The only experience she had by then of actually running a business of her own was owning a shoe shop when she was 24. Little detail of that business experience was elicited in evidence. In the years between running that business and buying Café Purple, she worked directly or indirectly in the hospitality industry, mostly in hotels. She estimates she had worked in that industry for about 22 years (T46). In cross-examination she was challenged about her experience in running a small business. She conceded that Café Purple was effectively her first business experience but she said she had extensive experience in running hotels, including lecturing on the subject at the Adelaide Training Academy (T46 and T114). She decided to change her work to avoid working nights, so she could better care for her 15 year old daughter.
She said she investigated the purchase of the café and observed the operation of two cafés, Café Purple and one in Glengowrie. She said she visited Café Purple about eight times over about three months before she purchased it and concluded it was in a good location with local customers, particularly from the nearby universities of Adelaide and South Australia (T47 and 48). Café Purple is situated on the southern corner of an L-shaped street called Austin Street, which runs south from North Terrace opposite the University of Adelaide, then east to Pulteney Street. The plaintiff said that it was her decision to buy the business although she had received accounting advice from her accountant.
She settled on the purchase of the business on 11 December 2002. She paid $60,000 for it, plus stock amounting to about $3,000. She borrowed from her bank and offered a rental unit as security. She said she was unaware of any proposed building work in the vicinity. Specifically she was unaware of publicity surrounding a proposal to build apartments on the top of the John Martins carpark, which extended for the whole of the western side of that part of Austin Street which ran south from North Terrace. I will later refer in more detail to that publicity because it assumes importance in assessing the credibility of the defendants who also claim to have been unaware of the same publicity.
It is common ground between the parties that nothing in the documents associated with the sale of the business would have alerted the plaintiff to the proposed building work. The relevant document bearing on the question of disclosure is Schedule 1 Division 2 of Form 2. It is a statement required by section 8 of the Land and Business (Sale & Conveyancing) Act 1994 to be completed by a vendor (see Exhibit P4 tab “representations” page 7). Question 4 for the vendor is:
Is the vendor aware of any written notice served on the landlord or licensor, or any other circumstance that may positively have a significant adverse affect on the business?
The defendants answered “no”. The male defendant, Mr Khneiger, says he gave that answer believing it to be true. Because he was the dominant figure in the business, and the only defendant to give evidence, I will usually refer to “the defendant” singular.
The plaintiff’s first trading day was 11 December 2002, the same day the lease between her and the landlord commenced. It is common ground that the defendant complied with his undertaking in the contract to assist the plaintiff in the handover of the business. He introduced the plaintiff to customers and made her familiar with the running of the café. While there was some difference between the evidence of the plaintiff and the defendant as to the emphasis placed by the defendant on the topic, it is common ground that the defendant told the plaintiff that a component of the café’s turnover was outside catering to neighbouring businesses and the universities. The defendant provided the plaintiff with the names of outside catering customers. Part of the defendant’s case is that the plaintiff did not sufficiently follow-up on his advice about fostering outside catering.
The plaintiff kept records of income and outgoings in the business. Five books containing the relevant records were tendered (Exhibit P6). Other documents relating to the turnover were also tendered:
Graph (Exhibit P8)
Plaintiff’s receipt book (Exhibit D11)A schedule of turnover (Exhibit P4 page 256)
The plaintiff’s tax returns for the years 2002-2003 (Exhibit P4 pages 257-263), 2003-2004 (pages 264-272) and 2004-2005 (pages 273-283) were tendered.
A closer analysis of these documents will be made later but, broadly, the plaintiff asserts that from June 2003 onwards there is a decline in turnover. That decline continued until the landlord distrained the premises on 31 March 2005. The warrant to distrain shows that the plaintiff then owed the landlord $13,978.31 in unpaid rent and other monies due (Exhibit P4 page 255).
The plaintiff asserts that the turnover started to deteriorate when pre-construction work began in June 2003. Barricades were erected restricting access and reducing amenity. Access and amenity were more affected as construction work got underway. The photographs (Exhibit P5) show the extent to which access and amenity were affected. The plaintiff gave evidence that noise and dust were caused by the works. Large vehicles coming and going in the street made the area dangerous, whereas before there had only been the odd car or light delivery vehicle (T90). From the photographs it is not difficult to appreciate how the construction works might affect the business. When a crane was first installed at the North Terrace end, access was blocked off completely for a few days (see photograph 1 of Exhibit P5). That prevented potential patrons from seeing the café, as well as preventing access from North Terrace. When the crane was removed, access was only via a covered footpath on the eastern side of Austin Street, running south from North Terrace (T81). The plaintiff kept a non-exhaustive diary of the building works and their effect in the area from 31 July 2003 to 30 March 2005 (Exhibit P4 pages 208-214). The plaintiff said that she noticed that regular customers reduced their visits to the café (T97).
The plaintiff learnt of the proposed building work before it started. On 2 April 2003, she received a letter dated 31 March 2003 from Mr David Chappill, the project manager of the company contracted to construct the first stage of the project (Exhibit P4 pages 187-188). The letter gave notice, not of the application for planning approval (that had already been granted) but of the application to the council to close Austin Street and to erect the fences and structures necessary to undertake the building works. The plaintiff said this was the first she knew of the project. There is no suggestion she knew any earlier. She promptly objected and protested about the proposed building and the proposals for restrictions associated with its construction (P4 pages 190-192). The agents for the landlord made representations on behalf of the plaintiff and other neighbouring businesses about the restriction (Exhibit P4 pages 196-197). There is no suggestion that the plaintiff did not do what she could to minimise the restrictions but it does not appear from the evidence that her efforts had any effect.
What is put against the plaintiff is that she made insufficient efforts to so manage her business that the losses were minimised. It was put to her that she was unfriendly towards customers and that the quality and quantity of the café’s meals fell off. It was also put to her that she failed to pursue the outside catering side of the business. When the building work began it was suggested she made insufficient efforts to attract the custom of the building workers. It was put to her that she was out of her depth in running the business and that she had a high staff turnover (T197). The plaintiff denied that she was unfriendly towards customers. She denied that the quality or quantity of food served fell off and she said that she kept up with the outside catering side of the business. She gave details of the outside catering that she undertook (T194). She gave details of only minor changes in staff (T197-198). She maintained that she was not out of her depth in running the business. She said she did what she could to minimise the effects of the building work. She said she met with the City Council to see what could be done to increase patronage during the construction. She said she wasn’t very hopeful following that meeting (T123). That last topic was not pursued in cross-examination.
Objection was taken by counsel for the plaintiff to cross-examination of her about her failure to mitigate her loss. That failure had not been pleaded. I heard argument on an application by the defendants to amend their pleadings so as to plead the plaintiff’s failure to mitigate and to allege mismanagement of the business. Subject to requiring the defendant to give the plaintiff notice of witnesses to be called on that topic, and to open in broad terms on that topic before cross-examination of the plaintiff concluded, I permitted the amendment to the defendants’ pleadings and I permitted further cross-examination of the plaintiff on those topics (see application and argument and ruling T148-156, T182-189 – see resumed cross-examination of the plaintiff T189-201).
It was a critical part of the plaintiff’s case that the defendants knew of the proposed building work. Essentially she based the assertion that they did know on the following items of evidence:
1.Written Notification to the Defendants directly. By letter dated 11 July 2000 addressed to the defendants C/- Café Purple, 46 Austin Street, Adelaide, the City Council’s principal planner gave notice that the council had received an application for development approval for the works. Written comments were to be forwarded by 20 July 2000 (see Exhibit P4 page 99). A list of owners and occupiers affected by the proposal includes the defendants. There is a tick alongside their names, purporting to indicate that the defendants were contacted regarding the proposed development (Exhibit P4 pages 100-111, particularly at page 108). The defendants denied receiving that written notice.
2.Written Notification to the Landlord. Mr Jones, the property manager for the defendants’ landlords in 2000, said he received a letter from the landlords, or at least a company based in Melbourne called Property and Project, which was acting for the landlords. The letter notified the landlords of the application for development approval. Mr Jones was never asked, either in examination-in-chief or cross-examination or re-examination, to identify the letter he received but he said he learnt of the proposed development from that letter. He said he photocopied it and personally delivered copies to the tenants for whom he was responsible. That included the defendants. He said he had personal dealings with the defendants and he remembered delivering the letter to them. He went on to say that he discussed the proposed works with Mr Khneiger. I pause to say that I am unwilling to rely on Mr Jones’s evidence, either as to his having delivered a letter to the defendants or as to his having discussed the proposed works with Mr Khneiger. While Mr Jones may well now believe that these events occurred (and he may be right) his evidence was not sufficiently clear for me to rely on it. I cite two passages to illustrate what I mean by insufficiently clear. In cross-examination at T170:
QYou say that you made copies of that letter?
A Yes.
Q And you took copies to the tenant?
AEach tenant.
QThat includes the Khneiger’s?
AAbsolutely.
Q And you have a memory of doing that?
A Absolutely.
Q To whom did you give the letter?
AIt would have been addressed personally to Jamal, Mr Khneiger, and I am pretty sure that I would have – if I hadn’t seen Mr Jamal at the time, I would have made it very clear to the person that I gave it to that they needed to read it.
QThere was a copy of the letter coming from the City Council, was there anything else as well, anything from your organisation about the Adelaide City Council letter?
AYes. I would have attached a cover letter detailing what it meant.
QDid you deliver the copy letters from the Adelaide City Council to each of the tenants at the same time?
AYes.
QOn the same visit?
AOn the same day.
QWhich involved one or more visit?
AOne visit. I did it all at once.
QWere there any tenants that were left out of that visit to receive that letter?
ANo.
QDo you remember now in your conversation that you had with Mr or Mrs Khneiger or anybody else from Café Purple about that communication?
AEssentially, he was very vocal about any issue in the property so I would have spoken to him about it. Essentially, I said he would have to contact the council. I wouldn’t do it on his behalf, it is none of my business.
In further cross-examination at T179:
QCan you tell us what the letter said?
AThe letter would have detailed –
QWould have, or are you sure?
AThe letter detailed that there was a development occurring in the future, because I was not given an exact time. It said that the council had approved the plans and sometime in the future they anticipated development occurring, and if you need to make an appeal to the council for clarification, please make it by a certain date.
QDid the letter state that the development was going ahead or it was only proposed?
ANo, it had already been given approval.
QMy client, James Khneiger says that he did not speak to you at any stage. What do you say about that?
AI say he is incorrect.
QCould you be incorrect?
AI could be incorrect, you could be incorrect, anyone could be incorrect.
QIs it possible therefore, that you didn’t speak to him?
AAnything’s possible…
QYou could be incorrect about speaking to him about the project on the John Martins Carpark site?
APersonally I would not be incorrect. I was very hands on. I was very diligent. So if I gave the letters to everyone else and I gave it to them, or Mr Khneiger or someone else on Mr Khneiger’s behalf, I would speak about the contents of the letter…
QYou are really unable to tell us whether the letter about the John Martins development was given to him or someone else?
AI cannot tell you whether it was given to him directly, you are correct there. But it was discussed.
QI put it to you that it was not discussed with him.
AI put it to you, you are incorrect.
QCould you be mistaken about that?
AAnyone can be mistaken. I don’t think I am.
QIs it possible that you did not have a discussion with him specifically about that?
AAnything’s possible.
That evidence is, in my view, insufficiently clear to rely on. As already mentioned, I am unwilling to rely on Mr Jones’s evidence on the topics of his having handed the letter to Mr Khneiger or to anyone on his behalf or to having discussions with Mr Khneiger about the letter. That is despite Mr Jones having written to the council on behalf of the tenants, including the defendants (Exhibit P4 page 161). I acknowledge that such a letter would suggest that it was done on specific instructions from the defendants but the evidence about Mr Jones’s contact with Mr Khneiger is so unclear that I am not willing to rely upon it.
3.Newspaper Publicity of the proposal was prominent. The plaintiff tendered copies of The Advertiser of 24 and 28 October 2000 and the City Messenger of 12 July 2000, 2 May 2001, and 10 July 2002 (see P14). Each of these publications gave prominence to the proposal and to public comments on it. The proposal was controversial and there were large pictures of the proposal in the articles. The topic was most prominent and on the front pages of the Messenger editions of 2 May 2001 and 10 July 2002 but it was also prominent in the 12 July 2000 edition. The defendant gave evidence that The Advertiser was available for sale in Café Purple and copies of the Messenger were in the shop for patrons to read. Given the café’s proximity to the proposed works, the plaintiff submits that it is simply unbelievable that the defendants did not notice any of the publicity, or at the very least, hear of it from their staff, customers or business neighbours.
The plaintiff submits that there is a significant coincidence between the notification by the council of the development application in July 2000 and the defendants’ decision to sell. The coincidence in timing becomes evident in Exhibit P13, the first exchange of correspondence between solicitors for the parties. The first letter is from the plaintiff’s solicitors dated 1 October 2004. The reply of the defendants’ solicitors is dated 25 October 2004. The defendant’s solicitors deny that the defendants knew of the proposed building work when they sold the business to the plaintiff in December 2002. The letter says in part:
It cannot be asserted that our clients were motivated to sell the business by reason of the proposed development since the records will establish that the business had been offered for sale some two and a half years prior to execution of the contract with your client.
That would suggest that they intended to sell in mid 2000, when the plans were first notified. In cross-examination on that letter, the defendant said that he had tried to sell the business several times from 1998 (T262-266). He did not assent to the proposition that he tried to sell it in mid 2000, as his solicitor’s letter would suggest. He said (T265). ,
Well, I can’t say, it’s the middle of 2000. It’s 1999 maybe or maybe 2001
When asked what records showed attempts to sell the business in mid 2000, the defendant said he did not know what records his solicitors were referring to (T266).
Summary of Plaintiff’s Case
The plaintiff’s case may be summarised in this way:
1.The plaintiff knew nothing of the proposed building works when she purchased the business on 11 December 2002.
2.She said she would not have purchased the business if she had known about the proposed building work. She would have seen the potential risk to the business.
3.The defendants did know about the proposed building work and failed to disclose that knowledge.
4.The defendants were obliged to disclose that knowledge pursuant to section 8 of the Land and Business (Sale and Conveyancing) Act 1994.
5.Their obligation was to answer “yes” rather than “no” to the question 2 (4) of the schedule to the section 8 statement.
6.The answer should have been “yes” because either:
a)The defendants were aware of the written notice served on the landlord concerning the proposed building work (it was delivered to them by Mr Jones) or;
b)They were aware of “a circumstance that may prospectively have a significant adverse effect on the business”, inasmuch as they knew that the building work was proposed, even if the notice served on the landlord had not come to their attention. They either received a notice addressed to them or they became aware of the project by reading about it or hearing about it from their staff, customers or neighbouring businesses.
7.The building work adversely affected the business to the extent that it had to close.
8.The plaintiff did not fail to do all that she could to mitigate her loss.
9.The plaintiff has suffered loss as a result of the defendants’ failure to disclose information about the business that it was legally obliged to disclose.
The Defendants’ Case
The defendant is 51. He was born in Syria and completed the equivalent of Year 11 at school. He became a qualified accountant in Syria. He migrated to Australia in 1980 when he was about 24. He met his wife before that when she was holidaying overseas. She was born in Australia. He has had extensive experience in running snack bars and also in the building industry. He and his wife purchased Café Purple (then under a different name and with a different landlord) in 1995. He and his wife worked in the business, but after about one and a half years, he reduced his time in the café and increased his time in construction work. By 2000 two of the defendant’s daughters had left school. There were three other children still at school. The defendant said that he put the shop on the market in “about 1999” (T236). The reason for selling then was not entirely clear. In examination-in-chief he said:
Q Did you come to any decision as to the future of the shop?
AOf course, I can’t spend time there, my wife she’s busy raising the children and looking after them, she didn’t want to spend time in the shop and I had another income from my building work. So we don’t keep the shop (T236).
In cross-examination he said that his wife was tired from the business and his daughters, who had worked in the shop, were now working elsewhere (T266). The defendant’s daughter, Angela O’Brien gave evidence saying that she worked in the café at the beginning of 2000 when she started TAFE but her parents put the business on the market in 2000 or 2001 because when she and her sister left, her mother would have to come in more often (T280-283). The plaintiff said that the defendant’s wife told her that she was getting tired (T57).
The defendant said that he knew nothing of the proposed works next door when he sold the business to the plaintiff. He denied receiving any letter on the topic from Mr Jones (T238). He had not read anything about the project (T271-273) and he had heard nothing about it from anyone else (T273-274). He had not seen the letter about it addressed to him. He had not ever discovered that he had missed any mail deliveries (T276). His counsel canvassed with him what he might have done with his business if he had known about the project. He said he would have sold it (T246).
The defendant said he stayed in the business for a week after the sale and helped the plaintiff familiarise herself with it. He said that he emphasised to her how important it was to be friendly to customers and he emphasised the importance of outside catering. In respect of his advice to the plaintiff on how to interact with customers, he said she didn’t respond. He was not asked to elaborate on that (T245). He said that when he later visited the plaintiff in the shop she appeared to be happy and she showed no signs of not coping (T245-246).
The defendant called witnesses who inferred poor management of the business on the part of the plaintiff, at least in the areas of being unfriendly and causing a drop in the quantity and quality of food on offer. I now summarise the evidence of those four witnesses.
The first was Mr Andrew Mazzone, a jeweller from 21 Pulteney Street in the Renaissance Arcade. He said he started frequenting Café Purple in 2004 and was a customer for two or three years. It is clear that he must be wrong about when he started as a customer there and he agreed that he might have got his dates mixed up (T289-290). He said he continued going there after the plaintiff took over, but she did not agree to deliver meals and coffee to his shop as the defendant had. He said he did not think that the plaintiff “read” clients like the old owners did. So far as the quality of the food was concerned he “just felt like it changed from the quality that was there and the food that was on offer in some ways, in my eyes, just didn’t look as fresh and presented the same way” (T291). He was not asked to elaborate. He said he stopped going there three or four weeks after the plaintiff took over. He said that during that time he noticed that the clientele probably halved from what it had been when the defendants owned it. There is no evidence from any of the financial documentation to suggest that there was any drop off in takings at the café until after the construction work began. In other words, Mr Mazzone’s observation about the clientele reducing by about half in the first three weeks is simply not borne out by the figures. So far as notice of the building work is concerned, he said he received no notice of the proposal although he did read about it in the Messenger. He said that when the defendants returned to the shop in 2005, he resumed going there. In cross-examination Mr Mazzone said that he observed that before the construction work began the clientele had reduced to about 30% of what it was when the defendants were there (T297). This is simply not borne out by the financial figures.
The second witness was Mr Christopher Fraser. He was a chef at David Jones at the time. He said he became a regular at Café Purple when the defendants ran it. He went there because he was a smoker and it was the quickest access point to his workplace for morning smoko (T304). He said he would go there at lunchtime five days a week but he would take his own lunch. He would only buy a drink or a paper there. He said that he noticed a drop off in customers by about 25-30% after a couple of months. By February 2003, it was down by 20-30%. He himself stopped going there in March or April 2003. He said that he had a confrontation or disagreement with the plaintiff some three or four weeks before he stopped going there. He said she was not happy with him sitting there if he was not purchasing anything (T309). Again the financial figures do not bear out Mr Fraser’s observation that the clientele reduced by 20-30% by February 2003. I appreciate that a simply numerical reduction in customers does not necessarily mean that turnover would be reduced by that same proportion. However, if there were to be such a dramatic drop as 30% in customers going to the shop, then there would have to be an increased expenditure by those who were still patronising the shop to make up the income. There is no evidence to suggest that the plaintiff put up her prices so as to increase her income that way.
The next witness was Ms Robin Stewart. Between 1998 and 2002 or 2003, she worked in the David Jones Food Hall. She used to go to Café Purple three or four times a week in her breaks and before work. When the plaintiff took over she continued to go there for a couple of months and then decided that she would take her breaks elsewhere. She said she did that because she did not feel as welcome. She thought the plaintiff was a little bit shy and not particularly welcoming (T326-327). She said she noticed other regular clientele dropping off as well. She noticed, “sort of quite a high changeover of staff” (T328). She thought the presentation of food was not the same as it had been with the defendants and there was a reduction in quality and variety as well. She was not asked to elaborate on what she meant by that. She said that whereas formerly she had spent $40 or $50 a week there when the defendants were the proprietors, that reduced to $5 or $10 a week when the plaintiff took over. She returned to the café when the defendants resumed working there. Like the other witnesses, she said that customer numbers dropped off a couple of months after the plaintiff took over.
The final witness in this group was Mr Mark Robinson. He works in the finance section of the University of Adelaide. He was a pretty regular customer, having breakfast there three or four times a week when the defendants ran the café (T334). He would spend $20 to $25 a week there. He said that he became aware that there was going to be a development there because there had been talk about it for years (T337). He said he noticed the quality of service deteriorate after the plaintiff took over (T338). He said it was noticeable about six months after she took over. He said the freshness of the food and the portions became less. He said he was not the sort of person to make a fuss but he would tend to move on. He said that the plaintiff seemed quite friendly. He said he decided to stop patronising the café because he did not consider the food to be of the same quality and also the noise and the concrete trucks in the laneway became such that you could not eat a reasonable meal in peace and quiet (T339). He said he noticed other patrons dropping off to the extent of a reduction of 50% (T340). In cross-examination he said that trying to eat at the café when the construction began was like being in the middle of a construction site. He said that the quality of food deteriorated after the construction work began, not before. He said that he found the plaintiff pleasant and that she was service oriented (T345). He said that there had been talk about construction happening in the area for years but he said that talk was about both the construction on the top of David Jones and also the other building on the corner of Austin Street and North Terrace, which was constructed later (T346). Of the four customer witnesses, Mr Robinson was the only one whose evidence is not contradicted by the financial evidence. He was the only one to experience the effects of the construction work on the amenity of the café.
The defendant called Mr Norman Zerbe. In 2002-2003 he was employed by SA Real Estate as a business sales agent. He effected the sale of the business from the defendants to the plaintiff. He said that he had looked into the shop after the plaintiff had taken over and the business “seemed to be ticking along ok there” (T354). He said that on one occasion the plaintiff explained to him that the business was not what she hoped it would be and that the construction site had caused some problems (T354).
The defendant also called Mr William Bullock. He is the proprietor of Bullock & Co. Real Estate. He managed nine shops within the Renaissance Centre for his client JM Properties Pty Ltd (the plaintiff’s landlord). He said that when the plaintiff began to have difficulties with her business, she asked for a rent reduction. He said that he asked for some trading details but they were never provided and so there was no rent reduction granted. That was never put to the plaintiff. When the plaintiff fell substantially into arrears, the landlord re-entered and distrained. He said that from his observations there was a significant drop off in customers to the café, but there were a range of causes for that. He was not asked to elaborate. He did say that the plaintiff did not appear to have the same outgoing personality of the defendants (T366). He estimated that the trade probably dropped off to about 50% (T367).
They are the witnesses called by the defendants.
Discussion – Did the defendants know of the proposed building works when they completed the section 8 notice?
The defendant says he knew nothing of the project. For that to be so, Mr Ross-Smith for the plaintiff points out that the defendant must have missed out on several sources of information. He submitted that while it may be credible that the defendant might miss out on one source, it is not credible that he missed out on all of them. Mr Ross-Smith submitted that the defendant should not be believed when he denies all knowledge. The defendant’s credibility is critical to this issue in the trial. The plaintiff must prove the defendants did know of the project.
I say at the outset that in assessing the defendant’s credibility I am unable to derive any assistance from his demeanour in the witness box. I saw nothing in the manner in which he gave his evidence that caused me to disbelieve him. For my assessment of his credibility I rely instead on other indicators of credibility namely, how the defendant’s evidence stands alongside other evidence I believe, and how inherently believable his account is.
I return to the possible sources of information about the proposed development;
1.Written notice to the defendant directly. A copy of a notice addressed to the defendants has been tendered. The defendant said that although correspondence reached him when addressed to 46 Austin Street, he also received correspondence for three other addresses at the same place. A list purporting to be of businesses in the location who were sent the notice includes the defendant’s name as it does that of the neighbours, Mr Holding and Mr Gentlecore. Those neighbours also said they did not receive the notice. While the evidence of the neighbours is not determinative, it is not irrelevant that they claim not to have received the notice. However slight, their evidence does increase the possibility of a system failure. I am not able to find that the defendants did receive this notice.
2.Written notice to the landlord delivered to the defendants by Mr Jones. I have already indicated I am not prepared to rely on Mr Jones’s evidence to establish that he gave this notice to the defendants.
3.The newspaper publicity. The publicity in The Advertiser was quite prominent. No one questioned the defendant about his newspaper reading habits but I can accept that not everyone reads the only daily newspaper published in Adelaide. The defendant may not have read it, and it may be that his wife and daughters did not read it either. The paper was available for purchase by the café’s customers but it may be that not one of the defendant, his wife or two daughters working in the café, read it themselves. The same comment may conceivably be made of the Messenger newspaper, but there are some significant differences between the papers which are relevant on this topic. I think I can take judicial notice of the fact that the Messenger is a free, weekly publication. The first difference is that the Messenger gave the project story prominence, even in 2000. It seems inconceivable to me that not one of the Khneiger family saw that front page article during the week or so that the paper was in the café for customers to read. Although no one asked any questions on the topic, it is reasonable to assume that someone working in the café would have had to receive copies of the paper into the shop. It seems likely that a staff member would, from time to time, handle the paper in the week that it was there, removing it from tables or putting it back in the place reserved for papers, or tidying up the pile of papers, or removing the papers when they were out of date. There were of course staff who were not family members, but it seems extraordinary that in some way or other, the topic did not come to the defendants notice through staff handling of the paper. Likewise it seems remarkable that no customer ever mentioned the topic to the defendants. I find that the defendant was gregarious with his customers. Several witnesses spoke of that being so, but one impression I did form of the defendant in the witness box, is that he would be likely to be outgoing with his customers. In that way, I expect they would have felt free to chat to him. It seems inconceivable that not one customer mentioned the topic to him. The other impression I got from the defendant himself and from the evidence of others, is that he was a good businessman. I think he would have been alert to matters that affected his business. An illustration of that is his return to the business in 2005. He was invited back by the landlord. That bespeaks confidence by the landlord in the business skills of the defendant. The defendant successfully negotiated a low re-purchase price of the business. He had sold it to the plaintiff in December 2002 for $60,000 plus stock. He re-purchased it in 2005 for $12,000 when $15,000 was sought by the landlord. He paid for the existing equipment only. He paid nothing for good will. He negotiated a lower rent. The building work had not finished by the time he re-purchased the building, but he was nevertheless confident he could make a profit, and given those lower overheads, there is no reason to disbelieve him when he says he succeeded. He said he spent a further $25,000 on new equipment. He said he changed the name of the business and got his daughter to run it (T249). All these factors suggest he was an astute businessman. I think he would have been alert to any mention of the project by his staff, his customers and his business neighbours. It is true he called two of those neighbours who said that they knew nothing of the project before 2003. I do not reject their evidence on that topic but it would be remarkable if no business neighbour heard of the project in 2000 and I think it no less remarkable that none would have occasion to mention it to the defendant.
In the circumstances, I am satisfied that the defendant did learn of the project in mid 2000. I am satisfied that directly or indirectly he learnt of it from newspaper publicity.
I am reinforced in that view by one other matter. While I do not overlook the possibility of pure coincidence, I find it significant that the defendant decided to sell his business well before December 2002. Despite the defendant’s claims that he first decided to sell in 1998, I find his evidence on that topic unsatisfactory. He was vague about when he first decided to sell. I have already recited his evidence on that topic (see paras [23] and [24]). His daughter said that they decided to sell in 2000 or 2001. I do not place great reliance on that evidence against interest as I accept that she may not have been able to be precise about dates. Of more significance however, is the solicitor’s letter (Exhibit P13) (see para. [22] above) which asserts, in effect, that the defendant decided to sell in mid 2000.
In those circumstances I find that the defendant decided to sell the business in mid 2000, when he first learnt of the project next door.
That knowledge required the defendant to disclose to the plaintiff what he knew. In my view, the project next door plainly had the potential to have a significant adverse affect on the business. It was foreseeable that so large a project in such a limited space would adversely affect the café. It was foreseeable both that access to the café would be restricted and the amenity of the café would deteriorate. All the evidence, including the photographs, points graphically to the restrictions on access and amenity. It was significant and it was foreseeable.
Adverse effects on access and amenity would not be sufficient to give rise to an obligation to disclose. Unless it could be shown that income may be lost as a result of those effects, then I do not think that it could be said that the effect on business was a relevant one. A nexus between adverse physical effects and financial loss would have to be foreseen. That raises the question whether the test is a subjective or an objective one. What is the position if a reasonable person would foresee the potential for significant adverse effect on the business, but the defendant did not? In my view, that question is academic in this case. I find that the defendant was an astute businessman. He would be at least as able to foresee business risks as would the reasonable person.
What if the defendant thought that there was a possibility of a significant adverse effect on business but that he, with his particular business skills, could overcome those adversities. In my view the word “may” in the form and in the section, has the effect of requiring disclosure in that situation. The purpose of the Act is protective of purchasers. Disclosure by the vendor of significant prospective risks is the protection provided by section 8.
There are two occasions giving rise to the obligation to disclose;
1.Awareness of any written notice on the landlord…or
2.Awareness of any circumstance…
Defendant’s knowledge of the proposed building work
As I have said, I am not satisfied on the balance of probabilities that the defendants received the written notice on the landlord. Thus I am not satisfied that the first occasion for disclosure arose. However, for the reasons already given I am satisfied that the defendants were aware of the proposed project from as early as mid 2000, giving rise to the second occasion for disclosure. Their knowledge constituted an awareness of a “circumstance” giving rise to the obligation to disclose.
The nexus between the defendants failure to disclose and the plaintiff’s loss
Insofar as the defendants claim that the plaintiff’s losses are due solely to her own ineptitude, that claim has failed. The financial evidence shows that the takings did not begin to drop off until after June 2003, when the construction work began. In my view ineptitude of the sort alleged by the defendant and his witnesses would have shown up earlier in the takings figures. The defendant’s witness Mr Bullock said that the problem with small tenancies and small businesses in secondary locations such as Café Purple, it is that the personality of the operator becomes a very big issue (T366). If the plaintiff’s personality was as unconducive to the success of the business as the defendant and some of his witnesses suggest, and if, as claimed, that is compounded by an almost immediate drop in the quantity and quality of food on offer, then I would expect a drop in takings well before June 2003, some seven months after the purchase. I will deal in more detail with the figures shortly, but in my view, the proximity of the drop in takings to the commencement of the building work is sufficient proof of the connection between the two. The nexus is made out.
Mitigation of Loss
There is the separate question of whether the defendant can discharge the onus on him to prove that the plaintiff failed to mitigate her loss. He alleges that the plaintiff contributed to her own loss by 1) her manner, 2) the deterioration in product quality and quantity, and 3) a failure to undertake sufficient outside catering.
The evidence in support of the first two alleged failings comes essentially from the four customer witnesses. I did not find their evidence persuasive, even taken together. Each gave evidence of an immediately noticeable lack of friendliness on the part of the plaintiff. Each spoke of a noticeable drop off in the produce offered. Except for Mr Robinson, each said the drop in customer numbers occurred well before June 2003. All but Mr Robinson say they stopped or reduced their own patronage soon after the plaintiff took over. The takings figures simply do not bear out a sudden drop in business. I am mindful that no less than three people speak in similar terms. I have no reason to believe they have conspired together. Except perhaps in the case of Mr Fraser, there is no apparent reason for them to misstate what they experienced (Mr Fraser may have taken offence at being discouraged from sitting at a table when he bought along his own lunch and purchased very little from the café). I conclude that, with the exception of Mr Robinson, the witnesses have in fact overstated criticisms of the plaintiff and the service she provided. I think the reason for that may be that customers’ tastes are very personal. What one sees as unfriendly behaviour, another sees as an acceptable reserve on the part of a proprietor. Some people are less accepting of change than others. Some welcome or don’t mind change, where others are sensitive to it and see it as unwelcome and possibly indicating a drop in standards. I think the plaintiff may well have been less outgoing than the defendant. The plaintiff’s more reserved attitude may have put some people off but I am not persuaded that her behaviour amounted to a failure to mitigate her loss. It may be that when the adverse effects of the building work really put her business in jeopardy, she cut corners to make ends meet, but that is not what the witnesses claim. They claim that the deterioration occurred well before the construction work began.
The evidence about outside catering was scant. The plaintiff gave evidence of the outside customers the defendant introduced her to, and she said she maintained that service (T139). The defendant was not able to produce any documents or to provide any details of the outside catering work he had undertaken. Nor was he able to adduce evidence of outside customers being neglected. There is no evidence from which I can infer that the plaintiff failed to maintain or to obtain outside catering.
Overall the defendants have not demonstrated that the plaintiff has failed to mitigate her loss.
Criteria for Determining Loss
I have found that the defendants failed to disclose to the plaintiff information they were required to disclose pursuant to s 8(1)(b) of the Land and Business (Sale and Conveyancing) Act 1994. They did so by a misrepresentation. Section 15 of the Act provides remedies for such breaches. I have found, pursuant to subsection 15(2), that the plaintiff is prejudiced by the failure of the defendants to comply with the Act. Subsection (2)(b) provides for the court to:
…award such damages as may, in the opinion of the court, be necessary to compensate loss arising from the non-compliance
Thus damages may be recovered under this Act.
They may also be recovered pursuant to the Fair Trading Act 1987. Section 56(1) of that Act provides:
A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.
In my view, the misrepresentation committed by the defendants amounts to conduct that is at least misleading.
I accept the submission of Mr Ross-Smith for the plaintiff that the criteria appropriate for determining damages under s 56 of the Fair Trading Act are the same as for sections 52 and 82 of the Trade Practices Act 1974 (Cth).
Section 82(1) of that Act provides:
A person who suffers loss or damage by conduct of another in contravention of a provision of Part 10 (other than section 57) may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention.
The plaintiff has made references to Federal Court and High Court authorities which have considered the question of damages pursuant to the Trade Practices Act. I will refer to those authorities shortly.
The Loss – Factual Basis
In broad terms the factual basis upon which the plaintiff’s loss has to be determined is as follows. The plaintiff gave evidence that if she had been notified of the proposed building work next door to the business she was buying, she would not have bought it. I accept that evidence. She was relatively inexperienced in business and cautious. She was a sole parent of her daughter. I find she would not have taken the risk to the business that the building work posed. She paid $60,000 for the business together with other outgoings. In the first six months of the business the turnover was reasonably constant. The plaintiff said that takings were comparable to those achieved by the vendors. The schedule of turnover is at page 256 of Exhibit P4. Its accuracy was not challenged. I am conscious that the turnover figures are not those to be used to directly assess damages. Variable costs have to be considered. However, the turnover figures confirm the evidence of the plaintiff about business falling off on the occurrence of certain events. The average turnover for the first five full months of business, ie from January to May 2003 inclusive is $16,322. In June 2003 the pre-construction work began. The worksite was fenced off, access along Austin Street to the café was limited and materials and machinery were brought onto the site. Concrete was poured on 31 July 2003. During the six months from June 2003 to November 2003 inclusive the average turnover per month was $14,199, a drop of 11.4%. The worst month was June 2003 when the pre-construction work began. The turnover for that month was $13,337. In the following month there were receipts of $15,159 but there was a steady decline through to November 2003.
There is then a further noticeable drop from December 2003 to the end of trading in March of 2005. That is when work began on another building abutting Austin Street. That building was for University apartments which fronted North Terrace. The building also abutted Austin Street on the eastern side (T99) (“the University building work”). For reasons that are not entirely clear no one received notice of that building work or at least no evidence was lead that notice was given. Certainly it is not suggested that the defendants were aware of these proposed building works. The commencement of that building work in December 2003 caused the entire blocking off of Austin Street for a period and although the access re-opened business never recovered. It could not be safely said that this further drop off in business was caused only by the continuing work on the subject building. The coincidence with the beginning of the university building work is too marked. The average turnover for the fifteen months from December 2003 to March 2005 was $10.530, a further drop of 13.5%. That made an accumulated drop of 24.9% from the first five months.
The defendants submit that I should take into account the fact that another café called Illy Café began business after the subject building work began. However no evidence was lead before me to suggest what might have been the impact of that business. I am not willing to assume that the plaintiff’s business would have suffered as a result of that café starting business. The position with the University building work is different. I have seen the photographs of the more restricted access. The further drop in turnover coinciding with the commencement of that building work is sufficient, I think, for me to conclude that the cause and effect are there evident.
Before buying the business the plaintiff had done some research and determined to buy a snack bar business. She had two businesses under consideration before deciding to purchase the subject business. I am satisfied that if she had not purchased this business she would have purchased either the other one or a similar one. From her success in the subject business for the five or so months before the construction work began, I am satisfied that she would have conducted a similar business successfully. I am satisfied that the fall off in business was not due to her own failings but was due to the building work. I am also satisfied that it was reasonable for her to continue the business for as long as she did because inevitably the building work was going to conclude and she had every reason to think that business might eventually return to its pre-construction levels. Her departure was directly caused by the landlord’s distraint. That in turn resulted from her falling into arrears of rent.
The Loss – Legal Principles
What are the principles to be applied in assessing the damages?
The test of what damages are recoverable is not to be determined by direct analogy with common law remedies to be found in the laws of contract or tort. The High Court has so determined in relation to damages recoverable under the Trade Practices Act. In Marks v GIO Australia Holdings (1998) 196 CLR 494 McHugh, Hayne and Callinan JJ said at para [38]:
It can be seen, therefore, that both s 82 and s 87 require examination of whether a person has suffered … loss or damage “by conduct of another person” that was engaged in the contravention of one of the identified provisions of the Act. That enquiry is one that seeks to identify a causal connection between the loss or damage that is alleged has been … suffered and the contravening conduct. But once that causal connection is established, there is nothing in s 82 or s 87 (or elsewhere in the Act) which suggests either that the amount that may be recovered under s 82(1), or that the other orders that may be made under s 87 should be limited by drawing some analogy with the law of contract, tort or equitable remedy. Indeed, the very fact that s82 and s 87 may be applied to widely different contraventions of the Act, some of which can be seen as inviting analogies with tortes such as deceit (eg s 52) or with equity (eg s 51AA) but others of which find no ready analogies in the common law or equity, shows that it is wrong to limit the apparently clear words of the Act by reference to one or other of these analogies.
At para [39] their Honours quoted with approval from a passage in the judgment of Mason, Wilson and Dawson JJ in Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1 at 14:
The question then is whether it is appropriate to apply the contract measure of damages to the contraventions found to have taken place. The courts are not bound to make a definitive choice between the two measures of damages so that one applies to all contraventions to the exclusion of the other. However there is much to be said for the view that the measure of damages in tort is appropriate in most, if not all, part IV cases, especially those involving misleading or deceptive conduct and the making of false statements. Such conduct is similar both in character and effect to tortious conduct, particularly fraudulent misrepresentation and negligent misstatement.
Further at paragraph [41] their Honours cautioned that it should not be assumed that damages will be determined in exactly the same way as damages for deceit.
… the damages for deceit will be the sum representing the loss suffered by the plaintiff because the plaintiff altered its position in reliance on the defendant’s misrepresentation [authority is deleted]. But the analogy cannot be pressed too far. It should not be pressed to the point of concluding that the only damages that may be allowed under s 82 are those that would be allowed in an action for deceit. The question presented by s 82 is not what would be allowed in deceit, it is what loss or damage has been caused by the conduct contravening the Act. (paragraph [42]). It follows then, that a comparison must be made between the position in which the party that has allegedly suffered loss or damage is and the position in which that party would have been but for the contravening conduct. And even this enquiry may not conclude the question. Analysing the question of causation only by reference to what is, in essence, a “but for” test has been found wanting in other contexts [authorities deleted], and it may well be that it is not an exclusive test of causation in this area either. But that is not a question which we need to consider in this case. For the moment it is enough to say that s 82 requires identification of a causal link between loss or damage and conduct done in contravention of the Act [authority deleted].
In determining the causal link between the action of the defendants and the damage suffered by the plaintiff, the plaintiff need not prove the defendants’ act was the sole cause of her loss or injury. In I&L Securities v HTW Valuers (2002) 210 CLR 109 at [33] Gleeson CJ said:
The relevant purpose of the [Trade Practices Act 1974(Clth)] was to proscribe misleading and deceptive conduct in circumstances which included those of the present case. In aid of that purpose, the statute provided for compensation, by an award of damages, to a victim of such conduct. The measure of damages stipulated was the loss or damage of which the conduct was a cause. It was not limited to loss or damage of which such conduct was the sole cause. (Italics added.)
That being so His Honour found that:
The whole of the loss on the transaction was a consequence of the fact that the mortgaged land was substantially less valuable than was represented [31].
His Honour did not accept that the party responsible for the misleading conduct could avoid liability for the whole loss even where there was a so called “independent” cause of some of the loss (see [32]). In their joint judgment Gaudron, Gummow and Hayne JJ spoke in similar terms at [57]:
In light of these considerations, it is hardly surprising that it is now well established that the question presented by s 82 of the Act is not what was the (sole) cause of the loss or damage which has allegedly been sustained [authorities omitted]. It is enough to demonstrate that contravention of a relevant provision of the Act was a cause of the loss or damage sustained [authorities omitted].
In support of its application for damages the plaintiff drew attention to the case of Tomlinson v Cut Price DeliPty Ltd [1995] FCA 1371 (per Drummond J) where the plaintiffs were held entitled to recover the cash price they had paid for the business together with incidental outgoings, and damages for consequential loss determined by reference to the value of their unpaid labour. In that case, as in the present case, there was no demonstrated trading loss, as opposed to a diminution in trade.
So too in the case of Cut Price Deli Pty Ltd and Ors v Jacques and Ors (1994) 126 ALR 413 the Full Court of the Federal Court held that the trial judge had been correct to include in the assessment of loss suffered by a plaintiff adversely affected by misrepresentation a component of unremunerated labour (see page 418 per the trial judge and page 421 per the Full Court). In that case the trial judge had determined the lost by reference to the hours the plaintiff worked, the relevant award rates at the lowest hourly rate and the amount of drawings actually taken. To those considerations he applied what he described as “a very significant discount” (see page 419).
Recoverable loss
There are thus two heads of recoverable loss:
1. The loss of the investment and;
2. The loss of remuneration.
The loss of the investment
The plaintiff purchased the business for $60,000 together with other outgoings. When the landlord distrained she recovered nothing. The business was worth nothing. She owed rent. The defendants paid nothing for the business
when they re-entered the café at the invitation of the landlord. They paid only for stock. They negotiated a lower rent.
The plaintiff has tendered a schedule headed “Formulation of Plaintiff’s Losses”. I reproduce that schedule.
Description Comment
Document
Loss
Purchase Price of Business Business Sale Agreement signed 18/11/02
Settlement occurred 11/12/02 11/12/02Business Sale Agreement dated 18/11/02 – in Exhibit P4 – Plaintiff’s Tender book, 36-56 $60,000
Stock for Business Letter from Carrington Conveyancers to Jo Cookson dated 11/12/02 confirming settlement and enclosing Settlement Statement in Exhibit P4 – Plaintiff’s Tender Book page 247
$1,293.71 Stamp Duty for purchase of business
Settlement Statement in Exhibit P4 – Plaintiff’s Tender Book page 248 $1,475.00 Other costs associated with purchase
Adjustment for rental 1,215.12
Conveyancer fees 425.00
Bullock’s fees 812.31
Searches – documents 65.00
Business names transfer 24.00
Lessors Solicitor’s fees 500.00Settlement Statement in Exhibit P4 – Plaintiff’s Tender Book, page 248 $3,041.43 Consequential loss of income From the date of settlement 11/12/02 to when plaintiff ceased trading ion 31/3/05 being a period of 118 weeks. The plaintiff was entitled to expect total wages of $115,989.46 (that is 118 weeks x $982.96)
The Form 2 (paragraph 11) $94,635.46 SUB TOTAL
$160,445.60
Interest on Sub Total: Interest rate of 4% (Supreme Court Rule 30C.20). Simple Interest calculated from Date of Rule 6A letter being 1 October 2004 until 25 May 2007 (2.6 years)
4% of $160,445.60 is $6,417.82 per year which totals $16,686.34
$16,686.34
TOTAL $177,131.94
I find that the plaintiff is entitled to recover the purchase price and associated outgoings. I order first that the plaintiff recover the first four heads of loss identified in the schedule viz purchase price of business, stock for business, stamp duty for purchase of business and other costs associated with the purchase. That makes a total of $65,810.14.
Loss of remuneration
Mr Ross-Smith suggested two ways of calculating the plaintiff’s loss of remuneration. His first suggestion was to calculate the likely net trading profit that would have been made if the plaintiff had received the profit realised by the defendants. In my view that is not an appropriate way to determine the plaintiff’s loss. Her takings in the first 5 months of her trading were not quite as high as those received by the defendants. Those first 5 months of trading were not affected by the building works. In those circumstances to compensate her by reference to the profits of the defendants is effectively to guarantee her their profits. There is no good reason to take that approach.
The second suggested approach is to base the plaintiff’s loss on income determined by an employee’s award wages as disclosed by the defendant’s Form 2. This suggestion envisages calculating the plaintiff’s wages for the affected period and deduct from that the net profit earned by the plaintiff as disclosed by her tax returns. While that approach would be conformity with some of the authorities (in particular, Cut Price Deli v Jacques (supra)), I am not able to rely on the accuracy of the plaintiff’s tax returns in this case. I mean nothing sinister by that finding, but the tax returns do not appear to accurately reflect the trading of the business. I will give reasons for so finding when discussing how I calculate the loss (see paragraphs [78] to [82]).
Notwithstanding that I am not willing to rely on the plaintiff’s tax returns to find her net trading profit for any financial year, I think I can at least estimate her net trading profit from the evidence I have received. Although the exercise might involve something of a broadaxe approach I think that calculating the loss of remuneration in that way represents the fairest approach. Both the defendants and the plaintiff took no drawings. They each regarded the net trading profit as their income.
I will therefore calculate the plaintiff’s loss as being the net trading profit she lost from the time when the building work began in June of 2003. I find as a fact that she would have maintained the trading profit she achieved in the first five months of her trading for the whole time she operated the business until March of 2005 had it not been for the building works. There does not seem to be any appreciable seasonal change in the takings.
I also find as a fact that the further diminution in trading profit from December 2003 to March 2005 was caused by the so called “independent” cause of a second building work. I conclude that this may be recovered as well because had it not been for her purchasing the business the plaintiff would not have suffered this loss. I have referred to High Court authority which, in my view, entitle the plaintiff to recover this loss as well (see I & L Services v HTW Valuers, supra).
As mentioned earlier (see paragraphs [56]-[57]) the turnover figures shown by the schedule at page 256 of Exhibit P4 demonstrate how trade diminished. The figures show that there was a drop of 11.4% in the average monthly takings from June 2003 when the subject building work began. This represents a drop from a monthly average of $16,322 to $14,199 – a drop of $2,123 per month. There was a further drop of 13.5% when the University building work began in December 2003 (from $14,199 to $10,530 per month or a drop of $3,669 per month).
The total drop in turnover from the average of the first 5 months turnover to the average of the last 15 months turnover is 24.9% or an average monthly drop of $5,792. However, those are the turnover figures. They do not represent the loss of net trading income.
The plaintiff’s tax returns show the gross takings and the net trading profit before tax. Those figures are shown for the three financial years when she was operating the business. I set out those figures and the pages of Exhibit P4 where they appear. I also refer to the trading profit of the defendants for the 2002 financial year as disclosed by the Form 2 Schedule also appearing in Exhibit P4. I bear in mind that the net trading figures for 2003 and 2005 are for partial years only.
Calculation of net trading loss (page references in Exhibit P4)
Defendant's Trading Profit 2002
Plaintiff’s Trading Profit 2003 (trading for 6 ½ months)
Plaintiff’s Trading Profit 2004 (trading all year)
Plaintiff’s Trading Profit 2005 (trading for 8 months)
$51,114
(page 94)$4,691
(page 261)$7,403
(page 267)$9,260
(page 274)Plaintiff’s Gross Takings 2003 Plaintiff’s Gross Takings 2004 Plaintiff’s Gross Takings 2005 $86,695
(page 261)$139,561
(page 267)$85,078
(page 277)
Two striking anomalies arise from these figures. The first is the great difference between the defendant’s net trading profit in 2002 ($51,114) and the plaintiff’s net trading profit for 2003 ($4,691). The plaintiff’s figures for that year are of course for only 6 and a half months trading. To make the figures comparable one might therefore double that figure ($9,382). There is still an enormous difference between the net trading profits of the defendant’s last year of trading and the plaintiff’s first year. In her evidence the plaintiff said that for the first 5 and a half months of trading she was receiving approximately what the defendant had represented the receipts to be. The turnover schedule that she produced (page 256 of Exhibit P4) bears out this evidence.
The second striking anomaly is the comparison between the plaintiff’s net trading profits for the years 2003 (her best trading period when only one month was adversely affected by the building work) and the 2005 year when the whole 8 and a half months were adversely affected by both building projects. The turnover figures would suggest this was a period of her worst trading months. The net trading profit for the worst 8½ months of trading is greater than double her net trading profit for her best trading months.
I draw two conclusions from these anomalies. The first is that I am unwilling to assess the plaintiff’s loss by any comparison between the defendant’s figures for the last year of their trading as disclosed by their Form 2 and the plaintiff’s trading profit figures as disclosed by her tax return for her first trading year. Mr Ross-Smith submitted that I should assess her loss in that way (page 6 outline of submissions regarding assessment of damages). I decline to do so. His own client’s evidence, together with her turnover schedule, contradicts any suggestion that there was such a drastic drop in income in the first year of her trading. The problem I think is in comparing two different sorts of documents – the defendant’s Form 2 and the plaintiff’s tax return. Having said that I have no reason to think that the defendant’s figures in the Form 2 are unreliable. I intend to rely on that material for my calculation.
The second conclusion I draw from the anomalies is that I do not think the plaintiff’s tax return accurately reflect what I find is a significant drop in receipts caused by the building works. When the plaintiff took over the business in December 2002 she was trading well. Buy March 2005 her landlord distrained against her because she was unable to pay the rent. I think that the schedule of turnover figures accurately reflects the two drops in trading caused by the two building projects. I think overall her income dropped by about 25% after the building works started – 11.4% after the June 2003 building work and a further 13.5% after the December 2003 building works.
I think it is going to be necessary to take a broadaxe approach in assessing the plaintiff’s loss, doing the best I can with the evidence before me.
The defendants’ Form 2 shows that in their last financial year of trading they received a net trading profit before tax of $51,114 or $4,259 per month. The form said that the annual figure was 24% of gross takings. The actual gross taking for the last financial year of the defendants’ trading was $211,952. That is $17,662 per month. The plaintiff said that her trading was comparable to that of the defendant when she first began operating the business. Her schedule of turnover bears that out. Her trading for the first full month in January of 2003 was $16,309 and her average turnover for the first full five months was $16,322. Although her takings appear to be slightly less than the defendants’ for their last trading year, I do not see any reason to compensate the plaintiff for that difference. Certainly, the difference cannot be explained by the building works. The building works did not begin until June 2003 and the defendants’ losses did not begin until then.
I find that I have reliable figures for the net trading profit for the defendants for their last trading year. Those figures come from the Form 2. In that way I can determine the net trading profit per month for the defendants. I also have what I regard as reliable figures for the plaintiff’s turnover for the whole of the period she operated the business. I accept as reliable the Schedule of Turnover found at page 256 of P4. What I do not have from the plaintiff are reliable figures for the net trading profit. The only figures I have for that are from her tax returns, which I am not willing to rely upon. I simply cannot reconcile the net business income disclosed in the tax returns with the evidence of the plaintiff’s successful trading in the first five and a half months of her business. The tax return in that respect is inconsistent with the evidence. I am nevertheless satisfied that the turnover figures are accurate and they reflect the downturn in business occurring from June 2003 due to the subject building work and the further diminution in business from December 2003 as a result of the university building work.
In the absence of reliable net trading figures for the plaintiff, I will assess her operating loss by assuming that her net trading profit would be the same percentage of her gross takings as were those of the defendants for their last trading year – ie 24%. The evidence suggests that it is appropriate to equate the plaintiff’s turnover figures with the defendants’ gross takings. Thus I will first calculate the plaintiff’s average net trading profit during the first five complete months from January to May 2003 inclusive. I find that if it had not been for the building work, she would have continued to trade at that level for the remaining 22 months – that is, from June 2003 to March 2005 inclusive. The average net trading profit for the first full five months is therefore 24% of $16,322, namely, $3,917.28. Had it not been for the building work, I find that the plaintiff would have received that sum for each of the following 22 months, that is, $3,917.28 x 22 = $86,180.16.
The plaintiff did not receive that amount. Instead she received by way of turnover the sums shown in the schedule from June 2003 to March 2005 inclusive, $253,685. I determine that the net trading profit for those 22 months is 24% of $253,685 = $60,884.40.
I therefore determine that the plaintiff’s net trading loss is $25,295.76 ($86,180.16 minus $60,884.40).
Total Loss
I therefore calculate that the total loss suffered by the plaintiff is:
1. Loss of investment $65,810.14
2. Loss of remuneration $25,295.76
Total $91,105.90
Orders
I will hear the parties as to the precise orders I should make.
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