Davis v Perry O'Brien Engineering Pty Ltd
[2023] QSC 243
•1 November 2023
SUPREME COURT OF QUEENSLAND
CITATION:
Davis & Anor v Perry O’Brien Engineering Pty Ltd & Ors [2023] QSC 243
PARTIES:
ROY STEVEN DAVIS
(first plaintiff)
AND
COLLEEN JOYCE DAVIS(second plaintiff)
v
PERRY O’BRIEN ENGINEERING PTY LTD
ACN 077 375 207(first defendant)
AND
R.B. PERRY INVESTMENTS PTY LTD
ACN 607 303 248 AS TRUSTEE FOR THE PERRY INVESTMENT TRUST
(second defendant)
AND
M.G. O’BRIEN INVESTMENTS PTY LTD
ACN 607 300 201 AS TRUSTEE FOR THE O’BRIEN INVESTMENT TRUST(third defendant)
FILE NO:
5928 of 2016
DIVISION:
Trial Division
PROCEEDING:
Trial
ORIGINATING COURT:
Supreme Court of Queensland at Brisbane
DELIVERED ON:
1 November 2023
DELIVERED AT:
Brisbane
HEARING DATE:
24, 25, 26, 27 and 28 July 2023, 3 and 11 August 2023
JUDGE:
Applegarth J
ORDER:
1. The parties to agree, if possible, or otherwise submit forms of order to reflect my findings.
2. The matter be adjourned to a date to be fixed to hear submissions and to enter judgment.
CATCHWORDS:
TRADE AND COMMERCE – COMPETITION, FAIR TRADING AND CONSUMER PROTECTION LEGISLATION – CONSUMER PROTECTION – MISLEADING OR DECEPTIVE CONDUCT OR FALSE REPRESENTATIONS – where the Sellers of shares in a business provided inaccurate financial information and failed to disclose the truth about the company’s financial performance, profitability, and the extent of its creditors - where the Buyers contend that if they had not been misled by the Sellers and, instead, had been given an accurate account of the financial position they would not have continued with the purchase of the shares and settled the transaction - “No transaction” case – where, but for the misleading or deceptive conduct, the transaction would not have occurred – causation – remedies – applicable principles – whether counterfactual relevant to analysis – whether counterfactual should be pleaded
CONTRACTS – BREACH – damages - sale of company shares – warranties about company’s financial affairs – assessment of damages
DAMAGES – ASSESSMENT OF DAMAGES IN ACTIONS FOR BREACH OF CONTRACT - breach of warranty as to company’s financial information – damages recoverable by Buyers for breach of warranty assessed as difference between price actually paid and what price would have been if accurate financial information had been disclosed
TRADE AND COMMERCE – COMPETITION, FAIR TRADING AND CONSUMER PROTECTION LEGISLATION – ENFORCEMENT AND REMEDIES – ACTIONS FOR DAMAGES – ASSESSMENT OR AVAILABILITY OF DAMAGES – misleading representations as to the company’s financial information – where the Buyers seek compensation to be assessed as the difference between the price paid and the actual value of the shares
Australian Consumer Law, ss 18, 236
Building and Construction Industry (Portable Long Service Leave) Act 1991 (Qld)
Competition and Consumer Act 2010 (Cth), s 137B
AndarTransport Pty Ltd v Brambles Ltd (2004) 217 CLR 424, cited
Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549, cited
Berry v CCL Secure Pty Ltd (2020) 271 CLR 151, cited
Cackett v Keswick [1902] 2 Ch 456, cited
Campbell v Backoffice Investments (2009) 238 CLR 304, cited
Chappel v Hart (1998) 195 CLR 232, cited
Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64, cited
Dominelli Ford (Hurstville) Pty Ltd v Karmot Auto Spares Pty Ltd (1992) 38 FCR 471, cited
DSHE Holdings Ltd v Potts (2022) 405 ALR 70; [2022] NSWCA 165, discussed
Elna Australia Pty Ltd v International Computers (Australia) Pty Ltd [No 2] (1987) 16 FCR 410, cited
Financial Conduct Authority v Arch Insurance (UK) Ltd [2021] 2 WLR 123; [2021] UKSC1, cited
Gold Coast City Marina Pty Ltd v Wyzenbeek [2020] HCATrans 54, cited
Henville v Walker (2001) 206 CLR 459; [2001] HCA 52, cited
Holmes v Jones (1907) 4 CLR 1692, cited
Hunt & Hunt Lawyers v Mitchell Morgan Nominees Pty Ltd (2013) 247 CLR 613, cited
I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (2002) 210 CLR 109, cited
Keeley v Horton [2017] 1 Qd R 414, cited
Lewis v Australian Capital Territory (2020) 271 CLR 192, cited
Lion Nathan Ltd v C-C Bottlers Ltd [1996] 1 WLR 1438, cited
Masters v Cameron (1954) 91 CLR 353, cited
Pix v Suncoast Marine Pty Ltd [2019] QSC 45, cited
Robinson v Harman (1848) 1 Ex 850, cited
Rosenberg v Percival (2001) 205 CLR 434, cited
Westpac Banking Corporation v Jamieson [2016] 1 Qd R 495; [2015] QCA 50, discussed
Wyzenbeek v Australian Marine Imports Pty Ltd (2019) 272 FCR 373; [2019] FCAFC 167, not followed
Yam Seng Pte Ltd v International Trade Corporation Ltd [2013] 1 CLC 662, followedCOUNSEL: D Ananian-Cooper and L Henry for the plaintiffs
D de Jersey KC for the defendants
SOLICITORS: Project Legal for the plaintiffs
Shand Taylor Lawyers for the defendants
Table of Contents Page
Background
The general issues arising from the Buyers’ claim
The general issues arising from the Sellers’ claim
General principles about misleading or deceptive conduct
The division of responsibility for the management of the business
The Schedule 1 Representations
The 3 November Representation
The Westpac Representation
The Late November Representations
Employee Entitlement Representation and the Wages Book Liability
Reliance and causation
Causation and contravening conduct – general principles
The onus of proof
Pleading a counterfactual
The “no transaction” counterfactual and the Sellers’ response to it
Assessment of the competing counterfactuals
Contributory fault
Breach of warranty claims
Loss and damage – misleading and deceptive conduct claim
Loss and damage calculations
Loss and damage for breach of contract
Claim for Indemnities
Conclusion on the Buyers’ counterclaim
The Sellers’ claim
Mrs Davis’ loan and the Lucy compromise
The $750,000 “Settlement Loan” and the assignment of $400,000 of it
The Stock Loan Portion of the Settlement Loan
The Sponsorship Agreement
The Sellers’ damages claim for breach of the Sponsorship Agreement
Judgment and forms of orders
Summary and Conclusion
This litigation arises out of the sale of shares in a company that operated an earthmoving and civil contracting business. The Buyers claim that they were misled by a variety of representations about the financial affairs of the business and that the Sellers breached express warranties in a Share Sale Agreement (“SSA”). The Sellers sue for money owed under the SSA and allege that the Buyers reneged on a separate oral sponsorship agreement.
The principal issues on the Buyers’ counterclaim are:
(a)were the alleged representations and conduct in not disclosing the truth about the company’s financial affairs likely to mislead the Buyers?
(b)were the Buyers in fact misled and did they rely on the representations in proceeding with and settling the agreement rather than terminating it?
(c)should the Buyers’ compensation for contravention of the statutory prohibition on misleading conduct be reduced because of a failure to take reasonable care within the meaning of s 137B of the Competition and Consumer Act 2010 (Cth)?
(d)what loss or damage did the Buyers suffer by the alleged contravention of statute, and by reason of breach of contract?
Several issues arise on the Sellers’ claim. They will be discussed later since they make little sense until the details of the SSA and its aftermath are explained.
Background
The plaintiffs (“the Sellers”) owned an earthmoving and civil contracting business that they conducted through a company, Earthpro Pty Ltd. Mr Davis was its sole director and Mrs Davis worked in the business in connection with its financial administration.
The Sellers had built up the business since it was established in 1997. By 2014, Mr Davis wanted to step back from the business and devote more time to his and Mrs Davis’ pastime of motor racing. As a result, the business employed a general manager to take over many of Mr Davis’ tasks in connection with the day‑to‑day operation of the business. This included managing contracts and supervising a staff of about 70 individuals who worked on sites and operated equipment. The office was a small one, with two bookkeepers inputting into a MYOB system invoices that arrived from suppliers, invoicing customers for moneys that were due under claims, and paying invoices if they were approved by Mrs Davis. The general manager did not have access to the MYOB system. The bookkeepers were responsible for the routine operation of the MYOB accounting system and they took their instructions from Mrs Davis or Earthpro’s external accountant, Mr Ings.
In 2015, Mr Michael O’Brien and Mr Robert Perry, who were experienced in civil works and earthmoving, expressed an interest in buying the business. They and their accountant, Mr Bristow, had discussions with the Sellers and their accountant, Mr Ings. Matters progressed to a point at which Mr O’Brien and Mr Perry were invited to work in the business with a view to learning more about it as prospective buyers. Earthpro terminated the services of its general manager on 17 August 2015. Mr O’Brien took over his responsibilities in administering contracts, while Mr Perry concentrated on operations in the field, including the business’ plant and equipment. Mr O’Brien and Mr Perry worked in the business without pay.
Mr Davis introduced Mr O’Brien and Mr Perry to customers and suppliers as potential buyers. Mr and Mrs Davis remained in control of the business, but they would be absent from it for periods, for example, pursuing their interest in motor racing and attending racing events. The bookkeepers continued to regard Mrs Davis as their boss. In the final months of 2015, Mr O’Brien and Mr Perry attended to the day‑to‑day operations of the business, including staffing decisions and decisions about the operation, repair and replacement of plant and equipment.
The proposed purchase was to be by the purchase of shares in Earthpro by Mr O’Brien’s and Mr Perry’s respective trustee companies. These entities, which are the second and third defendants, will be referred to as “the Buyers”.
On 4 October 2015, the Sellers and the Buyers entered into a SSA. Under the SSA, all the shares in the first defendant, as well as another company, Earthpro Plant Hire Pty Ltd, were to be sold to the Buyers. The SSA was subject to conditions about due diligence and obtaining finance. It contained numerous other terms including conditions about the accuracy of information provided to the Buyers and the disclosure of information to them prior to completion. Clause 2.6 of the SSA obliged the Sellers to “ensure that the information provided to the Buyer in respect of the Companies or the Business is materially complete and accurate in all respects”. Clause 7.3 provided:
“If, before Completion, the Sellers have knowledge or become aware of any matter or thing which has or may be considered by the Buyer (acting reasonably) to have a material effect on the profitability or the value of the Business or the Companies, the relevant Sellers must immediately give notice to the Buyer fully describing the matter or thing and its likely effect on the Business.”
The Sellers warranted in clause 8.10 that at the date of the document and at completion, each of the statements listed in Schedule 1 were true and correct. The statements in Schedule 1 included the following:
“O. All written information given to the Buyer by the Sellers or the Companies before the date of the document and up to Completion is true and accurate in all material respects. None of that written information is misleading in any material particular, whether by omission or otherwise.
P. No information or details relating to the Companies, the Business or the Assets which would be material for disclosure to a prudent intending purchaser of the Companies, the Business or the Assets has been withheld or not disclosed to the Buyer.
Q. There are no facts or circumstances which might reasonably be expected materially and adversely to affect the financial position, operations, profitability or prospects of the Companies or the Business.”
The Sellers also agreed to indemnify the Buyers in relation to any claim arising from any breach of a warranty given by them, and to indemnify the Buyers for all future liabilities of or claims against Earthpro or the business that related to the period prior to completion.
During the due diligence period and thereafter, Mr O’Brien would seek information from the Sellers or their accountant, Mr Ings, who was the Sellers’ agent and acting on their behalf. Mr Ings would provide information from time to time, including financial statements. He and the Buyers’ accountant, Mr Bristow, would discuss matters. One reason was to enable Mr Bristow to provide a due diligence report to the Buyers and to advise them. The Buyers and Mr Bristow relied upon the information they received from Mr Ings, including financial statements that were produced on the basis of Earthpro’s MYOB records.
The business had many contracts but also a number of problems. It was making losses. A substantial part of the heavy equipment was aged and required extensive maintenance. When it was not operational it had to be replaced by equipment on hire. The business had a number of customers and would perform work at different sites. In the nature of such a business, it incurred significant costs in performing work under large contracts, but had to await payment for the work that it had done. This entailed having surveys done of the work, generating draft claims, reviewing and revising the claims in consultation with the customer, submitting a formal Payment Claim which, if certified and approved by the customer, would then lead to the bookkeepers being asked to generate an invoice. There then would be a period until the invoice was paid. Because of this process, the business experienced cash flow problems and relied upon a bank overdraft which usually was in the vicinity of half-a-million dollars.
The business depended upon the continuation of work from established customers. One such major customer, Austral Bricks, told Mr O’Brien and Mr Perry in October 2015 that it was dissatisfied with Earthpro’s performance, made disparaging remarks about Mr Davis, and indicated that it was unlikely to renew its contract with Earthpro. The threatened loss of such a major customer of the business they hoped to acquire concerned Mr O’Brien and Mr Perry. They reported what they had been told to Mr Davis, and he took great exception. In fact, he told Mr O’Brien and Mr Perry “you fuckers can get out of my house”.
Relations between the Sellers and the Buyers were patched up to some extent, and on 13 October 2015, it was agreed that Mr O’Brien and Mr Perry would relinquish their operational roles in Earthpro and focus on the completion of due diligence with the aim of proposing a revised purchase price.
The Buyers had limited funds to contribute to any agreed purchase price. They required a large loan and dealt with Westpac through a mortgage broker and directly.
An important matter for the Buyers was the current assets to current liabilities ratio. The SSA provided for a ratio of 1.25. This was intended to give the Buyers a financial buffer and the cash surplus that was required to operate and improve the business. Mr O’Brien appreciated that unless the 1.25 ratio and other financial targets could be achieved, Westpac would not give final approval to the loan that was required to complete.
The matters that emerged during the due diligence led to the Sellers and the Buyers entering into amendments to the SSA. The first amendment was on 22 October 2015.
The Buyers were given financial statements for the years ended 30 June 2014 and 30 June 2015. However, they needed additional information and financial statements in connection with the period after 1 July 2015. The Sellers and the Buyers had a mutual interest in ensuring, if possible, that Westpac would approve the required loan. The parties’ accountants discussed the preparation of a Profit and Loss Statement for the period July to October (inclusive) of 2015. This led to certain adjustments being made, the details of which will need to be discussed in greater detail later in these reasons.
One important set of financial statements, a Profit and Loss Statement for that four‑month period, was prepared by Mr Ings on the morning of 3 November 2015. It was provided to the Buyers and their accountant. In reliance on the 3 November Profit and Loss Statement, Mr Bristow prepared a letter to Westpac for the purpose of obtaining finance. Westpac provided conditional approval for finance. One of the conditions required an amendment to the SSA to include a list of plant included in the sale. Westpac’s approval also was conditional on the Sellers providing a signed letter confirming that:
“(a) all statutory obligations for the two companies had been met and were in accordance with statutory requirements;
(b) all employee superannuation for the companies had been paid and was up to date;
(c) all other employee entitlements were paid for and up to date and provision had been made for any outstanding amount; and
(d) financial statements for the companies provided to Westpac and the buyers presented an accurate view of the companies’ financial position.” (Emphasis added)
The Sellers signed and provided such a letter on 23 November 2015.
Throughout this period Mr O’Brien remained concerned about the ratio of Earthpro’s current assets to its current liabilities, which the SSA required to be 1.25. The information that had been provided by Mr Ings indicated that the ratio was less than this.
On 22 November 2015, Mr O’Brien sent a letter to Mr Davis, summarising what they had discussed the previous day. The email relevantly stated that:
(a)the “October figures” for Earthpro showed its ratio of current assets to current liabilities was 1.16 and that there would need to be a cash input of $900,000 for it to achieve a 1.25 current ratio;
(b)further monies would be contributed to the company by the Sellers prior to settlement to pay the overdraft, pay the company’s bills to the end of November 2015, pay wages to the end of December 2015, and that some of those monies would be returned to the Sellers after completion, that money was “tied up in material that have been paid for by the business but cannot be claim (sic) for until installed”; and
(c)in order to facilitate the above, Earthpro’s trading figures until the end of November 2015 should be prepared as accurately as possible to capture all debtors, an accurate assessment of creditor invoices, work in progress and stock on hand.
On 23 November 2015 the Sellers signed and provided the letter that Westpac required. The Buyers contend that the letter that the Sellers provided to them in order to give to Westpac reiterated earlier representations that had been made to them, including representations appearing in statements in the SSA and representations conveyed by the 3 November Profit and Loss Statement.
On 23 November 2015, the parties again amended the SSA.
The parties also reached an agreement that 25 November 2015 would be the date to “cut off the books”. One factor that may have led to the adoption of that date was that Mr Ings was about to go on holiday. In any case, there was to be an effort to ensure that all of Earthpro’s suppliers submitted invoices to it on 26 November 2015, and Earthpro would invoice its customers for work that was able to be billed. Mr O’Brien attended to the process of billing work, ensuring that he had information from site superintendents and others to do so.
An email from Mr O’Brien at 7.32 am on 26 November to the Sellers, their accountant (Mr Ings), the Sellers’ office staff and others requested that all debtors and creditors up to and including 25 November be captured and accounted for. The email concluded that invoices for work done for Earthpro must be obtained.
As for Earthpro’s creditors, Mr Ings advised Mr O’Brien and others in an email at 8.54 am on 26 November 2015, that Earthpro had already captured “very close to 95 to 99% especially all of significance”. The Sellers were copied into Mr Ings’ email. At no stage did the Sellers dispute or qualify what Mr Ings said on their behalf. However, as became apparent to Mrs Davis that day, many of Earthpro’s creditors that had supplied goods or services to it over the previous month were not in a position to urgently deliver invoices. The bookkeeper, Ms Utz, was told this when she was chasing up invoices and reported this fact to Mrs Davis. Mrs Davis told her to not worry about it.
Importantly, the Sellers did not inform the Buyers that Mr Ings’ statement that very close to 95 to 99 per cent of creditors of significance had already been captured was inaccurate. It was only after settlement, that the Buyers learned that many invoices from Earthpro’s creditors for work done up to and including 25 November had not been sent and entered by the bookkeepers into the MYOB system by 26 November 2015.
The Sellers’ failure to disclose to the Buyers that many creditors had not sent invoices for November, as the Buyers had requested and expected, was important. An understatement of Earthpro’s creditors would mislead the Buyers as to Earthpro’s financial position, its profitability and the amount of the shortfall that existed between its current financial position and the 1.25 ratio that the SSA required. That condition was intended to provide the Buyers with essential cash to pay creditors of a loss-making business if and when the Buyers acquired Earthpro.
On 26 November 2015, Mr O’Brien proposed the following adjustments to the sale arrangements:
(a)Earthpro’s financial statements would be closed as at close of business on 25 November 2015;
(b)creditor invoices for services up to 25 November 2015 would be sourced from creditors and collated on 26 November 2015 to arrive at a net creditor sum for all services up to 25 November 2015;
(c)debtor invoices would be similarly collated;
(d)on the settlement date, the Sellers would pay the overdraft of $470,000 and provide the company with a sum for the company’s wages in December in the amount of $306,000;
(e)a loan which had been made by Mrs Davis to Earthpro would become a loan to the Buyers on the settlement date; and
(f)after settlement, the Buyers would return to the Sellers the balance of the total debtors receipted to Earthpro after the settlement day and return the agreed value of “the Seller’s Stock”, which was estimated at 25 November 2015 to be $350,000 but which could not yet be claimed by Earthpro under its contracts.
On 27 November 2015, Mr Ings emailed the Sellers, the Buyers and the Buyers’ accountant, Mr Bristow. He proposed a simpler way to address the issues that Mr O’Brien had raised about cash advances by the Buyers to pay wages and Mrs Davis’ $250,000 loan not being repaid to her. Mr Ings produced a handwritten balance sheet, supported by working papers, apparently created from Earthpro’s accounting records as at 25 November 2015. This document stated that it had total debtors of $2,089,167, current creditors of $2,003,803 and, therefore, a surplus of current assets over current liabilities of $85,364. Mr Ings proposed that:
(a)the price to purchase the shares in Earthpro under the SSA should be $3,500,000 on settlement and that the Sellers would lend $750,000 to Earthpro to clear the overdraft completely and provide cash flow;
(b)the $750,000 loan would be partly repaid by the sale of Earthpro’s stockpiles “as listed but not accounted for (German church rock, geo fabric etc etc approx. value $350,000)” and payment of the sum of $120,000, being the balance of Mrs Davis’ loan after accounting for invoice no. E.P.-01 dated 19 October 2015 issued by Lucy Contractors to Earthpro in the sum of $130,000 (plus GST);
(c)after the above repayments had been made, any outstanding balance of the $750,000 loan would be assigned to Earthpro’s new directors.
Mr Ings asked Earthpro’s solicitor to prepare a document to record these terms.
The Buyers contend that Mr Ings’ email of 27 November 2015, on behalf of the Sellers:
(a)represented that as at 25 November 2015, Earthpro’s current assets were $415,586.75 less than was necessary to sustain the Current Ratio Warranty;
(b)represented that the information recorded in the documentation provided with his email as to Earthpro’s financial position as at 25 November 2015 was true and accurate;
(c)reiterated “the 25 November Information Accuracy Representation”; and
(d)represented that on settlement of the SSA, the shortfall (ie, the $415,586.75) was the true sum required to be injected into Earthpro in order to achieve the Current Ratio Warranty and that the shortfall could be overcome by adopting the proposal set out in his email.
This last matter may be referred to as “the Shortfall Representation”.
On 9 December 2015, another deed was entered. In essence:
(a)the Sellers agreed to advance a ‘Settlement Loan’ of $750,000 to Earthpro, but also agreed to assign at settlement $400,000 of their entitlement to repayment of that loan to the incoming directors for a consideration of $1;
(b)the parties agreed that the balance of the Settlement Loan would be repaid by the proceeds of sale of certain ‘Stock’ identified in the Deed;
(c)Earthpro agreed to repay a loan advanced by Mrs Davis to it of $120,000 by four $30,000 instalments.
During this period the parties were negotiating a Sponsorship Agreement, whereby Earthpro would agree to sponsor Mr Davis’ motor racing activities. Historically, Earthpro had done so. He explained at the trial that Earthpro used to sponsor his “hobby” in the order of $100,000 per annum. The Buyers had no real interest in continuing to do so. However, in commercial terms, agreeing to sponsor Mr Davis’ motor racing activities was a means by which the Sellers could derive some additional financial benefit from the sale over a five-year period.
The amended SSA was due to complete on 23 December 2015. That day the Sellers and the Buyers entered into another agreement by way of a Deed of Variation. It deleted item G of Schedule 1 to the SSA (which warranted that at completion current assets were to be 1.25 times current liabilities) and amended the financing completion dates.
The SSA was completed at a settlement on 23 December 2015. However, no Sponsorship Agreement was signed that day or subsequently.
Early in 2016, the Buyers realised that Earthpro was in a very poor financial state. They were told that it did not have enough money to pay the wages that were due.
Work undertaken by the bookkeepers at Mr O’Brien’s request revealed a number of matters. Mr O’Brien thereby ascertained that a substantial number of invoices had not been got in on 26 November 2015, being the day after the agreed cut-off date. He also was told, for the first time, of employees’ entitlements and a process whereby employees could “bank wages”. This was an arrangement whereby, instead of being paid the money that they were owed at the end of a busy working week and taxed at a higher rate, employees could “bank” a certain number of hours in a handwritten wages book to later draw on when they had less work and needed the money they had earned. In other words, this was a wages liability that had not been disclosed before the settlement.
The Buyers also came to learn that, contrary to representations about Earthpro not having any long leave or annual leave entitlements because its employees were on an Enterprise Bargaining Agreement, there were such entitlements.
Confronted with this kind of news, the Buyers refused to pay further moneys that were to be paid under the SSA. They also refused to allow a $200,000 retention sum to be released to the Sellers.
In 2016 the Sellers sued Earthpro and the Buyers for various sums that they claimed were owed to them under the amended SSA. Earthpro and the Buyers defended the action and counterclaimed:
(a)over conduct, consisting of the making of representations and failures to disclose, that they allege was likely to mislead or deceive and in fact misled them;
(b)for alleged breaches of warranty including for providing and not correcting false information;
(c)for declarations that they are entitled to be indemnified in respect of liabilities that were visited upon them as a result of breaches of warranty.
The proceeding did not progress rapidly to trial. A mediation in 2019 did not resolve it. It was placed on the Commercial List in February 2023 and set down for trial. Lay evidence was heard on five days, and expert evidence about the value of plant and equipment and the value of the shares at completion in December 2015 was heard on another day.
The forensic accountants agree that the business was a loss-making enterprise. Its future maintainable earnings were so low that the value of the business (goodwill) did not exceed the net value of the assets required to operate the business.
The Buyers say that if they had not been misled by the Sellers and, instead, had been given an accurate account of Earthpro’s financial position, they would not have continued with the purchase of the shares and settled the transaction in December 2015. They seek as compensation the difference between what they paid and the value of the shares. The value of the shares is principally the net value of the plant and equipment at the date of settlement.
The general issues arising from the Buyers’ claim
The issues are formally defined by the lengthy pleadings, including amendments made by the Sellers by leave during the trial. Counsel for the parties, who were engaged only shortly before the trial, prepared the matter for trial and conducted the trial with great skill and efficiency. Before final submissions, at my request, they produced an Agreed List of Issues in Dispute (Exhibit 46).
The pleaded representations in the counterclaim that are described as “the Operative Representations” are the making of what are defined in the pleading as:
(a)the Schedule 1 Representation;
(b)the 3 November Representation;
(c)the Westpac Information Representation;
(d)the 25 November Information Accuracy Representation;
(e)the 27 November Representation;
(f)the Shortfall Representation; and
(g)the Employee Entitlement Representation,
(together “the Operative Representations”).
Broadly speaking, the issues arising from the Buyers’ claim include:
(a)Were the pleaded representations made?
(b)Was the conduct of the Sellers, including their agent, Mr Ings, likely to mislead? That conduct includes the making of representations and non‑disclosure of matters that the Sellers were obliged to disclose in circumstances that included the disclosure obligations in the SSA.
(c)An associated issue on the breach of warranty claim is whether a variety of representations as to the financial position of Earthpro were inaccurate at the time they were made or at the date of settlement and thereby breached express warranties in the SSA.
A significant issue is the Buyers’ reliance on the Operative Representations, both individually and collectively. The reliance issue is associated with a causation issue, namely whether in the absence of misleading conduct the transaction would not have been completed and the Buyers would not have suffered the large loss associated with buying shares in a loss-making business that was worth far less than what they agreed to pay.
The Sellers contend that the amount the Buyers may recover should be reduced under s 137B of the Competition and Consumer Act 2010 (Cth) on account of the Buyers’ “failure to take reasonable care” within the meaning of that section.
The quantification of the Buyers’ claim for compensation for contravention of the Australian Consumer Law centres on:
(a)the value of the plant and equipment as at 23 December 2015;
(b)the value of certain stock and work in progress as at that date; and
(c)accounting for Earthpro’s liabilities as at that date.
The general issues arising from the Sellers’ claim
The general issues arising from the Sellers’ claim include:
(a)whether a loan of $250,000 to Earthpro from Mrs Davis remains owing or whether it was reduced to $120,000 by the 9 December 2015 Deed or on account of dealings by which Mr Lucy of Lucaton Pty Ltd was prepared to compromise claims against Earthpro by a promise to accept $130,000;
(b)whether the Settlement Loan of $750,000 by the Sellers to Earthpro was reduced to $350,000 by the assignment at completion of $400,000 to Earthpro’s new directors because the $1.00 to be paid in respect of the agreed assignment was paid at completion, or the Sellers waived payment of the $1.00 or are estopped from denying that they received the $1.00 consideration;
(c)the $350,000 “Stock Loan Portion” of the Settlement Loan that was to be repaid from the proceeds of sale of “Stock”, including whether the relevant stock existed and had been paid for by Earthpro so as to comprise “Stock” as defined in the 9 December 2015 Deed, whether the stock has subsequently been utilised or sold by Earthpro, and the amount of those proceeds;
(d)whether a binding oral agreement was reached by which Earthpro would sponsor the Sellers’ motor racing activities, or whether the defendants are estopped from denying its existence;
(e)whether works performed by Earthpro in December 2015 and January 2016 for the Sellers were performed pursuant to the Sponsorship Agreement, and, if not, whether Earthpro can claim for the value of those works and for damage done to its plant and equipment in performing those works.
Depending on the resolution of the parties’ competing claims, issues of set-off may arise. Any offsetting of amounts will determine the appropriate order as to a retention amount of $200,000 that was paid into court.
Overview of the Buyers’ case about misleading conduct and inaccurate financial information
The focus of the Buyers’ case is the financial performance of Earthpro for the four‑month period from 1 July to 31 October 2015. A centrepiece of their pleaded case are differences between MYOB records that were produced and shown to them in the course of their discussions and due diligence prior to completion on 23 December 2015, and “old MYOB” records that were located by them on Earthpro’s system after completion.
Paragraph 61A of their pleading alleges that subsequent to completion they discovered that Earthpro’s records had been altered such that they did not reflect its true financial performance over the critical four-month period. They plead:
“(a) the Company’s total income for the 4 Month Period was $3,450,419.65 (rather than $3,958,822.65);
(b) the Company’s Direct Job Costs for the 4 Month Period were $2,232,197.76 (rather than $1,705,028.72);
(c) the Company’s Fuel Usage costs for the 4 Month Period were $391,577.70 (rather than $253,261.92);
(d) the Company’s Total Cost of Sales for the 4 Month Period were $2,623,775.46 (rather than $1,613,824.14);
(e) the Company’s Gross Profit for the 4 Month Period was $826,644.19 (rather than $2,000,232.01, excluding Work in Progress / Stock on Hand);
…
(j) the Company’s Nett Profit (Loss) for the 4 Month Period was:
(i) ($1,452,372.23) (rather than ($273,796.82), excluding Work in Progress / Stock on Hand);
(ii) $1,178,575.40 less (or worse) than had been articulated in the 3 November Profit and Loss Statement.”
They plead that these matters were not recorded in any documents about Earthpro that were provided to them prior to completion or otherwise made known to them. In addition to being part of its misleading conduct case, the Buyers say that the Sellers thereby breached the conditions and warranties given in the SSA including the items I have quoted in [9] and [10] above.
The Buyers are entitled to rely on the cumulative effect of “the Operative Representations” which, in the context of non-disclosure of information the Sellers were obliged to disclose, is alleged to be conduct that was likely to mislead and in fact misled the Buyers. It remains, however, necessary to consider each component of the conduct, and to consider the relevant representations and whether they continued to be relied upon by the Buyers up to and including the completion date.
Therefore the “helicopter view” presented by paragraph 61A of the Buyers’ pleading does not provide a basis to analyse the Operative Representations, representation by representation, and their individual and cumulative effect over a period of months in late 2015 as financial information evolved.
This case differs from a simple case of alleged misleading conduct by a seller that induces a buyer to purchase a business or the shares in a company that conducts a business. The paradigm case is one for the sale of a business where a false representation is made about a matter such as the revenue or profitability of the business. A false or misleading representation, either oral or in writing, about such a fact induces the buyer to enter the contract and the buyer remains misled until completion.
Here, by contrast, one has a contract that itself is said to have conveyed certain representations (“the Schedule 1 Representation”) followed by a number of post‑contractual representations that are alleged to have been relied upon where, if the truth had been disclosed, the Buyer would not have proceeded with the contract and, instead, terminated it. The contractual context is important. The express warranties about providing accurate information and disclosing material information reinforces what otherwise would be a reasonable expectation that previously disclosed financial information or representations that became inaccurate would be corrected. It was not a case of caveat emptor in the context of a contract that imposed no disclosure obligations.
General principles about misleading or deceptive conduct
Counsel for the Sellers helpfully and correctly submit that the question of whether conduct is misleading or deceptive or likely to mislead or deceive is determined by looking at the relevant course of conduct as a whole in the light of the surrounding facts and circumstances.[1]
[1]Campbell v Backoffice Investments (2009) 238 CLR 304 at 341 [102].
Contravention of the statutory prohibition requires proof that the relevant conduct is misleading or deceptive or likely to mislead or deceive. Whether conduct is misleading or likely to mislead is an objective question. A person may be misled by information or a document that is neither misleading nor likely to mislead: for example, if they do not read something or misinterpret what is said or written. That would not involve misleading conduct by the defendant.
If, however, a contravention is proven because conduct is likely to mislead, the contravention will not be productive of loss if the claimant is not misled or, having been misled, ascertains the truth before it is too late and ceases to be misled before loss is suffered.
A claimant who is misled by conduct that is misleading or likely to mislead does not cease to have a claim simply because it would not have been misled if something more had been done, such as making further inquiries or analysing information that was in its possession. In some cases, an egregious failure by a claimant to make inquiries or take steps that easily would have revealed the misleading nature of a representation may be relevant to a causation issue. However, the starting point is that misleading conduct does not cease to be misleading and to cause loss because of an unreasonable failure by a claimant to make inquiries or take steps that would have resulted in it not being misled. A failure to take reasonable care may be relevant to a reduction in compensation under s 137B of the Competition and Consumer Act.
These general principles fall to be applied in considering submissions by the Sellers that the Buyers were not misled because Mr O’Brien was in control of Earthpro’s finances or because, if he had looked closer at certain documents and annexures, he would have realised certain things, for instance, about the accounts that were payable at a certain date and that the MYOB records did not capture all of the invoices that he had been assured would be received from suppliers by 26 November 2015.
It will be necessary to consider these principles and the parties’ submissions in the context of specific representations. An example is the 3 November Representation which arose from a Profit and Loss Statement for the four months ending October 2015 that Mr Ings produced and sent that day on behalf of the Sellers. The Sellers say that it was accurate at the time it was produced. It did not, however, include invoices for the relevant financial period that were dated October 2015 and totalled $571,967.04 (excluding GST), but that were only received after 3 November. An issue to be addressed is whether “the Missing October Invoices” should have been apparent to Mr O’Brien because of an Aged Payables report that he received at around the same time. Another issue is whether, having supplied a purported Profit and Loss Statement on 3 November that did not include the Missing October Invoices, the Sellers and their agent, Mr Ings, should have disclosed at some stage that it was not an accurate report of Earthpro’s financial affairs for the relevant period because of the omission of many October creditors.
This overview explains the necessity to consider each of the alleged Operative Representations in turn before considering whether individually and collectively they entailed conduct that was likely to mislead and that it in fact misled in the evolving circumstances that led up to completion on 23 December 2015.
The division of responsibility for the management of the business
The parties identify this as the first issue in their list of issues. I already have summarised the evidence.
After the employment of the general manager, Mr Hegan, was terminated in mid‑August 2015, Mr O’Brien took over the responsibilities of general manager. In Mrs Davis’ words, Mr O’Brien and Mr Perry were “running all the jobs” but they were not “dealing with the finances” of the business. She and Mr Ings were.
In their capacity as prospective buyers, Mr O’Brien and Mr Perry could ask Mrs Davis or Mr Ings for financial information, including MYOB reports on profit and loss and balance sheets, and they did so. Neither of them, nor their accountant, Mr Bristow, had direct access to the MYOB system.
The bookkeepers in the business regarded Mrs Davis as their boss. Mrs Davis would verify invoices received from suppliers against dockets and, based on a printed list, direct which invoices to pay.
Mr O’Brien controlled the management of contracts that were being performed and projects, particularly when Mr and Mrs Davis went away on motor racing events. He was not, however, in full control of the business. I accept his evidence on that point and on how the day-to-day operations of the business were conducted between mid‑August 2015 and the completion of the contract.
Mr O’Brien’s day-to-day role as general manager in running projects during this period did not give him or Mr Perry a detailed understanding of the financial affairs of the business. Mr O’Brien relied on Mrs Davis and Mr Ings to manage the financial affairs of the business, including cash flows, the payment of invoices and financial reporting. Mr O’Brien’s day-to-day management of existing contracts and projects did not enable him to form a reliable opinion about the company’s finances. For example, it was only in early 2016 and after the Buyers completed the purchase that they discovered that Earthpro had previously overcharged for work on the Birkdale project, with the result that in 2016 Earthpro could not charge at the contract rates and suffered losses on that project.
Despite giving control of the day-to-day operation of projects to Mr O’Brien and Mr Perry after August 2015, Mr Davis was silently resentful of a perceived lack of consultation on decisions about ordering materials and plant and employing staff. I am reluctant to rely on entries in Mr Davis’ diary, many of which I strongly suspect were written in early 2016, long after the relevant dates, and after the parties fell into dispute. If, however, the diary and Mr Davis’ evidence are to be believed, he resented Mr O’Brien running the business “as if he is the director of Earthpro” (11 November 2015 diary entry) and not paying Mr Davis the respect he thought he deserved on the occasions that Mr Davis would come into the office. This resentment seems to have been concealed from Mr O’Brien and Mr Perry. Perhaps they resented Mr Davis leaving them to operate the business without being paid for their work, while he pursued his motor racing and other interests. In any event, they did not consult Mr Davis on all operational decisions or acknowledge in front of others his position as owner and director as much as he would have liked.
For his part, Mr Davis justified in his mind not paying Mr O’Brien and Mr Perry for their day-to-day work because they were there as prospective owners and were buying the business for less than Mr Davis wanted or thought it was worth.
According to Mr Davis’ diary, he thought that Mr O’Brien and Mr Perry were “con‑men”. He was upset that the sale process was dragging on.
I did not find Mr Davis to be a reliable witness. I regard his diary as a generally unreliable record on contentious matters. For example, the diary frequently records his upset at Mr O’Brien and Mr Perry, but contains not a single word about his disappointment when a long-time business associate, Mr Lucy, suddenly presented Earthpro with a bill for more than $700,000 for 10 years’ work. The evidence Mr Davis gave under cross-examination and the way certain entries are written lead me to suspect that many entries about the Buyers were written long after the events. To the extent the diary records private thoughts, Mr Davis largely kept to himself his resentments about the role that Mr O’Brien and Mr Perry played in the business and his views about them.
In summary, I decline to find that Mr O’Brien was in control of the financial performance of Earthpro between mid-August 2015 and completion on 23 December 2015. He performed the role of general manager, managed the performance of contracts, and made management decisions. He was not in control of Earthpro’s finances, for example, in directing whether and when invoices should be paid. Mrs Davis supervised the bookkeepers in that regard and more generally. During this period, the Buyers could request financial information from the Sellers or Mr Ings on the Sellers’ behalf, and did so.
The Schedule 1 Representations
The Buyers plead that, by executing the SSA, the Sellers represented to them that each of the warranties set out in Annexure A to their pleading “was, and would be upon completion of the Share Sale Agreement, true in fact”. These are defined as the “Schedule 1 Representations”.
The Annexure is lengthy and picks up numerous warranties including the ones I have quoted in [10] above. Clause 8.10 of the SSA stated:
“The Sellers warrant to the Buyer that at the date of this document and at Completion, each of the statements listed at Schedule 1 are true and correct.”
The Buyers submit that the representations were false and the Sellers had no reasonable basis for making them. This is said to be obvious from the fact that the financial records were altered by the Sellers in the respects alleged in paragraph 61A.
I accept that by executing the SSA the Sellers made the Schedule 1 Representations. There is nothing novel about the proposition that in certain contexts contractual terms may convey representations.[2]
[2]Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304 at 322 [35].
The difficulty with this part of the misleading conduct case and its counterpart breach of warranty case is that the Schedule 1 Representations address matters of fact as at the date the SSA was made and future matters, including the state of Earthpro’s financial affairs up to the date of completion and the future provision of information over the period up to completion. They cover a diversity of matters.
The mere fact that from time to time financial statements were updated or amended in the light of additional information (such as the arrival of further invoices) or decisions about how certain items, such as work in progress or stock, should be recorded does not necessarily mean that the financial statements were inaccurate at the time they appeared.
Depending upon a specific context, the fact that financial statements are altered does not mean that the Sellers did not have a reasonable basis for making the representations at the time the statements were produced.
The Sellers reasonably relied on Mr Ings and their bookkeepers to maintain the financial records and to produce financial reports from time to time.
The accuracy or otherwise of financial statements and information disclosed by the Sellers or their agent, Mr Ings, to the Buyers or their agent, Mr Bristow, is best assessed in a factually specific context. This will focus on matters such as the accuracy or otherwise of:
(a)the 3 November Representation and the omission of “the Missing October Invoices” totalling $571,967 that rendered a profit and loss statement sent by Mr Ings an inaccurate statement of the business’ creditors and financial affairs;
(b)representations in late November about the state of the accounts, the getting in of “95 to 99%” of invoices by the cut-off date, and the “additional November Invoices” totalling $427,514; and
(c)the 27 November Representations conveyed by Mr Ings’ email and balance sheet and the extent of the shortfall that the Sellers would be required to contribute at completion for the sale transaction to achieve the commercial result required by the Buyers in terms of funds to pay bills and sustain the company’s operation.
The 3 November Representation
On 3 November 2015 Mr Ings, on behalf of the Sellers, sent a Profit and Loss Statement for the four-month period from July to October 2015 and a Balance Sheet of the assets and liabilities of Earthpro as at 31 October 2015 to Mr O’Brien and Mr Bristow. These financial reports were relied upon by Mr Bristow to prepare a letter from the Buyers to Westpac in support of their seeking finance to complete the SSA. The Buyers submit that in sending the 3 November Profit and Loss Statement the Sellers represented that each of the figures in it was accurate. According to the Buyers, they were not accurate, since Earthpro’s records were subsequently altered, such that the net profit for the period from July to October 2015 reduced by about $1.5 million. A related aspect of the Buyers’ case consists of the failure of the Sellers to make these alterations known to the Buyers prior to completion.
Background to the 3 November Representation
When providing the “September 2015 quarter numbers” in an email dated 26 October 2015, Mr Ings advised that “the figures are pretty ugly due to the $501k we moved back into June to make the bank happy at that date”. This referred to an earlier occasion when invoices for work done in June 2015 that should have been included in the July figures as an invoice issued that month were moved back to June 2015 by Mr Ings. That improved Earthpro’s accounts for the financial year ended 30 June 2015 but had a corresponding adverse effect on its September quarter figures.
Having received Mr Ings’ advice about the September quarter figures, Mr O’Brien sought figures for the four-month period to the end of October 2015. He anticipated that there would be significant income in October 2015. On 30 October 2015, he advised that there was a delay with “the numbers up until October 2015” and acknowledged that this would cause a delay in the “banks’ (sic) answer until Tuesday”.
On 2 November 2015, Mr Ings emailed Mr O’Brien a profit and loss statement from Earthpro’s management accounts for the four-month period 1 July 2015 to 31 October 2015 and Mr O’Brien forwarded the document to Mr Bristow. It reported that for the four months Earthpro’s:
(a)total income was $3,958,522.65;
(b)Direct Job Costs were $1,643,356.39;
(c)Fuel Usage costs were $285,782.17;
(d)Total Cost of Sales were $1,929,138.56;
(e)Gross profit was $2,029,384.09;
(f)Total Non-Direct and Overhead Costs were $2,195,692.77;
(g)Operating Profit (Loss) was ($166,308.68);
(h)other income was ($3,357.36);
(i)Total Other Expenses were $76,134.45;
(j)Earthpro’s Net Profit (Loss) was ($245,800.49).
The next day, 3 November 2015, Mr Bristow emailed Mr Ings asking him to make adjustments to the profit and loss statement received the previous day, “for $400k approx. for Stock / WIP”. Mr Ings responded the same day by providing an adjusted profit and loss statement for the four-month period to Mr O’Brien and Mr Bristow.
The revised profit and loss statement derived from the MYOB management accounts for the same four-month period reported that Earthpro’s:
(a)total income was $3,958,522.65;
(b)Direct Job Costs were $1,705,028.72;
(c)Fuel Usage costs were $253,261.92;
(d)Work In Progress / Stock on Hand was valued, as a cost of sales, as ($344,466.50);
(e)Total Cost of Sales were $1,613,824.14;
(f)Gross profit was $2,344,698.51;
(g)Total Non-Direct and Overhead Costs were $2,194,537.03;
(h)Operating Profit (Loss) was $150,161.49;
(i)other income was ($3,357.36);
(j)Total Other Expenses were $76,134.45;
(k)Net Profit (Loss) was $70,669.68.
The Buyers’ case about the 3 November Representation
As noted, a key part of the Buyers’ case is that only after completion did they locate other MYOB records that are said to have shown Earthpro’s true financial performance and showed that Earthpro’s net profit (loss) for the four-month period was much worse than had been represented in the 3 November Profit and Loss Statement.
The Buyers’ case about the 3 November Representation has two elements. First, the subsequent alteration of certain figures is said to show that certain figures in the 3 November Profit and Loss Statement were inaccurate and misleading. Second, the Sellers and their agent, Mr Ings, did not disclose that the alterations had been made and this misled the Buyers into thinking that the figures in the 3 November Profit and Loss Statement remained accurate.
The Buyers contend that they and Mr Bristow relied on the figures in that statement in deciding to proceed with the transaction. Mr Bristow explained this was “special purpose” information provided by one CPA to another CPA for a particular purpose and it was used by him to assess whether the Buyers should proceed with the transaction. I accept his evidence and find that the financial statements were presented on 3 November 2015 in circumstances where they would be relied on and that Mr Ings would have expected them to be relied on by the Buyers.
Mr Bristow’s evidence was that if some supplier invoices for October had yet to arrive, then the report would be wrong about Earthpro’s profit or loss, that he should have been told this and told once the invoices arrived about its true profit or loss.
The 3 November Profit and Loss Statement was not just a simple extract from MYOB at that particular date used for internal purposes. It was, as Mr Bristow said, a document produced for a “business sale transaction”. It was given by the Sellers’ CPA to the Buyers’ CPA. Its figures were not stated to be subject to a qualification about further October invoices that were pending or expected.
In the context in which it was given, including the conditions in the SSA about the accuracy of financial statements and disclosure of material information, the provision of the 3 November Profit and Loss Statement represented to the Buyers and their agent that the figures in it were accurate. If the figures were not accurate and required adjustment because additional creditors needed to be included for the reporting periods, then this should have been disclosed to the Buyers or their agent.
Three substantial alterations to the 3 November Profit and Loss Statement
Three alterations are the focus of submissions. They are helpfully summarised in the Sellers’ submissions, which I will adopt with minor modifications in the next six paragraphs.
First, two draft invoices were entered by an Earthpro bookkeeper, Ms Utz, with a transaction date of 30 October 2015 and an aggregate value of $540,500 (excluding GST). However, the draft invoices were later deleted or edited by Ms Utz before she entered the finalised invoices into the accounts.
The final invoices were entered into the management accounts with a transaction date in November 2015. The effect was to reduce the income recorded in the accounts for the period ended 31 October 2015, but to increase the income recorded for November 2015. The net profit for the period ended 31 October 2015 thus reduced by $540,500 (excluding GST).
Second, Mr Ings entered a series of transactions into MYOB to capitalise certain expenses of Earthpro as stock (in the aggregate sum of $442,896.75) as at 31 October 2015.
He later deleted those transactions in early November 2015, because “it was a single‑purpose entry” as Earthpro had not previously accounted for stock, and because “[i]f it were left in there, it wouldn’t roll forward properly, so it was taken back out because it was put in for the purpose of that 30 October figures only”.
The effect of deleting the transactions was to increase the level of expenses recorded in the accounts for the period ended 31 October 2015, and thereby to decrease the net profit by $442,896.75 (excluding GST).
Third, many supplier invoices were received after 3 November 2015, that were dated and entered into the accounts with a transaction date in October 2015, with an aggregate value of $571,967.04 (excluding GST).
The effect of the entry of the Missing October Invoices was to further increase expenses, and to reduce the net profit for the period ended October 2015 by $571,967.04.
In summary: the three alterations concern (a) two draft invoices; (b) the capitalisation of certain expenses as stock; and (c) what are described in the submissions as “the Missing October Invoices”.
The draft invoices
I conclude that the treatment of the draft invoices was not misleading and did not in fact mislead the Buyers. The inclusion of the amounts stated in draft invoices (which had yet to be finalised and sent to the customer) was known about and approved by Mr O’Brien and Mr Bristow. The work had been done in October, and estimates were made about its costing.
Mr O’Brien also accepted in his evidence that he was aware of the inclusion of the draft invoices and the stock in the 3 November Profit and Loss Statement.
As to the draft invoices, Mr O’Brien agreed that he wanted the claims for the October work to be included in the accounts so that the figures could look the best they reasonably could. He approved the two draft invoices dated 30 October 2015, and was aware that the final invoices would go into the accounts as at the date they were issued which would obviate the previous accounting for work in progress. In the case of the Birkdale work for the Redland City Council, Mr O’Brien became aware that the draft invoice was not accurate. The invoice ultimately issued in November was for a materially lower amount of $374,863.96, as compared to the draft invoice for $550,000.
Mr Bristow’s evidence was that the work that was to be invoiced should have been accounted for as work in progress (as opposed to revenue), but he acknowledged that the effect of doing it correctly would have been identical to what was in fact reported in the 3 November Profit and Loss Statement.
The capitalisation of certain expenses as stock
Further drafts of the Sponsorship Agreement were communicated between the parties.
On 16 December 2015, Mr Davis emailed Mr O’Brien as follows:
“Can you please finalise the Sponsorship, road reconstruction, surfacing and building a shed for the new residence as per our agreement dated 4th October 2015 by this Thursday 17th Dec 2015. This will give us some time to read and sign it off before settlement day.”
On 17 December 2015 there were further email exchanges about revised drafts of the Sponsorship Agreement.
The settlement was fixed for 23 December 2015. On the afternoon of 22 December 2015, the Sellers’ solicitor, Ms Tonkin, emailed the Buyers’ solicitor, Mr Ellwood, and stated:
“We understand that the parties have agreed to enter into a Sponsorship Agreement and that this document will need to be signed before completion tomorrow. We understand our clients will liaise directly with each other in relation to this.”
On 23 December 2015:
(a)at 9.55 am Mr Davis emailed Mr O’Brien a further draft of the Sponsorship Agreement;
(b)at 12.45 pm, Mr O’Brien emailed Mr Ings, marked for the attention of the Sellers’ solicitors, specifying several amendments to the draft Sponsorship Agreement; and
(c)at 2.21 pm, Mr Davis emailed Mr O’Brien, in substance accepting those amendments.
Mr Davis’ email of 2.21 pm was responsive to the few points that Mr O’Brien had raised in his email at 12.45 pm. Mr Davis responded:
“1. Ok to remove the obligations that Earthpro will be engaging the contractors and the reference to quality.
2. 90 days. We are OK to remove but please insert that Earthpro Pty Ltd must pay the invoices for the constructions works within 30 days of myself and Colleen invoicing Earthpro Pty Ltd for this cost.
3. Ok noted we will ensure we arrange public liability insurance.
4. We are ok with clause 6.1 being included. We had requested clause 6.4 and 6.5 to be removed as we were unsure why this was necessary. Include if you require.
Please amend the agreement as above and sign a copy (email a copy to us) so that this can be given to us before 2:45pm today.”
Evidence was given about events on 23 December 2015. It is unnecessary to recite them in full detail because the contemporaneous file notes of Ms Tonkin are a reliable record of them. It is, however, necessary to set the scene because it bears upon the Sellers’ argument that there was a concluded oral agreement reached that day or that, alternatively, the Buyers are estopped from denying its existence.
The parties themselves did not attend the settlement conference. Mr and Mrs Davis came into the city and their solicitor, Ms Tonkin, and Mr Ings attended on their behalf. Mr O’Brien did not personally attend the settlement conference. His solicitor, Mr Ellwood, did.
Ms Tonkin made handwritten notes and also dictated a file note around 3 pm, shortly after the settlement. I regard these notes as an accurate account of the events. The file note records in relation to the Sponsorship Agreement that she asked Mr Ellwood to clarify with Mr O’Brien whether the agreement was signed. Mr Ellwood called Mr O’Brien in Ms Tonkin’s presence and asked him if he had signed. Mr O’Brien said he had not yet seen Mr Davis’ further email. At that point Ms Tonkin handed Mr Ellwood her notes of what that email consisted of and asked Mr Ellwood to confirm with Mr O’Brien whether it would be signed. Mr Ellwood obtained instructions and confirmed to Ms Tonkin that his client would sign the Sponsorship Agreement that afternoon. The four points that Ms Ellwood raised are in a handwritten note. They reflect the four points made in Mr Davis’ email.
The evidence of Mr Davis, Mrs Davis and Mr Ings was to the effect that during the conference Mr Ings telephoned Mr Davis and informed him that Mr O’Brien had not yet signed the Sponsorship Agreement, but that Ms Tonkin had been informed that it would be signed later that day. Mr Ings asked Mr Davis whether they should proceed to completion of the SSA on that basis, and Mr Davis instructed that they should. Mr Ings relayed that instruction to Ms Tonkin. The settlement subsequently occurred.
Mr O’Brien gave evidence about the settlement and had an imperfect recollection of the conversation.
In summary, the Sellers were assured by the representation conveyed to them that an agreement reflecting the points noted in Mr Davis’ email would be signed by the Buyers that afternoon. They proceeded to completion without insisting upon a signed copy of the Sponsorship Agreement. The Buyers knew or ought to have known that the representation about the Sponsorship Agreement being signed that afternoon would induce the Sellers to proceed to completion of the SSA without insisting upon the Sponsorship Agreement being signed.
The Sellers’ case is that there was a concluded oral Sponsorship Agreement constituted by offer and acceptance communicated between the parties’ solicitors at the settlement conference. The matter is determined according to whether the conduct evinces an objective intention to be bound. In final submissions the issue turned upon what has been described as whether the oral agreement reached at the settlement conference falls within the first category of agreement referred to in Masters v Cameron.[65] This is that the parties reached an agreement about the final terms, intended to be immediately bound by those terms, but also intended for those terms to be set out in a formal document at a later date.
[65](1954) 91 CLR 353.
In my view, there was such a concluded oral agreement. This conclusion is fortified by the fact that this is not a case in which one is concerned simply with a conversation. The conversations on 23 December 2015 occurred in the context of exchanges of draft agreements and conversations that related to the contents of the latest email.
On an objective analysis, there was an offer to proceed to settlement on the basis that the Buyers would sign the sponsorship agreement later that afternoon. That offer was accepted on behalf of the Buyers by Mr Ellwood.
The Buyers submit that I should not find that the parties entered into an oral agreement because, as matters transpired, negotiations about the sponsorship agreement continued after 23 December 2015, and no written agreement was signed or concluded. However, the fact that Mr O’Brien sought to introduce or amend the terms that had been discussed and subsequent email communications do not mean that there was no oral agreement. It means that Mr O’Brien was attempting to vary that agreement.
Likewise, the fact that at 12.21 pm on 23 December 2015, Mr O’Brien had not received a tracked version does not affect the conclusion that, objectively speaking, there was an agreement.
If I am wrong in that conclusion, then there was an estoppel. The Buyers made a representation upon which the Sellers relied, to their detriment. In the circumstances, it would be unconscionable to allow the Buyers to resile from that representation.
The representation by Mr Ellwood that the Buyers would sign the Sponsorship Agreement later that afternoon, based on the current draft and the four points recorded in Ms Tonkin’s note, was clear and unequivocal.
The Sellers clearly relied on that representation in instructing their solicitor to complete the SSA without requiring a signed copy of the Sponsorship Agreement. It was reasonable for the Sellers to do so in circumstances in which the matter was the subject of some degree of formality in discussions between their respective solicitors. The value of the Sponsorship Agreement was significant. In all the circumstances, including the hard bargaining that had preceded the settlement date, I conclude that if the representation had not been made then the Sellers would not have completed the SSA transaction without requiring the Sponsorship Agreement to be signed.
As noted, the Buyers knew or ought to have known of the reliance on their solicitors’ representation which immediately followed the instructions that Mr O’Brien had given. Mr O’Brien knew that the settlement of the SSA was in progress.
In relying on Mr Ellwood’s representation on behalf of the Buyers, the Sellers acted to their detriment. As I earlier found, they would not have instructed Ms Tonkin, via Mr Ings, to proceed with completion if their representation had not been made. As a result, they suffered a material disadvantage. They settled without the benefit of a signed agreement that promised them sponsorship fees totalling $350,000.
In all the circumstances, it would be unconscionable to allow the Buyers to resile from the representation that the Sponsorship Agreement was to be signed that afternoon. In short, the Buyers are estopped from denying the existence of the Sponsorship Agreement that was orally agreed between the parties at completion.
The remedies in relation to the oral Sponsorship Agreement or an estoppel are essentially the same. The Buyers are bound to perform the agreement reflected in the final draft agreement, as clarified according to Ms Tonkin’s file note which reflected Mr Davis’ 2.21 pm email.
In essence, the Buyers agreed to complete works at Wuduru Road up to a maximum amount of $100,000. They also were to make five annual payments totalling $250,000.
As for the Wuduru Road works, between 28 December 2015 and 13 January 2016, Earthpro supplied earthmoving machinery, quarry materials and labour at that address. Mr Perry gave evidence confirming the value of the work that was done, or the costs to Earthpro in supplying the equipment. This was reflected in the summary of expenses that became Exhibit 35. The amount totals $50,848 and includes spare parts costs to repair machinery that was returned by Mr Davis in a damaged state and was unavailable to be put to use by Earthpro. The balance of the $100,000 maximum is $49,152 and this constitutes part of the damages for breach of the Sponsorship Agreement.
The balance of the moneys payable under the Sponsorship Agreement totalling $250,000 were not paid. The damages for Earthpro’s breach of the Sponsorship Agreement therefore total $299,152.
The Sellers’ damages claim for breach of the Sponsorship Agreement
The Sponsorship Agreement was a separate legal agreement to the SSA. However, the two agreements were connected. The commercial imperative for the Buyers to agree that Earthpro would pay the Sellers $350,000 under a Sponsorship Agreement was not for Earthpro to obtain marketing or exposure contemplated by the Sponsorship Agreement. It was to provide the Sellers with additional amounts in respect of the sale of their shares in Earthpro, in circumstances in which the Buyers could not offer to increase the purchase price under the SSA and therefore to increase the amount that they would be required to pay at settlement.
The Buyers’ pleading alleges that any oral Sponsorship Agreement (the existence of which they denied) formed part of, or were ancillary to, the sale of the shares as contemplated under the SSA. They did not allege in their counterclaim that any oral Sponsorship Agreement would not have been entered into but for the misleading conduct that they allege in their counterclaim and which I have found. The fact remains, however, that the oral Sponsorship Agreement was collateral to the SSA and if the SSA had been terminated or not proceeded to completion, no Sponsorship Agreement would have been entered into by Earthpro. There would not have been a settlement on 23 December 2015 or on any other day.
The compensation that the Buyers seek in relation to misleading and deceptive conduct is the loss that they suffered in acquiring shares in Earthpro that day. Seemingly, the Buyers do not seek to include as part of their compensation claim (even if this was legally possible) a loss they suffered because Earthpro assumed a liability to pay $350,000 under the Sponsorship Agreement. Earthpro seemingly does not seek compensation in respect of the same liabilities on the arguable basis that because of the Sellers’ misleading conduct it suffered a loss of $350,000 by its anticipated directors agreeing that it would enter into the Sponsorship Agreement with the Sellers. The Buyers do not plead or submit that Earthpro’s value at completion was diminished by $350,000 on account of its entry at completion into the Sponsorship Agreement, and therefore the value of the shares they acquired was reduced by a further $350,000. They do not appear to seek an order setting aside the oral Sponsorship Agreement as a remedy for the misleading conduct that I have found.
The situation, then, would appear to be that the Sellers are entitled to damages in the amount I have assessed against Earthpro for breach of the Sponsorship Agreement.
The retention moneys
An amount of $200,000 was retained at settlement, and was later paid into Court.
The parties accept that orders in relation to the payment out of that sum depend upon the disposition of the claims, which I have now determined.
Judgment and forms of orders
I shall hear the parties as to the appropriate form of orders. The Sellers have succeeded in claims against Earthpro, not against the Buyers, and therefore no set-off would appear to arise as between the Buyers and the Sellers. The Sellers will be entitled to judgment against Earthpro and an order for an account against it.
In summary, the Sellers have succeeded upon:
(a)a debt claim against Earthpro in respect of Mrs Davis’ Shareholders Loan of $120,000 pursuant to the 9 December 2015 Deed;
(b)an order for an account by Earthpro of the proceeds of certain stock; and
(c)a damages claim against Earthpro in the amount of $299,152 in respect of the oral Sponsorship Agreement.
The Buyers have succeeded against the Sellers for contravention of statute and also for breach of contract. I have assessed the Buyers’ compensation at $1,646,798.
In due course, consideration will need to be given to issues of interest and orders as to costs.
Presently, I propose to publish my reasons and direct the parties to agree, if possible, or otherwise submit forms of order to reflect my findings. The matter will be adjourned to a date to be fixed to hear submissions and to enter judgment.
Summary and Conclusion
The Sellers were contractually obliged to give accurate information and not mislead the Buyers, by omission or otherwise, in relation to the written information given to the Buyers up to the date of completion. The Sellers also were under a duty to disclose information that was material for disclosure to a prudent buyer.
The Buyers were not given true information about the financial affairs of Earthpro. Instead, they were given misleading or inaccurate information.
The Sellers failed to make required disclosures. Overall, they failed to disclose accurate information about a number of aspects of the financial performance, profitability, and creditors of the business.
The Sellers thereby engaged in misleading conduct and misled the Buyers.
The Buyers always appreciated that the business had difficulties, was making losses and had equipment that was old and poorly maintained. The Sellers had entrusted the day‑to‑day conduct of the business’ operations to a general manager. The Buyers apprehended that the business had not been well-managed and that there was a potential to improve it, return it to profit, and benefit over the long-term.
A critical matter for the Buyers was a promise from the Sellers that the business’ current assets and its current liabilities had a ratio of 1.25. This financial buffer was critical to the company’s future and the Buyers’ ability to continue the business and improve it.
In negotiating the SSA, the Sellers believed that the business was better than it was and sought a much higher purchase price than it was worth. The purchase price agreed under the SSA had to be reduced in the light of the Buyers’ due diligence. Even after that, it became apparent to both the Buyers and the Sellers that the contractually-promised 1.25 ratio could not be achieved. The Sellers would be required to either again reduce the purchase price or make a large cash contribution to the business.
The Buyers were misled that invoices had been obtained from suppliers for work done up to the cut-off date of 25 November 2015 and entered into the company’s accounts. Representations made by the Sellers in late November 2015 understated the company’s creditors and did not disclose the extent of its losses. The information provided by the Sellers’ accountant on their behalf also vastly understated the shortfall that the Sellers were required to cover to achieve the cash equivalent of the 1.25 ratio. Based on inaccurate and misleading information, and a continuing failure to disclose the true facts, the Buyers entered into a deed on 9 December 2015 and completed the purchase on 23 December 2015.
If true and accurate information had been disclosed to the Buyers in late November and early December 2015, they would not have been misled and would not have proceeded to complete the SSA. The transaction as it then stood would not have been completed and no alternative sale transaction would have been entered into.
As a result, the Buyers suffered loss and damage of $1,646,798 by misleading conduct that contravened statute and by the Sellers’ breach of contract. The Buyers are entitled to be compensated by the Sellers for this loss.
The Sellers are entitled to damages against the company for failure to repay a loan of $120,000 to Mrs Davis and for money that was due under an oral sponsorship agreement but not paid. An amount of $299,152 remained to be paid under that agreement. The Sellers also are entitled to an account of the proceeds of the sale of certain stock.
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