De Costi Seafoods (Franchises) Pty Limited and Anor v Wachtenheim and Anor (No 3)
[2013] NSWDC 54
•03 May 2013
District Court
New South Wales
Medium Neutral Citation: De Costi Seafoods (Franchises) Pty Limited and Anor v Wachtenheim and Anor (No 3) [2013] NSWDC 54 Hearing dates: 12-15, 18-22, 25-29 June; 2-6, 9-13, 16-20, 23-27, 30, 31 July; 1-3, 6-10, 13-17, 20-24, 27-31 August; 3-7, 10-14, 24-26 September; 2-5, 8-11 October 2012 Decision date: 03 May 2013 Jurisdiction: Civil Before: P Taylor SC DCJ Decision: 1. Judgment in favour of the first, second, fourth, fifth and seventh cross-defendants on the cross-claim.
2. Otherwise dismiss the cross-claim.
3. Remove the stay operating on the plaintiffs' judgment.
4. Order the cross-claimants to pay the first, second, fourth, fifth and seventh cross-defendants' costs of the cross-claim.
5. Grant liberty to the parties to apply within 28 days to vary the costs order in order 4, or to seek any further order in respect of costs.
Catchwords: MISLEADING CONDUCT - oral representations - unconscionable conduct - purchase of business - reliance - damages - implied terms - breach of contract Legislation Cited: Evidence Act 1995, s 97
Trade Practices Act 1974 (Cth), s 51A, s 84Cases Cited: Ackers v Austcorp International Ltd [2009] FCA 432
Astram Financial Services Pty Ltd v Bank of Queensland Ltd [2010] FCA 1010
Attorney-General (NSW) v World Best Holdings Ltd (2005) 63 NSWLR 557
Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd (2003) 214 CLR 51
Australian Competition and Consumer Commission v Oceana Commercial Pty Ltd [2003] FCA 1516
Australian Competition and Consumer Commission v Top Snack Goods Pty Ltd (1999) ATPR 41-708
Awad v Twin Creek Properties Pty Ltd [2012] NSWCA 200
BBB Constructions v Aldi Foods [2010] NSWSC 1352
Bennett v Elysium Noosa Pty Ltd (in liq) [2012] FCA 211
Blomley v Ryan (1956) 99 CLR 362
BP Refinery Western Port v Shire of Hastings (1977) 180 CLR 266
Briginshaw v Briginshaw (1938) 60 CLR 336
Butcher v Lachlan Elder Realty Pty Ltd [2004] HCA 60, (2004) 218 CLR 592
Codelfa Constructions Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337
Commercial Bank of Australia Ltd v Amadio (1993) 151 CLR 447
Cordan Investments Pty Ltd v Lesdor Properties Pty Ltd [2012] NSWCA 184
Cut Price Deli Pty Ltd v Jaques (1994) 126 ALR 413
Dib Group Pty Ltd v Ventouris Enterprises Pty Ltd [2011] NSWCA 300
Fubilan Catering Services Ltd v Compass
Group (Australia) Pty Ltd [2007] FCA 1205
General Newspapers Pty Ltd v Telstra Corp (1993) 45 FCR 164
Gould v Vaggelas (1995) 157 CLR 215
Helton v Allen (1940) 63 CLR 691
Henville v Walker (2001) 75 ALJR 1410
Jones v Dunkel (1959) 101 CLR 298
Kaytonruby Pty Ltd v Glev Franchises Pty Ltd [1998] FCA 650
Keen Mar Corp Pty Ltd v Labrador Park Shopping Centre Pty Ltd (1989) ATPR (Digest) 46-048
Kizbeau Pty Ltd v WG & B Pty Ltd (1995) 184 CLR 281; (1995) 131 ALR 363
Louth v Diprose (1992) 175 CLR 621
Makita (Aust) Pty Ltd v Sprowles ((2001) 52 NSWLR 705
Maxwell v Murphy (1957) 96 CLR 261
McGrath, Re; Pan Pharmaceuticals Ltd (in liq) v Australian Naturalcare Products Pty Ltd [2008] FCAFC 2
NMFM Property Pty Ltd v Citibank Ltd (2000) 107 FCR 270
North East Equity Pty Ltd v Proud Nominees Pty Ltd [2012] FCAFC 1
Pappas v Soulac Pty Ltd (1983) 50 ALR 231
Poulet Frais Pty Ltd v Silver Fox Co Pty Ltd (2005) 220 ALR 211
Sanders v Glev Franchises Pty Ltd [2002] FCA 1332
Troulis v Vamvoukakis [1998] NSWCA 237
Watson v Foxman (1995) 49 NSWLR 315
Welker v Rinehart (No 6) [2012] NSWSC 160Category: Principal judgment Parties: De Costi Seafoods (Franchises) Pty Limited (ACN 103 324 812) (first plaintiff/first cross-defendant)
De Costi Seafoods (Holdings) Pty Limited (ACN 064 186 410) (second plaintiff/fifth cross-defendant)
Serge Wachtenheim (first defendant/first cross-claimant)
Deist Safety Equipment Australia Pty Ltd (ACN 081 763 877) (second defendant/second cross-claimant)
Frank Theodore (second cross-defendant)
George Costi (fourth cross-defendant)
Androulla Costi (seventh cross-defendant)Representation: Mr S J Stanton with Mr M B Holmes (plaintiffs/first, second, fourth, fifth and seventh cross-defendants)
Mr R Newell (defendants/cross-claimants)
McLachlan Thorpe (plaintiffs/first, second, fourth, fifth and seventh cross-defendants)
LC Muriniti & Associates (defendants/cross-claimants)
File Number(s): 2006/296319 Publication restriction: No
Judgment
Index
Heading
Page number
I. Introduction
5
II. Factual background
6
III. The alleged representations
8
A. General matters
9
(a) Oral representations
9
(b) Form of pleaded representations
11
(c) Credit of Mr Wachtenheim
12
(i) Mr Wachtenheim's memory
12
(ii) Mr Wachtenheim's dishonesty
15
B. Specific representations
23
(a) First Theodore representation
23
(i) The particulars
24
(ii) Various amended pleadings
27
(iii) Corroborating evidence
28
(iv) Mr Wachtenheim's and Mr Theodore's loan repayments
35
(v) Other matters that render the first representation unlikely
37
(vi) Conclusion
39
(b) Second Theodore Representation
39
(c) Third Theodore Representation
41
(d) Fourth Theodore Representation
43
(e) Fifth Theodore Representation
44
(f) Sixth Theodore Representation
45
(g) Seventh Theodore Representation
47
(h) First Costi Representation
47
(i) Second Costi Representation
48
(j) Third Costi Representation
49
(k) Further representations
50
C. Conclusion
51
IV. Misleading conduct
51
V. Reliance
64
VI. Damages
77
VII. The section 84 point
85
VIII. Unconscionable conduct
89
IX. Breach of contract
94
(a) Implication of term
94
(b) Breach
97
(c) One final term
102
X. Conclusion
103
I. Introduction
In November 2004 Mr Serge Wachtenheim purchased a seafood retail business. At the same time he became a franchisee by entering a franchise agreement with De Costi Seafoods (Franchises) Pty Limited ("Franchises"). Mr Wachtenheim claims that he entered those transactions as a result of representations by Franchises and related companies and persons (together "De Costi"). Those representations were said to constitute misleading and unconscionable conduct. Apart from one insignificant exception, I am not satisfied that any of the representations were made.
Mr Wachtenheim also claims that certain alleged terms of the franchise agreement were breached, but that claim is also rejected.
II. Factual background
In about July 2003, Mr Wachtenheim became interested in the possibility of becoming a De Costi franchisee. An opportunity arose to obtain a franchise at Camden. He visited a vacant, undeveloped shop at Camden where he met Mr George Costi, an owner of De Costi Seafoods (Holdings) Pty Limited ("Holdings") and Franchises (together "De Costi Seafoods"). He visited De Costi Seafoods headquarters at Lidcombe and also sought some advice from his brother-in-law, a business consultant named Barry David Shnider ("David Shnider"). Mr Wachtenheim decided not to proceed with the franchise at Camden.
In about June 2004, Mr Wachtenheim was told that a De Costi franchise at Dee Why may be available at a price of $450,000.
The business at Dee Why was owned by a company known as "De Fish Dee Why", the shares in which were owned by Frank Theodore and Con Costi, two employees of Holdings. Mr Con Costi was the adult son of Mr George Costi and his wife, Mrs Androulla Costi. Mr Theodore was Mrs Costi's brother.
In June 2004 Serge Wachtenheim spoke to Frank Theodore about purchasing the Dee Why business for $440,000. Mr Wachtenheim again enlisted Mr Shnider's assistance. Some financial documents were received which Mr Shnider analysed. Mr Wachtenheim asserts that the representations were made by Mr Theodore and Mr George Costi at this time.
With Mr Shnider's assistance, Mr Wachtenheim applied for finance for the purchase. He met with a finance broker named Mr Val Lorenzelli. Documents were provided to Mr Lorenzelli. Mr Wachtenheim received by a fax dated 13 August 2004 confirmation of finance approval from Westpac.
The Westpac approval contemplated monthly payments of $7,795 on a facility of $440,000. Mr Wachtenheim was not content with some of the terms. The loan was not accepted.
Mr Wachtenheim sought the assistance of another finance broker, Mr Kel Smith. On 25 August 2004 Mr Wachtenheim received approval for a facility with the National Australia Bank. The letter of approval provided indicative repayments of $5,348.73 per month for the 10-year business loan of $440,000, and a further $2,704.28 per month on a refinanced home loan of $423,000. The ten-year business loan proposal was adjusted to allow interest only payments of about $2,700 per month. This loan was ultimately accepted.
From about August until November 2004 Mr Wachtenheim spent about three months working in the Dee Why store, learning its operations. This work was undertaken under the direction of the store manager, Mr Konal Sharma.
On 16 November 2004 Mr Wachtenheim signed the purchase agreement and the franchise agreement, and his corporate vehicle, Deist Safety Equipment Australia Pty Ltd ("Deist") paid $440,000 for the business. Mr Sharma remained employed in Mr Wachtenheim's business.
The business seemed to perform well for Mr Wachtenheim in the initial months after the purchase. According to Mr Wachtenheim, he was ordering more fish then had been ordered when Mr Theodore and Mr Con Costi owned the business, he was selling all of the fish he ordered at the recommended price and he did not have any wastage. He met his mortgage obligations, made payments to Holdings for the fish product he ordered, and paid franchise fees to Franchises.
However, in time Mr Wachtenheim fell into arrears with the payments to De Costi Seafoods. He was being pressed for payment and consulted a solicitor in December 2005. In August 2006, 21 months after the purchase, Holdings ceased supplying seafood to Deist by reason of the unpaid invoices. The business ceased operating.
In August 2006, De Costi Seafoods sued Mr Wachtenheim and Deist for unpaid monies under the franchise agreement and for unpaid invoices for seafood supplied. In 2007 Mr Wachtenheim filed a defence and cross-claim alleging misleading conduct, unconscionable conduct and breach of contract. As well as Holdings and Franchises, Mr and Mrs Costi, Mr Theodore, Mr Con Costi and Mr David Shnider were also joined to the proceedings as cross-defendants.
The claim by De Costi Seafoods against Mr Wachtenheim has been separately disposed of, see De Costi Seafoods (Franchises) Pty Limited & Anor v Wachtenheim & Anor (unreported, District Court of NSW, Johnstone J, 12 December 2011). Franchises and Holdings each obtained judgment against Mr Wachtenheim in the amounts of $68,599.26 and $50,000 respectively. The enforcement of the judgment was stayed pending the determination of the cross-claim. The cross-claim is the subject of this judgment.
III. The alleged representations
Mr Wachtenheim and his company Deist (the cross-claimants) asserted that the transactions with Holdings and Franchises came about as a result of various representations of the cross-defendants which constituted misleading conduct. It will be necessary to analyse each of these representations separately, although there are some features common to all of them.
A. General matters
(a) Oral representations
A primary difficulty faced by Mr Wachtenheim is that all the alleged representations comprise oral statements in 2003 and 2004. Proof of them depends upon acceptance of the affidavit evidence of Mr Wachtenheim. The alleged representations were not replicated in any contemporaneous written document, nor were they recorded in any form of file note. None of the alleged representations appeared in a written form until February 2007 when the first version of the cross-claim was filed, and the representations in that pleading have changed markedly in the seven subsequent iterations. No affidavit supporting the representations was filed until June 2011, and no earlier statement or documentary record of the alleged conversations forming the basis of the representations was in evidence.
In these circumstances, the words of McLelland CJ in Eq in Watson v Foxman (1995) 49 NSWLR 315, 318-319 have particular application. To prove a case:
"...it is necessary that the words spoken be proved with a degree of precision sufficient to enable the court to be reasonably satisfied that they were in fact misleading in the proved circumstances. In many cases (but not all) the question whether spoken words were misleading may depend upon what, if examined at the time, may have been seen to be relatively subtle nuances flowing from the use of one word, phrase or grammatical construction rather than another, or the presence or absence of some qualifying word or phrase, or condition. Furthermore, human memory of what was said in a conversation is fallible for a variety of reasons, and ordinarily the degree of fallibility increases with the passage of time, particularly where disputes or litigation intervene, and the processes of memory are overlaid, often subconsciously, by perceptions or self interest as well as conscious consideration of what should have been said or could have been said. All too often what is actually remembered is little more than an impression from which plausible details are then, again often subconsciously, constructed. All this is a matter of ordinary human experience."
Mr Wachtenheim bears the onus or proof. In respect of each representation alleged, the Court "must feel an actual persuasion of its occurrence or existence": Helton v Allen (1940) 63 CLR 691 at 712.
As was noted in Watson v Foxman [at 319], this:
"...can pose serious difficulties of proof for a party relying upon spoken words as the foundation of a causes of action based on s 52 of the Trade Practices Act 1974 (Cth) (or s 42 of the Fair Trading Act), in the absence of some reliable contemporaneous record or other satisfactory corroboration."
In BBB Constructions v Aldi Foods [2010] NSWSC 1352 at [6]-[10] McDougall J affirmed and adopted these principles.
The principles espoused in Watson v Foxman apply equally in this case:
"There is no contemporaneous document in evidence which supports the making of any such promise or representation as is relied on and no other satisfactory corroboration."
(see Watson at [319])
Furthermore, there is no reference to misleading representations in early documents where, if the representations occurred, they might be expected to be recorded. In January 2006, Mr Wachtenheim was consulting a solicitor concerning the demands being made by De Costi Seafoods concerning outstanding payments. Mr Wachtenheim tendered correspondence with his solicitor. The documents reveal some concerns of Mr Wachtenheim but reveal no complaints about incorrect representations or breaches as pleaded in the cross-claim.
The Mr Wachtenheim's solicitor briefed counsel to advise. The instructions to counsel indicate a different representation from those pleaded: namely that the business generated $1,000 per week to the owners and $1,000 per week clear of tax to the manager. The documents indicate that Mr Wachtenheim sought advice "to just get out of the business" (Exhibit 1, Supplementary Material Volume (SM Vol) 1, p6252).
Thus, not only did no documents support the alleged representations, but such documents as existed did not refer to any alleged representations and, by that omission, tended to prove that the alleged representations did not occur.
The cross-claimants' submissions tended to confirm this problem. As an example, in a closely typed, 40-page final submission dated 17 October 2012, there was not a single specific reference to or identification of a document relied upon by the cross-claimants to support their case.
(b) Form of pleaded representations
A second and related problem for Mr Wachtenheim is the form in which the representations are pleaded and particularised. The pleading is often turgid prose, most unlikely to record accurately the form of an oral representation. The particulars accompanying the representations sometimes gave a more readable, believable form of representation, but those particulars are in many respects different from, even inconsistent with, the pleaded representations. This disparity between the pleading and the particulars emphasizes the fallibility of the recollection of oral conversations long past and increases the difficulty of ascertaining precisely what was said, with all the "subtle nuances", so as to prove the representations pleaded.
The particular differences between the pleadings and particulars are identified later in these reasons.
(c) Credit of Mr Wachtenheim
As there was no written record of the representations alleged, Mr Wachtenheim's credit became a matter of critical importance. His credit was challenged in a number of respects.
(i) Mr Wachtenheim's memory
Mr Wachtenheim was repeatedly challenged in relation to dates, the contents of conversations and the occurrence of events. On a number of occasions he referred to his faulty memory. He repeatedly conceded that he forgot things and that he was "shocking with dates". He claimed that an amended pleading resulted from a "flash of memory" (T1359/21-26). His recollection of the time his business started:
"Q. December, what year? The end of December what year, sir?
A. Well I started in 2000 and what, what was it, four, five, I can't remember.
Q. Can't remember what time you started what year you started?
A. 2005 I think it is.
Q. This is your case, Mr Wachtenheim.
A. Yes, I know it is my case.
Q. This is a matter that you would easily recollect, I want to suggest to you, when you started working in this business that you acquired from Theodore and Con Costi, you can't even recall that?
A. 2006? I thought it was late 2005, 2006, I mean--" (23/7/12, T1713/46-T1714/7)
An inability to remember dates so long ago is unsurprising. The bigger difficulty is that Mr Wachtenheim in his affidavits deposed to a memory of events on particular identified days, when he had no such memory. His recollection was not as he had sworn it to be. These errors were not confined to dates.
When challenged about whether a meeting was with "Tim" or "Michael", Mr Wachtenheim conceded that he "probably got confused with the two people at different dates" (T2034/19-31). Mr Wachtenheim placed Ross Cassimatis at a meeting when he could not have been present as it was prior to Mr Cassimatis commencing employment with De Costi (RC affidavit 21/3/12 at [43]).
Another example is Mr Wachtenheim's meetings with the finance broker, Mr Val Lorenzelli. In a chronology Mr Wachtenheim created for his expert witness, Mr Gary Dent, Mr Wachtenheim refers to a meeting with Mr Lorenzelli on 1 September 2003, and another where tax returns were requested, on 28 June 2004. In his 10 June 2011 affidavit Mr Wachtenheim said that his first meeting with Mr Lorenzelli was on 6 August 2004, and (at [253]) "I don't recall what was said". In his 4 August 2011 affidavit Mr Wachtenheim purported to correct the date of this first meeting to 11 August 2004 (at [19]) and he recalled a specific request by Mr Lorenzelli for his 2003 and 2004 tax returns. The correspondence reveals that by letter dated 13 August 2004 Mr Lorenzelli had received loan approval from Westpac, a matter not possible if the first meeting was on 11 August 2004. The confusion with these matters is a matter adverse to Mr Wachtenheim's credit.
Mr Wachtenheim sought to excuse this problem by attributing the particularity about dates, events and the contents of conversations to the help of others. The transcript (T2016/49-T2017/9) records the following exchange:
"Q. So you are relying on - if it's not your diary, Nicole Dhillon's diary, is that what you're saying sir?
A. Well, I'm not saying it's from a diary, but she - I've done my research with asking my wife, asking people that worked with me and most likely would've been Nicole Dhillon because she's been to all the meetings with me.
Q. And did she look at her diary to help you with that date?
A. I have no idea. But she's giving me information that was accurate.
Q. How do you know it was accurate?
A. Because we went together and she's got a very good memory, I haven't."
and later (T2019/47-48) "The problem I have is that I rely on people's information to help me to remember certain dates".
Thus, Mr Wachtenheim conceded that information and dates in his affidavits were based not (or not only) upon his own recollections, but upon reconstructions derived from more recent conversations with other persons. Contrary to Mr Wachtenheim's evidence Ms Dhillon also claimed to be hopeless with dates (eg T2802/8). Mr Wachtenheim's reliance upon information derived from others is also a matter that impacted adversely on the reliability of his evidence.
Mr Wachtenheim's difficulties with dates is perhaps manifested most clearly by a comparison between the chronology Mr Wachtenheim prepared for Mr Dent (Ex 1, SM Vol 4, p7522-7528), forwarded to Mr Dent on 8 June 2011, and the primary affidavit of Mr Wachtenheim, sworn on 10 June 2011. Although these documents are basically contemporaneous, a comparison reveals substantial differences in the dates of events.
The chronology also refers to a June 2004 diary. Although attempts were made to compel production of the diary, it was never produced and no satisfactory explanation of its absence was provided.
Evidence was led by the cross-claimants that Mr Wachtenheim had been diagnosed as possibly suffering from Attention Deficit Hyperactivity Disorder ("ADHD"). It was unclear whether this condition played any role in Mr Wachtenheim's unreliable memory. I do not think that this is a question that I need to determine. A faulty memory, effectively admitted by Mr Wachtenheim on numerous occasions, must impact adversely on the reliability of his evidence, whether that faulty memory is attributable to a diagnosed medical condition or something else.
(ii) Mr Wachtenheim's dishonesty
Mr Wachtenheim's faulty assertions of detailed recollections in his affidavits was not the only, or even the primary, basis for a challenge to his honesty.
To proceed with the purchase of the Dee Why business in 2004 Mr Wachtenheim needed to access at least $440,000. His only option was to borrow these funds. Applications for finance required him to disclose his income. But his income in the years prior to June 2004 had been very modest, at least according to his tax returns.
On 11 August 2004 Mr Wachtenheim provided to his accountant a handwritten document which to Mr Wachtenheim's knowledge grossly overstated his income. The purpose of the document was to enable the accountant to prepare a draft tax return, which Mr Wachtenheim could submit to a finance broker as part of an application for a loan. The accountant, Mr Birrell, prepared the draft tax return as instructed and it was submitted to the finance broker for the purpose of obtaining a loan to purchase the Dee Why fish business.
Mr Wachtenheim admitted that he provided the false information to his accountant knowingly for this purpose. Six weeks later, Mr Birrell prepared another tax return which Mr Wachtenheim lodged with the Australian Tax Office recording an amount of income less than 10 per cent of that shown in the draft tax return.
In his affidavit dated 4 August 2011, Mr Wachtenheim claimed that initially he had no recollection of these events. He said that when the draft tax return was shown to him he believed it to be a forgery. Then he saw his handwritten letter of instruction to his accountant. He deposed:
"I took some time to try and recall how the handwritten note was sent to Mike Birrell and under what circumstances. After looking at the handwritten note for about ten minutes my memory was refreshed and I recalled the circumstances under which the document was prepared by me".
In this affidavit Mr Wachtenheim then recounts three conversations, including a lengthy 25-paragraph conversation with Mr Shnider. In effect, the affidavit asserts that the false information was given by Mr Wachtenheim to his accountant on Mr Shnider's advice. Mr Wachtenheim asked Mr Shnider "Are you sure that I am not going to get myself into trouble?" and said that he accepted Mr Shnider's assurance.
In submissions, Mr Wachtenheim sought to excuse this conduct on the basis that Mr Shnider told him that the overstatement "was not calculated to do any harm" and was "just to make him look better" (cross-claimants' submissions ("CCS") dated 17/10/12 at [29]), and that Mr Wachtenheim understood "the minor exaggeration of an income" did not involve "any real dishonesty" (CCS 17/10/12 at [31]).
I do not view the conduct in this way. Far from excusing the conduct, Mr Wachtenheim's explanation showed him to be less than frank in his evidence and morally obtuse. His belief recorded in his affidavit of 4/8/11 at [88]) that "it did not matter about telling the bank...because...the bank would not be wiser or worse of [sic] for it" if the loans were serviced suggests at least the latter is true.
The so-called "minor" exaggeration of his income involved an increase from $6,457 (which included $3,747.40 in Commonwealth social security payments) to $73,792, including no social security payments. Mr Wachtenheim believed that in order to obtain a loan of about $440,000 it was necessary that he misrepresent to the bank the level of his income. I cannot see it as anything other than fraud, a deliberate falsehood to procure a substantial loan.
Further, the egregious nature of Mr Wachtenheim's conduct is magnified by him involving other parties - his accountant and the unwitting finance broker - in the fraud upon the bank. Whether Mr Shnider was also involved was a matter of dispute: there was no evidence apart from Mr Wachtenheim's account to link Mr Shnider to the falsehoods and Mr Shnider denied any knowledge of the matter.
Mr Wachtenheim's conduct of misrepresenting his income to obtain financial accommodation was not limited to August 2004. There was evidence of a similar event in 2003. In an earlier application to Tonto Home Loans for a home loan of $350,000 in February 2003 Mr Wachtenheim signed a declaration that his gross income exceeded $137,680 per annum, whereas his tax return for 2003 showed a gross income of less than $6,000 and a taxable income of $3,413. There was no suggestion that Mr Shnider had any connection with that false declaration.
This 2003 loan application indicates that Mr Wachtenheim was aware of the need to show a higher income if he was to secure a substantial loan. It casts doubt upon his claim that the exaggerated income shown in the 2004 draft return only occurred because of Mr Shnider's involvement.
In respect of the false tax return, it was submitted that Mr Wachtenheim's "frank concession before the trial cannot be a foundation for a suggestion that Wachtenheim is predisposed to lie under oath in the witness box" (CCS 17/10/12 at [28]). I make no judgment about predisposition. However, whilst not evidence of prior false testimony, evidence of prior fraud or criminal dishonesty, particularly where it is part of the factual matrix of the litigation, is plainly relevant to a proper assessment of Mr Wachtenheim's credit.
Furthermore, Mr Wachtenheim did not make a "frank concession" of this conduct. He made no reference to it in his first affidavit. In his second affidavit (4/8/11 at [9]) his "initial reaction" was to regard the document as a forgery by Mr Shnider even though he delivered his own handwritten instructions to Mr Birrell for the purpose of the draft tax return. When he saw his own letter upon which the return was based, he said that he "could not immediately recall when and under what circumstances I had prepared the document" (4/8/11 at [13]), even though, on his account, the circumstances involved the (ordinarily) memorable event of writing and signing a letter containing known falsehoods. Ultimately he sought to blame Mr Shnider for the handwritten instructions and the draft tax return, recording in detail a long conversation with Mr Shnider of which, on his account, he had no recollection moments earlier. This occurred at Mr Wachtenheim's solicitor's office. No other witness corroborated this account.
Having heard Mr Wachtenheim give evidence on this matter, and reading his affidavit, I found his whole account incredible and fanciful. Rather than being a "frank concession" it was an invention in an attempt to explain his fraudulent conduct once it was discovered.
Another matter indicating Mr Wachtenheim's dishonesty is that Mr Wachtenheim falsely maintained in an early affidavit that all of the receipts from the business were banked. In his affidavit dated 23 August 2011 at [3] Mr Wachtenheim said:
The Second Cross-Claimant, Deist Safety Equipment Pty Ltd operated only one bank account whilst it operated the Dee Why De Costi fish shop. The bank account which had been operated was a National Australia Bank account being account number 082183575760500 (hereinafter "the bank account"). The bank account was a cheque account. Apart from the bank account the Second Cross-Claimant did not operate any other bank account. All of the takings from the operations of the De Costi fish shop at Dee Why were banked by me personally into the bank account which was opened at the National Australia Bank branch at Dee Why. All payments which were necessary to be made in relation to the operations of the De Costi fish shop at Dee Why were all made through the bank account, cheques were drawn on the bank account and all the operating expenses of the De Costi fish shop at Dee Why were paid by cheques drawn on the bank account including payments for the cost of produce from De Costis, wages and all other operating expenses.
During the course of the pre-trial proceedings, this evidence was found to be false. Mr Wachtenheim conceded in oral evidence that this was a lie (T1531/3-15). He regularly took cash from the business to pay his own personal domestic expenses. Mr Wachtenheim said, "I've always paid my bills [in] cash wherever I go. That's - I'm old fashioned in that respect" (T1584/14-15). This conduct - "I paid my bills and I took $500" - was said to be in the order of $1,500 per week (T1578/21). The bills included personal expenses of rates, electricity, house mortgage, gas, food, groceries and petrol for his personal car (T1532/22-30, T1583/45, T1583/49-1584/8). The amount taken was at least $150,000 perhaps $200,000 (T1460). Mr Wachtenheim commonly received a weekly cheque for $500 wages (exhibit 11) as well as taking a wage from the till before the takings were banked (T1579/10-13).
These amounts drawn from the business were not banked into the Deist account. Mr Wachtenheim may have been entitled to draw whatever amounts he chose from the business. But these cash drawings were not revealed to his accountant and were not brought to account for the purpose of his personal tax returns, the returns of Deist, or for calculation of royalties. It also enabled Mr Wachtenheim to present a lower gross profit in these proceedings, understating the revenue from the Dee Why store.
Other receipts of the business were not recorded in its accounts. Mr Shnider paid $30,000 to reimburse Deist for funds wrongly taken by a member of Mr Shnider's family. Mr Wachtenheim deposed to having banked this reimbursement into the Deist account from which the funds had originally been taken (10/6/11 at [493]) but the bank records establish that the money was not deposited into the Deist account and Mr Wachtenheim conceded (T1796/20) that it may have been deposited "straight to the home loan".
When these withdrawn amounts were discovered, Mr Wachtenheim's solicitor, Mr Muriniti, sought to enlist the accountant, Mr Birrell, and Mr Dent (two of the plaintiff's expert witnesses) in providing an explanation. Mr Murinti's emails concede the significance of this non-disclosure on Mr Wachtenheim's credit:
"If the figures can now be recalculated and a fresh assessment of the business undertaken in light of the additional money which was taken out of the business and not accounted for previously and Serge ... and you are also able to re-swear an Affidavit to correct the omission, we may just be able to save Serge's credibility" (Ex 1, SM Vol 1, p6188)
"After discussing the matter at length with Wachtenheim what we have been able to determine is that the $150,000 can be account by virtue of the fact that Wachtenheim was taking money out of the cash register to pay his wages and living expenses and failed to appreciate that since he was taking money out of the cash register, he needed to tell you that he had been taking money out of the cash register" (Ex 1, SM Vol 1, pp6190-6191)
"We have discussed the matter with Wachtenheim and he agrees that this is the only characterisation that can be given to the money that he took from the cash register over and above his wages to pay living expenses which his wages were not adequate to meet". (Ex 1, SM Vol 1, pp6190-6191)
"It is important the accounts be amended to account for the missing money as soon as possible in order to ensure that Serge's credibility is not damaged or permanently impaired ...we should be most grateful if you could give this matter your urgent attention" (Ex 1, SM Vol 1, pp6190-6191)
"...we are extremely concerned about this development not least for the reason that Wachtenheim has been ordered to a mediation on 9 December 2011 and we believe that the De Costi are going to play the card of the unreported sales at the mediation to embarrass and intimidate our client and to damage his credibility permanently" (Ex 1, SM Vol 3, pp7230-7231)
Mr Wachtenheim also withdrew substantial amounts from the Deist accounts during the concluding months of the business, including $35,000 by cheque on 20 September 2006, about three weeks after the business ceased operating. Transfers by Mr Wachtenheim from the Deist account for purposes which bore no connection to business expenses totalled almost $65,000. This amount does not include the $150,000-$200,000 taken in cash and the $30,000 repayment by Mr Shnider that was deposited in Mr Wachtenheim's personal account rather than returned to the Deist account.
These amounts, totalling as much as $300,000, affect the veracity of the financial losses claimed by Mr Wachtenheim. But for present purposes they display the giving of false evidence by him. Although the false affidavits were corrected before trial, the solicitor's emails, quoted above, illustrate that these corrections were prompted by a recognition that the cross-defendants were aware of the false evidence, rather than because of a desire in Mr Wachtenheim to correct an innocent mistake.
An amount of $300,000 would represent more than 16 per cent of the total turnover, over $14,000 per month over the 21 months of the business. The withdrawal of that amount must have had a substantial, adverse impact on the recorded cash flow and profitability of the business. Yet Mr Wachtenheim purported to record complaints of low revenue in his first affidavit without once referring to his substantial unrecorded drawings.
There were other troubling examples in Mr Wachtenheim's evidence. He asserted that in respect of the cash and benefits provided to his manager, Andrew Osborne, that he had "quite recently" paid the tax (T1456/47-48) "just a few weeks ago" (T1606/32-33) and had a receipt for the payment. When a call was made for the receipt, Mr Wachtenheim retracted his answer (T1607/5-11) and eventually conceded his answer was a lie (T1610/42-T1611/22).
Mr Wachtenheim also gave oral evidence of very poor quality product, of the need to sell inedible product at a discount and of late and non-existent deliveries, even though the franchise system gave Mr Wachtenheim the opportunity to record and return product, not only for reasons of poor quality but also for reasons of over ordering. Mr Wachtenheim availed himself of that entitlement. The records in evidence indicate that there were relatively few occasions when Mr Wachtenheim rejected poor quality product and that on a number of occasions he returned product because he had ordered too much. Apart from the few returns, the documentary record does not include a single written complaint by Mr Wachtenheim of poor product, late deliveries, missed deliveries or the need to sell out-of-date product at a discount. In these circumstances, Mr Wachtenheim's evidence on this matter manifested a lack of concern with his obligation to be accurate and truthful to the best of his ability.
Mr Wachtenheim claimed to be commercially inept, unable to understand figures and documents. But his fax communications revealed a man comfortable in dealing with financial matters. His handwritten notes on a letter of offer dated 13 August 2004, criticizing various components of a proposed financial transaction, revealed him to be someone who had an understanding of financial transactions (ex 1, SM Vol 1, p6344).
Mr Wachtenheim denied having and using (and even being able to use) a fax machine, a matter crucial to his attempt to blame Mr Shnider for much of the correspondence. Then he asserted that his wife had a fax machine, an assertion inconsistent with Mrs Wachtenheim's evidence. He later accepted that Mr Shnider may have given him a fax machine. Mr Wachtenheim's diary contained references to "fax" and "fax to" indicating his tasks. But he said he "may" have faxed documents from the post office. He was ultimately forced to concede that he did use a fax machine. He quoted his own fax number as a reason for denying a certain facsimile document, before recognizing that the facsimile document bore the number he had quoted. The evidence showed regular use of the facsimile machine from his home in August and September 2004. His denials concerning his use of, and ability to use, a fax machine were, in my view, knowingly false evidence.
In other respects Mr Wachtenheim's oral evidence was unsatisfactory. He was unwilling to relinquish ownership of any terms in his affidavits and pleadings, even where it was clear he had no real understanding of their meaning. Similarly he asserted that could not meet loan repayments (T1381/19-42) but when shown that he did, asserted (for the first time and without any corroboration) that he received family help (T1382/6). This indicated his oral evidence was motivated by what would help his case, as he understood it, rather than the truth.
For all these reasons, I formed the view that Mr Wachtenheim was entirely discredited as a witness and that his evidence could not be relied upon. This conclusion creates a substantial impediment to Mr Wachtenheim establishing the oral representations alleged.
B. Specific representations
There are matters specific to many of the particular representations alleged by Mr Wachtenheim which mitigate against acceptance of them. These matters require that each specific representation be considered.
(a) First Theodore representation
The first representation alleged by Mr Wachtenheim (found in subparagraph 8(a) of the sixth further amended cross-claim ("6FACC")) was that in "about June/July 2004" at Dee Why Frank Theodore represented to Mr Wachtenheim:
"(a) The fish shop business conducted on an arm's length basis or as a franchise shop with [Franchises] and [Holdings] as supplier of wholesale fish would return a profit permitting [Franchises] to "take home" $1,000 per week after discharge of all business expenses and mortgage repayments of approximately $7,800 per month under circumstances that the fish shop business was under full management ("the predicted profit") and would return to [Mr Wachtenheim] more than the predicted profit if the fish shop business was not under full management in that [Mr Wachtenheim] worked in the shop (a future matter within the meaning of section 51A Trade Practices Act 1974 ("TPA") and section 41 Fair Trading Act 1987 ("FTA")("a future matter")."
(i) The particulars
Apart from specifying the location and approximate date of this representation, the particulars following this paragraph of the cross-claim identify oral statements made by Mr Theodore to Mr Wachtenheim which, the Court must infer, are said to constitute the representation set out above. The oral statements alleged to have been made were in the following terms:
"(i) The fish shop business was making profits out of which [Mr Theodore] made mortgage repayments of approximately $7,800 per month and was able thereafter to take home $500 per week and Con Costi (a co-director) took home $500 per week.
(ii) [Mr Wachtenheim] would be able to make his mortgage or loan repayments from the profits of the business and still have $1,000 to take home.
(iii) When [Mr Wachtenheim] acquired the business he would be able to make more money than $1,000 per week after making loan or mortgage repayments of approximately $7,800 per month if [Mr Wachtenheim] worked in the fish shop business."
Mr Wachtenheim also asserts that the representation is also implied from:
"(i) The fact that to the knowledge of the First, Second, Third, Fourth, Fifth and Seventh Cross-Defendants [Mr Wachtenheim] obtained a loan or loans in the sum of approximately $900,000 including a loan facility of $440,000 dedicated to the purchase of the franchise business ("the $900,000 loan package") from the National Australia Bank on the basis of his understanding of the profitability of the business and the silence of those Cross-Defendants in relation to that matter."
In a number of respects the particularised oral statements do not support the representation alleged.
First, phrases in the pleaded representation are absent from the particularised statements. The phrases in the pleaded representation "conducted on an arm's length basis" or "as a franchise shop" are not found in the statements alleged to have been made in the particulars. There is no reference to "[Franchises] and [Holdings] as supplier of wholesale fish", the words "would return" or "all business expenses" are not in the oral statements. There is no reference to "[Franchises]" being able to take home amounts, nor do the phrases "under circumstances that the fish shop business was under full management" or "if the fish shop business was not under full management" appear.
Secondly, the first particular is of no direct assistance because it concerns the performance of the business under Mr Theodore and Mr Con Costi, not the predicted performance under Mr Wachtenheim nor, if it were intended, the take home profit of Franchises.
Thirdly, the prediction in particular (ii) is that the business would produce profits to pay Mr Wachtenheim's mortgage or loan repayments plus $1,000 drawings. No reference is made to Mr Wachtenheim's mortgage of $7,800 per month, or indeed to any specific repayment obligation.
The fourth particular concerning the conduct from which the representation is implied is also problematic. The knowledge of the first, third, fourth, fifth and seventh cross-defendants or their silence says nothing about the content of a representation by the second cross-defendant, Mr Theodore. As to the knowledge of Mr Theodore, it is alleged that he made the representations that Mr Wachtenheim would make from the profits of the business mortgage payments of $7,800 a month plus $1,000 a week because Mr Theodore believed that Mr Wachtenheim had obtained a loan of $900,000 on the basis of Mr Wachtenheim's understanding of the profitability of the business. This proposition cannot be correct. Knowledge of the level of debt of a person is not equivalent to a representation that the person will be able to meet loan repayments of $7,800 a month, especially in circumstances where there is no allegation that the indebted person has loan obligations (known or unknown) of $7,800 per month. Representations require conduct, not mere belief, at least in the absence of "reasonable expectations of disclosure" (a matter neither pleaded nor submitted by the cross claimant).
This divergence between the particularised oral statements and the alleged representation impacts adversely on the ability of the Court to be satisfied that the representation was made in the form alleged.
The substance of the alleged representation appears to be a prediction about the fish shop's likely performance under Mr Wachtenheim's ownership, namely that the fish shop business would produce a profit allowing Mr Wachtenheim to meet mortgage repayments of $7,800 per month, plus allow drawings of $1,000 per week, and more if Mr Wachtenheim saved management costs.
Mr Wachtenheim, through his counsel, submitted (plaintiffs' submissions ("PS") 17/10/12 at [9]) that the substance of the representation is that the available cashflow was $12,000 per month. This submission may be correct in determining whether the representation was misleading in relation to Mr Theodore's business. That is, if the business was producing $12,000 a month cashflow, a statement that there were monthly mortgage repayments of $7,800 and that monthly drawings of $4,200 could be paid from the cashflow of the business is not materially misleading. Whether the funds were actually used for that purpose would not be of significance to Mr Wachtenheim.
However, the actual words of the conversation alleged are significant in assessing whether those words were actually spoken. I do not accept the cross-claimants' submission that even if a representation about $7,800 per month mortgage seems unlikely "the substance of the representation was $12,000 per month and that is the important matter" or that the reference to $7,800 was a "small matter". The terms of the representation alleged are crucial in determining whether the Court should be persuaded that it was actually made. As appears below, it is also important to the corroboration asserted by the cross-claimants.
(ii) Various amended pleadings
I referred earlier to the absence of documentary support for the alleged representations. One source of earlier recollections of Mr Wachtenheim is found in the pleadings. The current pleading is the sixth further amended cross-claim, the eighth filed version of the claim maintained by Mr Wachtenheim.
The original cross-claim was filed on 5 February 2007. It makes no reference to any representation by Mr Theodore, or anyone else, about a $7,800 per month mortgage. The representation alleged by Mr Wachtenheim in that cross-claim was:
"The fish shop business conducted on arm's length basis with the [Franchises] as supplier of wholesale fish would return a profit of $1,000 per week under circumstances that the fish shop business was under full management."
The particulars of that representation identify an oral representation by Mr Theodore at Dee Why in or about August 2004 and also rely upon trading figures supplied by Mr Theodore at about the same time.
It was not until the middle of January 2008, approximately three and a half years after the oral representations were allegedly made, that the reference to mortgage repayments of $7,800 a month finds an appearance in the amended defence and cross-claim. No evidence was led to explain this difference between the earliest statement of the representation and those appearing in later versions.
In my view, the absence of any representation about a mortgage for $7,800 a month in the first version of the cross-claim is significant evidence against Mr Wachtenheim's version of the representation.
(iii) Corroborating evidence
Mr Wachtenheim swore nine affidavits in the proceedings. In his 10 June 2011 affidavit (the first of nine read at trial) Mr Wachtenheim says that in his first meeting with Mr Theodore he was told a price for the shop of $440,000. Mr Wachtenheim deposes to the following conversation having occurred on 7 June 2004 (10 /6/11 at [120], [133]-[135]):
"Frank Theodore: Do you have a mortgage on your house Serge?
Serge Wachtenheim: Yes I do, I owe about $400,000 which is secured over my house.
Frank Theodore: You wouldn't believe it, I have a $400,000.00 mortgage on my house but then I had to go and borrow $400,000.00 to set us [sic] this business so I've got a total debt now of $800,000.00 which is about the same that you will need to borrow if you are going to buy my shop and I can guarantee you, you will be able to pay an $800,000.00 mortgage from the profits generated by this business and still take $1,000.00 home. I pay $7,800.00 per month for my mortgage, the business earns enough profit to support those repayments easily. We do about $24,000.00 per week in sales or [sic] gross profit on that is about $9,600.00 per week."
Mr Theodore denies this conversation, and denies ever telling Mr Wachtenheim that he paid $7,800 on his mortgage from the business. No other witness gives evidence of this conversation.
I accept that Mr Theodore may have mentioned his mortgage repayments to Mr Wachtenheim. This does not assist Mr Wachtenheim, for he needs to show with precision what was said. There is an evidentiary leap by the cross-claimants' submissions, moving from Mr Theodore making reference to his own mortgage to Mr Theodore saying he pays $7,800 on his mortgage and that Mr Wachtenheim will also be able to do so.
Mr Wachtenheim also deposes to having told his business advisor, Mr Shnider, about Mr Theodore paying $7,800 on his mortgage, not in his conversation with Mr Shnider immediately after speaking with Mr Theodore, but on a later occasion.
Mr Shnider denied ever being told that Mr Theodore was paying a mortgage of $7,800 per month.
Mr Wachtenheim gave oral evidence about the representations by Mr Theodore. It does not support his pleaded case. He said:
"Q. Now when you gave Mr Muriniti that entry, what now can you tell us "Frank represents" means?
A. Well Frank was promoting the shop.
Q. Yes, what words did he use?
A. I'm sorry?
Q. Well you say represents do you mean representations?
A. Well he represented that he was the owner of the shop with Con, he was, you know, he was saying that it was a good shop and all that sort of thing." (27/7/12, T2050/38-47)
"Q. --which your memory is more accurate in terms of recollecting. Tell us now what was represented to you according to that entry in mid-June 2004?
A. From memory, what I can recall is that when I met Frank and when he were representing the shop he was saying that it was a good business, that he was - that after being - that it was making money, that it was making - he was taking $1,000 a week after all his expenses and he was telling me that he also - from memory I'm pretty sure he said that, you know, he was, he had a mortgage and he was paying several things. What I do remember clearly is that, yeah, I mean he was promoting the shop to be a good shop and that he wasn't too keen on selling it but he wanted to sell it. I ask him "Why do you want to sell this shop?", he said because it was too far to travel, I mean I can't recall all the promotion that he's done on the shop but it sounded very impressive." (27/7/12, T2051/10-22)
Mr Wachtenheim deposes to another conversation with Mr Theodore on an occasion when Nicole Dhillon accompanied him. He says (10/6/2011 at [189]) that he told Mr Theodore that he had a mortgage of $400,000 and that he would need to borrow another $400,000 and that Mr Theodore replied:
"I think I told you before that I also have a $400,000.00 mortgage on the house but then I had to go and borrow $400,000.00 to set up this business so now I owe $800,000.00. You will be able to pay an $800,000.00 mortgage from the profits made by this business and still take $1,000.00 home."
According to Mr Wachtenheim, Mr Theodore also said (10/6/2011 at [192]) "I am making repayments of about $7,800.00 a month on the loans which are secured over my home"
and
"My mortgage payments are about $7,800.00 per month and the business generates enough income monthly for me to make that payment comfortably."
Nicole Dhillon in her affidavit dated 15 April 2011 deposes at [47] to the following conversation between Frank Theodore and Mr Wachtenheim (see T2768/46):
"We've just had one spectacular weekend where just on that weekend alone we made thousands of dollars profit just in one weekend. I am able to service my mortgage which cost me about $8,000.00 a month from the profits we generate from the store, pay myself a wage and pay all the outgoings. I'm laughing, we're doing really well, I am paying my mortgage and I am taking home $500.00 a week out of the shop for myself and Con is taking $500.00 for himself. This is after we paid all the operating expenses and we don't have to be here every day."
Mr Wachtenheim responded, "Can you show me some figures?" Subsequently Mr Wachtenheim expressed his concern to Ms Dhillon saying "I've been trying to get some figures from Frank Theodore but I can't seem to get any figures from him."
It can be seen that Ms Dhillon deposes to Mr Theodore referring to a different monthly repayment from that asserted by Wachtenheim. Mr Wachtenheim's account refers also to the capital value of the loan which is not mentioned by Ms Dhillon. Nevertheless, Ms Dhillon's evidence provides some support to Mr Wachtenheim's allegation.
Mr Wachtenheim also deposes to another conversation in which Mr Theodore referred to making mortgage repayments of $7,800 in the presence of Mrs Wachtenheim. Mrs Wachtenheim (8/6/2011 at [11]) gave evidence of a conversation that occurred in her presence in approximately late June 2004 where Mr Frank Theodore is alleged to have said:
"Serge, my mortgage cost me $7,800.00 per month which I pay from the profits from this business and I take home $500.00 per week. Con takes home $500.00 a week..."
Mrs Wachtenheim does not depose to making any relevant contribution to this conversation.
In Mr Wachtenheim's affidavit of 18 August 2000 (at [47]) he deposes to a conversation with George Costi where Mr Wachtenheim said:
"I am going to need about $8,000.00 per month to pay these loans. David [Shnider] has told me that I can service those borrowings from the earnings of the business and Frank [Theodore] has also said the same thing. He has told me that he has had to borrow about the same amount as me and has the same repayment obligations."
Mr George Costi denies this conversation.
Accordingly, Mrs Wachtenheim and Ms Dhillon respectively give evidence of conversations where Mr Theodore makes mention of paying his mortgage of $7,800 per month, and $8,000 per month. On the other hand, Mr Theodore, Mr George Costi and Mr Shnider deny that any reference was made to Mr Theodore paying $7,800 or $8,000 per month.
Ms Dhillon sought to buttress her evidence in the witness box by asserting in cross-examination that she had kept notes of the conversations recorded in her affidavits. When asked about those notes she said "I didn't keep them because I gave my affidavit and I saw no more need to keep the notes as one does". (T2769/45).
She resisted answering the size of the paper on which the notes were kept, but when pressed as to whether it was A4 paper she said "Á4 it is". She indicated that her notes were about what "George Costi had said about Camden, right that's the note that I had" (T2770/27) then clarified that she also had "notes of the other matters" because "I am a school teacher. I like to keep notes, I like to record things that happen between people".
When asked when she last saw the notes she said "I got them before I gave my affidavit, I revised my notes and then I went to give my affidavit." She said she still had copies of the notes when she made her affidavit on 15 April 2011 (T2772/45) and "I destroyed them as teachers do, once you have given your affidavit there is no need for notes because you will have your affidavit." She could not remember when she destroyed them "probably this year [2012]" and she still had notes on 15 April 2011, the date of her first affidavit. The notes, she said, recorded the conversations not word for word. She could not say if the notes recorded the date of the conversations, although she subsequently said dates weren't recorded: "I'm not a dates person, I teach languages, for me there is no need for dates, I don't teach the history part."
She also testified: "I didn't go with the notes when I prepared the affidavit ... I destroyed my notes in December because I didn't think that I would be called up to do an affidavit. I think I was clearing my filing cabinet and I saw the notes, no need for them, because I didn't think I'd ever be called up to give an affidavit ... since I gave the affidavit at April 11, it must've been 2010, December 2010 .... December is the time when I have my holidays so I always do a bit of a clean up and I just got rid of them". (T2800/35-50. She said the main conversations she recorded were with George Costi (T2804/33).
Thus, Ms Dhillon contradicted herself as to when she destroyed the notes, and whether they were used in the preparation of her affidavit. Ultimately she asserted that only parts of conversations in her affidavit were drawn from her notes (see T2820/50 - 2821/22) and that she destroyed her notes well before her first affidavit, when she found them in her filing cabinet while doing an annual clean up, even though the litigation was on foot.
Apart from Ms Dhillon's oral testimony, there is no evidence that she ever possessed any notes. She makes no mention of them in her affidavits. She did not tell Mr Muriniti or Mr Wachtenheim of their existence.
Like other witnesses in these proceedings, she received payments in cash upon which no tax was paid. But unlike other witnesses she refused to acknowledge that it warranted disclosure. She had not declared it, and she did not intend to do so, even though she accepted it was cheating (T2823/49-T2824/14).
Ms Dhillon was not a persuasive witness. I do not believe that she ever possessed any relevant notes. In my view this evidence was concocted in a misguided attempt to assist her friend, Mr Wachtenheim. Even if she did have notes of relevant conversations, which I reject, I cannot see how they could assist the reliability of her affidavit when she destroyed them months before its preparation.
Mrs Wachtenheim's evidence was also difficult to accept. In the witness box she claimed to have no recollection of Mr Wachtenheim's sources of income in June 2004 (T2506/26-28), which I think unlikely. She did not recall the level of her "mortgage" in June 2004 (T2500/24-26) but attributed her detailed recollection of a conversation between her husband and Mr Theodore eight years earlier to the striking coincidence that Mr Theodore's represented mortgage repayments were identical to her and her husband's obligations. This coincidence was non-existent: she did not have the repayment obligations attributed to Mr Theodore. In June no loan to buy the business had even been sought let alone approved. Further, the coincidence she claimed in the witness box and the conversation about it (that it was repeated three times) was absent from her affidavit evidence (T2509/5).
Mrs Wachtenheim claimed to have a "crystal clear" memory of the conversation she heard that occurred some eight years earlier between Mr Wachtenheim and Mr Theodore, as recorded in her affidavit. I think that is most unlikely given the lapse of time. In any event her account in the witness box differed significantly from her account in her affidavits.
In these circumstances, I was not persuaded that the evidence of either Mrs Wachtenheim or Ms Dhillon was reliable.
Attacks were made on Mr George Costi's credit. Perhaps the most cogent point was that Mr George Costi claimed to have bought the business of Stephen Vial, a witness and former franchisee, for over $300,000 (T3941/36). The evidence did not verify this purchase price, although substantial payments were made. However, I was not satisfied that payments made to Mr Vial were for reasons other than Mr Vial's legal or moral entitlement arising from the sale of his business to De Costi.
Mr Theodore's credit was also challenged. He said in his affidavit that he paid royalties in 2003 and 2004 but ultimately admitted that he did not. Mr Con Costi's evidence was similar. It was difficult to decide whether this was an honest mistake about a business they owned more than eight years earlier, or something more sinister. It caused me to be careful about accepting their evidence.
On occasions Mr Theodore was adamant that certain things were not said, more adamant than perhaps the passage of time would allow. He was also attacked on the basis that he received $500 per week cash from the business, cash that he refrained, initially at least, from declaring as part of his income for tax purposes. This is a matter that indicates a tolerance in himself of some personal dishonesty.
Notwithstanding these matters I was not persuaded that I should reject Mr Theodore's evidence. In other respects his evidence was persuasive and corroborated by documents.
In any event, Mr Wachtenheim and Deist bore the onus of proof. Mr Theodore made no admission that the representation occurred. The rejection of his evidence could not supplement the deficiency in the cross-claimants' case.
(iv) Mr Wachtenheim's and Mr Theodore's loan repayments
Neither Mr Theodore nor Mr Wachtenheim had mortgage obligations approximating $7,800 a month at any relevant time.
At no stage in 2004 did Mr Wachtenheim have loan repayments of $7,800 a month. Thus, a representation that Mr Wachtenheim would be able to meet loan repayments of $7,800 a month does not correlate with the circumstances that existed at the time.
Mr Wachtenheim did not have a mortgage of $800,000 at the time. It was not until November 2004 that Mr Wachtenheim incurred loan obligations arising from the purchase of the business, some five months after the alleged representation. Nor would a purchase be expected to increase his indebtedness by $400,000, when the purchase price was $440,000.
In about mid-August 2004, some weeks after the representation was alleged to have been made, Mr Wachtenheim did receive correspondence indicating the approval of a business loan. The monthly repayments on that loan approval were stated to be $7,795.
This document does not assist Mr Wachtenheim. It was created more than a month after the representation was alleged to have been made. The loan referred to in the document was a business loan only and did not cover his mortgage repayments.
Further, it was a loan that Mr Wachtenheim saw as unattractive from the outset. He did not ever propose to accept it. On the letter advising of the approved loan, he had noted unsatisfactory aspects about the loan and had indicated reasons why he would not proceed with it.
Moreover, Mr Wachtenheim placed no reliance on this document in these proceedings. His submissions (17/10/2012 at [45]-[50]) strongly reject any connection between the alleged representation concerning $7,800 per month and a business loan approval with repayments of $7,795 per month.
Mr Theodore did not have mortgage repayments of $7,800 per month. Both his home mortgage and his business loan to fit-out the shop were each much lower than the $400,000 loans Mr Wachtenheim alleges that Mr Theodore spoke about. Mr Theodore's home loan (jointly with his wife) and his business loan together were less than $400,000.
The evidence is clear that Mr Theodore and his wife received a payment of $2,729.44 each month, an amount that equalled the repayment obligations of Mr Con Costi in respect of his business loan. Mr Theodore's loan obligations were somewhat less than this amount, but for reasons of equity between the partners each received the same monthly sum.
Of course it is possible that Mr Theodore could have exaggerated the size of the mortgage being serviced by the business in order to induce Mr Wachtenheim to purchase the business. But it did not seem to me to be likely. It would involve making false statements about two matters, Mr Wachtenheim's finances and Mr Theodore's, both of which could easily be shown to be false and neither of which were crucial features in the important issue of the profitability of the business.
Thus the financial obligations of Mr Theodore and Mr Wachtenheim at the time of the alleged representation provide no support for the representation.
(v) Other matters that render the first representation unlikely
A statement by Mr Theodore that he drew $7,800 per month to pay his mortgage raises other issues for Mr Wachtenheim. Mr Con Costi was Mr Theodore's equal partner in the business and thus had an entitlement to drawings equal to Mr Theodore. The alleged representation would thus suggest that approximately $15,600 was being drawn from the business each month, plus a further $1,000 cash per week for Mr Con Costi and Mr Theodore. Mr Wachtenheim never asserted a representation of drawings of this magnitude.
Mr Wachtenheim did not attempt to use the representation for his own commercial advantage, such as by offering $400,000 to purchase the business rather than $440,000 (since his debt was represented to increase by only $400,000). On the contrary, he agreed to pay $440,000 for the business. It also seems unlikely that Mr Theodore would indicate $400,000 as the debt resulting from the purchase price when at all times he was seeking (and Mr Wachtenheim had agreed to) a purchase price of $440,000.
Furthermore, how Mr Theodore came to be informed about Mr Wachtenheim's financial position (wrongly as it appears) was never explained.
The cross-claimants "submitted beyond doubt" (17/10/2012 at [27]) that Mr Shnider was the genesis of the figure of $7,800 per month. Mr Shnider denies this and there is no evidence to indicate otherwise. There is also no evidence as to how Mr Shnider could have arrived at such a figure, either for Mr Wachtenheim's or Mr Theodore's mortgage, or how that led to a representation by Mr Theodore that he had a mortgage with repayments of $7,800 per month.
Any statement by Mr Theodore that he had repayment obligations of $7,800 was incorrect, whether Mr Con Costi's obligations are taken into account or whether he was speaking of his obligations alone. The magnitude of the discrepancy between his own, or his and Mr Con Costi's obligations, and $7,800 a month is substantial. It was not something that Mr Theodore would likely be honestly mistaken about. Thus, if Mr Theodore did say that he had obligations of $7,800 a month, it would, in the circumstances, have been knowingly false, in other words a fraudulent misrepresentation. The principles in Briginshaw v Briginshaw (1938) 60 CLR 336 require convincing proof before the Court would accept that such a representation occurred.
(vi) Conclusion
I am not satisfied that the First Theodore representation occurred. I reach this view because of both the general matters of concern I have recorded - the problems of oral representations, the form of pleading, and the various reasons why I do not accept Mr Wachtenheim's evidence - as well as matters of concern specific to this representation: its disparity with earlier versions of the cross-claim, its inconsistency with the surrounding objective factual matters and the absence of any reliable corroborating evidence.
(b) Second Theodore representation
Mr Wachtenheim alleges in his cross-claim [8(b)] that Mr Theodore represented "That the fish shop business had generated the predicted profit on the basis of a mark-up providing for a gross profit martin [sic] of 40% on cost of wholesale supplies". Mr Theodore denied the representation.
The "predicted profit" is a defined term being:
"a profit permitting the First Cross-Defendant to "take home" $1,000 per week after discharge of all business expenses and mortgage repayments of approximately $7,800 per month under circumstances that the fish shop business was under full management."
I have already rejected any representation based on $7,800 per month mortgage repayments. It follows that this representation must also be rejected as it contains this allegation. When this representation was first included in an earlier iteration of the cross-claim, the words "predicted profit" had a different meaning. It referred to a return of $1,000 per week. This is a matter that militates against acceptance of this representation.
In other respects this representation differs from that which was originally alleged in 2007. There are a number of changes over time but perhaps the most significant is that the words "providing for a gross profit margin" were added, so that the representation as originally pleaded suggested a 40 per cent mark-up, rather than a 40 per cent gross profit margin (which would mean a mark-up of about 67 per cent). This particular correction does not cause me to reject the representation. Indeed, the reference to the "margin" rather than "mark-up" is more consistent with other evidence in the proceedings. But this change in the wording undermines the reliability of the words claimed to have been used.
Proof of this representation is impacted adversely by several of the matters discussed in relation to the First Representation: the lack of any contemporaneous written document recording the representation, the passage of several years before the representation was recorded in an affidavit, the earlier versions of the pleadings recording a different representation, the uncreditworthy nature of Mr Wachtenheim's evidence for the various reasons given, and, to a lesser extent, the lack of precise correlation between the representation alleged and the particulars of what was said.
It was not in contest that the Dee Why business, both before and after its purchase by Mr Wachtenheim, operated on the basis that the standard mark-up on the cost price of the fish was such as to indicate a gross profit of 40 per cent. In other words, as an example, fish costing the business $6 would have a recommended retail price of $10. But this standard mark-up of approximately 67 per cent varied in its implementation from product to product; sometimes the mark-up was less, sometimes greater.
Thus, it is true that the business operated on the basis of a standard mark-up which provided for a gross profit margin of 40 per cent on the wholesale cost of the product. It would also not be surprising for Mr Theodore to have so informed Mr Wachtenheim: the wholesale price lists supplied by De Costi Seafood included a recommended sale price with the standard mark-up. But this is insufficient to establish the representation pleaded because of the reference to the business having "generated the predicted profit". That expression raises all the matters that caused me to reject the First Theodore representation.
For those same reasons, I am not satisfied that the representation alleged in [8(b)] was made by Mr Theodore.
(c) Third Theodore representation
Mr Wachtenheim alleges that Mr Theodore also represented "that the fish shop business had traded on the basis that it achieved a gross profit margin of 40%". There is no reference to this representation in the original version of the cross-claim and it is denied by Mr Theodore.
This representation is said to result or be implied from oral statements made by Mr Theodore at Dee Why in June 2004. The relevant particularised statement adds the phrase "and on that basis produced the predicted profit". I have already given reasons why I have rejected the allegation of a representation of the predicted profit. These same reasons justify rejection of the particularised statement. Oddly, the particularised statement which makes reference to "the predicted profit" is not relied upon in the cross-claim to support the First Theodore representation concerning the predicted profit.
The calculation of the gross profit margin depends on the cost of the goods sold. This would include the seafood product, but might also include ancillary products, like marinades, packaging and potentially also the 5 per cent fee for royalty and advertising. If these amounts, which increase directly and proportionally to turnover, are part of the costs of goods sold, then even sales at the recommended retail price would produce a gross profit margin below 40 per cent, to the extent of the royalties, advertising, packaging and marinades. Discussions about a 40 per cent gross profit margin would, without proof of the precise words used in context, result in ambiguity as to the calculation, as to the content of the cost of goods sold, and cause difficulty in determining whether any representation made was misleading.
Mr Wachtenheim obtains no support for this representation from Mrs Wachtenheim or Ms Dhillon. Neither gave evidence of a representation of a 40 per cent gross profit margin.
Mr Shnider gave evidence of an oral representation to him by Mr Theodore of a 40 per cent gross profit margin. Mr Shnider said that for a time in June 2004 (until he was provided with the financial statements, which showed a lower profit margin) he believed that the business generated a 40 per cent gross profit margin as a result of what was said to him by Mr Theodore. I found Mr Shnider to be a generally reliable witness. I think that it is likely that Mr Theodore did make reference to a 40 per cent gross profit margin in a conversation with Mr Shnider. However, I am not persuaded on the balance of probabilities that Mr Theodore said that the business achieved a gross profit margin of 40 per cent. To say that the business traded on the basis of a 40 per cent gross profit margin, meaning that this is the usual margin produced by the standard mark-up on the products, is a different representation. It alone would say nothing about what was achieved over the period of the business.
In any event, this evidence does not assist Mr Wachtenheim. Mr Shnider did not regard this representation as persisting, since he disregarded it once he saw the profit and loss documents showing a lower gross profit margin. This occurred well before the purchase. Secondly, Mr Wachtenheim rejected any case based upon Mr Shnider's reliance. And thirdly, the evidence at best concerns a representation to Mr Shnider, it does not identify what Mr Wachtenheim was told by Mr Theodore.
A reference by Mr Theodore to a 40 per cent gross profit margin would be unsurprising, but it leaves uncertain whether any representation was made that the business "achieved" a gross profit margin of 40 per cent. In circumstances where the alleged conversation occurred many years ago, and without any documentation to confirm or support the form of the representation alleged, and with profit and loss documents obtained by Mr Wachtenheim which showed the contrary, I am not satisfied that Mr Theodore represented that a 40 per cent gross profit margin was being achieved.
(d) Fourth Theodore representation
Mr Wachtenheim alleges that Mr Theodore also represented that the business "would generate the predicted profit on the basis of a mark-up providing for a gross profit margin of 40% on cost of wholesale supplies". Mr Theodore denied the representation. I have already given reasons why any representation which embraces the concept of the "predicted profit" should not be accepted.
This representation differs from the Third Theodore representation in another respect, alleging that Mr Theodore represented what Mr Wachtenheim would achieve rather than what Mr Theodore had achieved in the business.
Particulars are provided, but none of them support this representation. None of the statements alleged to constitute this representation contain any prediction by Mr Theodore, either directly or indirectly, that Mr Wachtenheim would achieve a 40 per cent gross profit margin. As indicated earlier, the absence of a statement corresponding to the representation alleged, whilst not necessarily fatal to the cross-claimants' claim, is a factor impacting adversely on the likelihood that a representation in the form alleged was made.
Further, Mr Wachtenheim did not give evidence that Mr Theodore represented that Mr Wachtenheim would make a 40 per cent gross profit margin in the business but rather Mr Wachtenheim's evidence was of a representation that related to the past performance of Mr Theodore's business.
For those reasons I reject the Fourth Theodore representation.
(e) Fifth Theodore representation
Mr Wachtenheim in the cross-claim alleges a representation in the following form:
(e) That the fish product supplied to the First Cross-Claimant pursuant to proposed franchise arrangements with the First Cross-Defendant and/or the Fifth Cross-Defendant would readily sell at retail prices determined by a mark-up providing for a gross profit margin of 40% and in any event the mark-up on which the de Costis franchise system was based ("the de Costis mark-up") in such quantities as reasonably to enable the generation of the predicted profit.
The convoluted manner of expression of this alleged representation militates against its acceptance. Further, the particulars of the representation allege that Mr Theodore made a statement in June 2004 that "the profit generated by the shop was generated by reference to a gross-profit margin of 40% and that the First Cross-Claimant would make even more money when he operated the shop". The differences between the statement in the particulars and the alleged representation are clear enough, and again impact adversely on acceptance of the representation.
The statement in the particulars is not so controversial. I am persuaded that a statement to a similar effect may well have been said in the context of Mr Wachtenheim reducing costs by not employing a manager.
But the oral statement alleged does not support the making of the representation alleged. Nor is there evidence from Mr Wachtenheim to support the representation. Mr Theodore denies it. Further, I have already rejected the existence of any representation which embraces the concept of the "predicted profit".
For the reasons previously given, I am not persuaded of a representation by Mr Theodore in these terms.
(f) Sixth Theodore representation
Mr Wachtenheim alleges that Mr Theodore told him at the Sydney Fish Markets in mid-2004 that Franchises and Mr Theodore "had a practice of providing fish product to franchisees at prices which were better than could be obtained from any other supplier."
This representation was not included in the original version of the cross-claim. The evidence to disprove the truth of it is contained principally in the affidavits of Mr Batchelor and Mr Turner, who are engaged in their own litigation against the De Costi parties. However, I am unable to determine whether this allegation first surfaced at about the time Mr Batchelor and Mr Turner became potential witnesses in these proceedings.
Mr Wachtenheim does not supply any further particulars of this representation other than it was an oral statement at the place and time set out above. In his affidavit he deposes to Mr Theodore saying:
We provide the best quality products and the best service. We are very consistent with our service, our product and quality control. We can give consistent supply and high quality throughout the year. Our prices are the best. You cannot buy produce from any other place cheaper than you can purchase from us. As our franchisee, you will be able to undercut your competitors.
This oral statement was never said, according to Mr Theodore.
There is a significant difference between the conversation to which Mr Wachtenheim deposes in the affidavit, and that pleaded.
The representation in the affidavit asserts that the prices are "the best" and that there is not "any other place cheaper ". Thus, Mr Wachtenheim's affidavit evidence does not suggest that the prices are lower, or better, than any other supplier, but rather that no other supplier's prices are better than what a franchisee obtains. This is contrary to what is alleged in the pleading, which asserts that Mr Theodore said that the prices for the franchisees were "better than could be obtained from any other supplier ".
This is not a mere technical difference. It is one thing to say that "our prices are the best, as good as anyone else's, nobody is better" when all suppliers are obtaining their produce from the same or similar sources, as the evidence in this case indicated. It is quite another thing to say that one's prices are better than anyone else's.
I was not directed to any evidence to support the alleged representation that Mr Theodore said that franchisees were able to obtain future product "at prices which were better than could be obtained from any other supplier."
The foundation of the allegations of unconscionable conduct seem to be that Mr Wachtenheim was vulnerable and the cross-defendants took advantage of his vulnerability in selling the Dee Why shop to him at a gross overvalue.
The primary basis for this vulnerability is the condition that Mr Wachtenheim was found to be suffering from at some stage after these proceedings commenced. Medical reports were in evidence and it was not contested that Mr Wachtenheim suffered some symptoms of a condition known as Attention Deficit Hyperactivity Disorder ("ADHD"). There was also some evidence that this condition is not of recent origin but may have existed throughout Mr Wachtenheim's life.
The evidence linking this condition with any inability of Mr Wachtenheim to understand figures or to manage his commercial affairs is limited. I must accept that Mr Wachtenheim suffered some symptoms of ADHD but the real question is what, if any, impact that played in relation to the purchase and conduct of this business. The cross-claimants do not allege that Mr Wachtenheim's condition was known to the cross-defendants, nor could they, given that it was not known to anyone else, even Mr Wachtenheim's own family, until sometime after 2006 when he ceased operating the Dee Why fish shop.
The cross-claimants asserted that the terms of the purchase of the business were so one-sided and unfavourable to Mr Wachtenheim that the cross-defendants should have known of his vulnerability and not allowed him to enter the transaction.
This argument ignores the independent advice that Mr Wachtenheim had available and received.
Mr Wachtenheim claimed in paragraph six of the cross-claim that he lacked business experience. I do not accept this. He ran his own small business, he was involved in real estate sales, and he was readily able to identify unsatisfactory financial proposals when he received his first letter of offer of finance for the purchase of the business on 13 August 2004. His faxes also evidence an ability to deal with commercial matters.
Mr Wachtenheim also claimed a high degree of dependency upon Mr Shnider. In my view this dependency was exaggerated. Mr Wachtenheim made his own decision about the Camden shop, and attended meetings with Dr Costi persons without Mr Shnider.
Even if Mr Wachtenheim's dependency on Mr Shnider were true, it does not establish any unconscionable conduct by De Costi.
There was no financial, familial or medical circumstance compelling or pressing Mr Wachtenheim to enter the transaction. He was as free to refuse to proceed with the Dee Why purchase as he was a year earlier when he declined the Camden shop. I have already mentioned Mr Wachtenheim's dealings with Mr Shnider, Mr Birrell and Mr Stephen Noss, his business adviser, accountant and solicitor respectively. These are the people who undertook the obligation, if one existed, to protect Mr Wachtenheim from an unfavourable deal. The cross-claimants could cite no authority to establish an obligation on the vendor of a business to ensure that the purchase is likely to be beneficial for the purchaser, irrespective of the contractual terms, in circumstances where the purchaser is represented by independent professional people retained to protect his interests.
The primary aspect of this claim, according to the cross-claimants' submissions, depended upon the cross-claimants establishing that the transaction was so improvident that no vendor could be unaware that Mr Wachtenheim was vulnerable. I have already given reasons as to the performance of this business and how proof of its unprofitability was absent. If the business is profitable it is difficult to see how it must be "manifestly improvident" to purchase it. In the absence of evidence of an unprofitable business there is nothing left to this claim other than the assertion that unbeknown to the vendors Mr Wachtenheim had a condition which impacted on his ability to make a success of the business. I did not understand the cross-claimants to press such a case, at least where the purchaser is represented by independent professional advisors. It is not enough to establish unconscionability.
In any event, I am not persuaded that Mr Wachtenheim lacked the ability to look after his own interests. Mr Shnider's evidence did not support Mr Wachtenheim's assertion. In my view, Mr Wachtenheim was fully aware of the relevant aspects of this business. He knew that there was a significant opportunity for him to purchase a new and growing business which would produce a lot of cash revenue. This was a significant attraction to him. Had he wisely accounted for that revenue, in my view the business represented an opportunity for him to make a profit. However, it was a business that did require long hours and strict control over wages and other expenses. Mr Shnider's contemporaneous notes shortly after the purchase indicated that no proper control was kept over wages and Mr Wachtenheim's own evidence shows that there was no proper accounting of the moneys that came into the business.
The cross-claimants challenged Mr Shnider's credit, primarily on the basis that he engaged in remunerative work for De Costi Seafoods in the months prior to the trial. This employment was not disclosed until Mr Shnider was specifically asked about it. I was not persuaded that this fact alone justified any adverse credit finding against Mr Shnider.
Particular reliance was placed by the cross-claimants on a demolition clause in the lease over the Dee Why premises. The effect of the provision was that the landlord could terminate the lease if it wished to demolish the building to construct a new shopping centre. This might seem to be a provision significantly adverse to the interests of Mr Wachtenheim. However, there was no obligation on Mr Wachtenheim to accept such an arrangement. So far as the evidence reveals, it was open to Mr Wachtenheim to accept an assignment of the existing lease without a demolition clause rather than have a new lease with a demolition clause in it. Alternatively, Mr Wachtenheim could have refrained from entering the contract to purchase the business.
The new lease arrangement had one significant advantage to Mr Wachtenheim: a five-year lease with a five-year option, a total of ten years compared to the existing lease which had two years remaining plus a three year option. The five-year lease plus a five-year option corresponded with the term of the franchise agreement which was for a period of five years, with a right to request a further five-year term. It also corresponded with the ten-year period of repayment of the loan for the purchase of the business.
I would infer that generally a finance provider would want to ensure that the business' premises were secure for ten years if it was providing for the purchase of the business funds that were to be repaid over a ten-year period. A term to this effect was contained in the loan contract.
There was no evidence that the demolition clause was ever exercised. Thus, there was at least some prospect that a ten-year lease with a demolition clause was more favourable than the existing, part-expired, three-year lease with a three-year option. In other words, the period of the lease and option essentially doubled the term of the existing lease, although there was a risk of a demolition clause. If Mr Wachtenheim were satisfied that the prospect of demolition was not great, the five plus five lease arrangement would seem preferable. Mr Wachtenheim's decision to enter that lease tends to suggest that Mr Wachtenheim preferred the five plus five term.
There is documentary evidence that Mr Wachtenheim was advised by Mr Noss as to the demolition clause. Correspondence from Mr Noss (at CB1202) recorded that Mr Wachtenheim "has approached the lessor to give a 5x5 lease. It is intended the lease be assigned and there be a variation" is evidence of Mr Wachtenheim's preference for a longer lease. Mr Noss' letter dated 14 April 2005, referred to above, also confirms that Mr Wachtenheim was given advice by his solicitor as to the demolition clause.
There was also some evidence in relation to a common practice applying when a demolition clause is exercised: the landlord might ordinarily give favourable treatment to the tenant in allowing an early choice of location in the new shopping centre in the event that the demolition clause was exercised. Whether or not this practice would have been adopted by Mr Wachtenheim's landlord and whether it fairly outweighs the inconvenience of having the business disrupted for a period of time is uncertain. However, I was not persuaded that the lease Mr Wachtenheim chose to enter was necessarily less favourable than an assignment of the earlier lease under which Mr Con Costi and Mr Theodore were operating.
Paragraph 25 of the sixth further amended statement of cross-claim alleges, among other things, that De Costi Seafoods did not disclose an intention to continue arrangements with supermarkets or continue the De Costi pricing structure. Yet the contracts between the parties expressly disclose these matters (see clause 2.2 of the franchise agreement, discussed below, and clause 12.2 which refers to the De Costi Seafoods Terms of Trade).
For these reasons I do not regard Mr Wachtenheim as being in any relevant way vulnerable nor do I regard the cross-defendants acceptance of Mr Wachtenheim offer to buy the business for $440,000 as unconscionable.
Other allegations in the statement of cross-claim were not referred to by Mr Wachtenheim in submissions and I do not propose to deal separately with them. The hearing was conducted on the basis that those matters not referred to were not pressed.
IX. Breach of contract
(a) Implication of term
The cross-claimants also asserted, in the alternative to the claim for misleading conduct and unconscionable conduct, that there was breach of an implied term of the contract providing for "timely and adequate supply of product". The term alleged is in clause 30 of the sixth further amended defence and cross-claim which states:
"The Cross-Claimants [Mr Wachtenheim and Deist] say that it was an implied term of the Franchise Agreement that the First Cross-Defendant [Franchises] and/or Fifth Cross-Defendant [Holdings] would provide and/or cause the Fifth Cross-Defendant [Franchises] to provide to the Cross-Claimants [Mr Wachtenheim and Deist] timely and adequate supply of seafood product for the purposes of the Second-Cross-Claimant's business [Deist]."
It is well known that a term of this type will only be implied if it is obvious, capable of clear expression, reasonable, necessary for business efficacy and consistent with the express terms of the contract: BP Refinery Western Port v Shire of Hastings (1977) 180 CLR 266; Codelfa Constructions Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337. These requirements reflect the difficulty in a party having terms implied into an agreement which is recorded in a detailed, signed document.
Clause 12.1(3) of the franchise agreement provides:
"De Costi Seafoods [Franchises] must use its reasonable endeavours to procure the Company [Holdings] to supply the Franchise with its requirements of the De Costi Seafoods Products".
This provision is inconsistent with an absolute obligation to ensure "timely and adequate supply of product". The obligation on Franchises was to "use its reasonable endeavours".
The pleaded term alleged also seems to me to fail each of the other tests proposed in Codelfa and BP Refinery. It is neither obvious nor reasonable that a term would impose an obligation on Holdings when it is not a party to the agreement, nor is it obvious or reasonable to grant a benefit to Deist which is not a party to the agreement.
Further, the use of the alternative conjunctive-disjunctive form "and/or" between the references to Franchises and Holdings and between Mr Wachtenheim and Deist creates ambiguity as to the precise nature of the obligation. There is a lack of clarity of expression. There is also an obvious lack of certainty in the meaning of the expression "timely and adequate".
Further, the absence of any reference in the suggested implied term to orders by the Franchisee suggests that there should be timely and adequate supply in the absence of any order by Mr Wachtenheim. This seems positively unreasonable.
Nor can such a term be necessary for business efficacy if the parties have agreed on a different obligation to regulate the supply of product: viz the "reasonable endeavours" clause 12.1(3) of the franchise agreement.
The franchise agreement also includes:
"Clause 12.2 The De Costi Seafoods Terms of Trade
(1) The De Costi Seafoods Terms of Trade will apply to all De Costi Seafoods Franchisees but may be varied to cater for individual circumstances...
(3) The Franchisees acknowledges and accepts that the company may add to, delete or otherwise modify the De Costi Seafoods Terms of Trade by giving written notice to the Franchisee of the change.
(4) A change to the De Costi Seafoods Terms of Trade takes effect seven (7) days after it is notified to the Franchisee."
There was no evidence of any change to the De Costi Seafoods Terms of Trade. Those terms are contained in Schedule C to the franchise agreement, and included such terms as:
"5(2) If a delivery date is specified that date is an estimate only and the Company is not liable for any delay in delivery.
(3) If the Company is unable to supply the Customer's total order these terms and conditions continue to apply to the Goods supplied."
Further clause 12.8 of the franchise agreement:
"If the Company is unable to supply any part of an order by the Franchisee for a De Costi Seafoods Product within a reasonable time after receiving that order, the Franchisee may obtain supply from an alternative supplier for that part..."
The clauses also are inconsistent with the implied term proposed. They provide a regime for a failure to supply product which contradicts the obligations sought to be implied.
For these reasons, I reject an implied term in the form pleaded.
An implied term of good faith is also alleged. Whilst there is authority supporting this approach, the content of such a term does not assist the cross-claimants. It requires cooperation, honesty and reasonableness (see Cordan Investments Pty Ltd v Lesdor Properties Pty Ltd [2012] NSWCA 184 at [145]). It does not overrule any of the express terms of the agreement (Cordan at [146]).
(b) Breach
The cross-claimants allege timely and adequate supply of product was not provided by Franchises and Holdings in breach of the implied term.
The particulars of breach of the implied term alleged were that:
"from and about February 2005...
(a) Supply was frequently effected outside of a 48 hour period from time of landing;
(b) Supply was frequently effected after 9:00am in the morning;
(c) Supply was frequently unable to be given;
(d) Inferior product was frequently supplied to the Second Cross-Claimant."
These particulars of breach manifest one of the reasons why the asserted implied terms cannot be implied: it is impossible to determine whether supply "outside of a 48 hour period from time of landing" or supply "after 9:00am in the morning" constitutes a breach of an implied terms requiring "timely supply". To impose an enforceable obligation, more words need to be implied. Further detail of the obligation or at least of the machinery for determining its ambit is needed.
The evidence of supply indicated a usual practice. The cross-claimants ordered product on a daily basis before 8am each weekday morning and the order was delivered the next day. Sometimes but not always did this occur before 9am in the morning but it was always given the subsequent day. There was no evidence to support the allegation that "supply was frequently unable to be given". Indeed, there was no evidence that on any occasion "supply" (as distinct from occasionally a particular line of fish product) was unable to be given, let alone "frequently".
I do not think that business efficacy, necessity or obviousness required that supply had to be given before 9am in the morning. If that was to be a term of the agreement one would expect it to have been included in the written document. The same must be true of the effecting of supply "outside of a 48 hour period from time of landing". In any event, Mr Wachtenheim did not allege that these times were implied, but that this conduct was in breach of the "timely delivery" term.
Although Mr Wachtenheim asserted in his affidavit (21/9/11) that deliveries were always late, in oral evidence he conceded that initially timeliness of delivery "wasn't too bad at all".
It was not disputed that on occasion product was delivered more than 48 hours after "time of landing" if this meant "arrival at the Sydney Fish Markets". Its meaning was never clarified by the cross-claimants. Plainly frozen product would offend such a term, since it may be stored for a period of weeks if not months. As for fresh product, the complaint may have been that the fresh product did not always reach the retailer, Mr Wachtenheim, within 48 hours of it being unloaded off the boat. But there was no evidence to suggest that this was the usual practice or even the preferred practice in the industry, let alone in the operation of the cross-defendants' business. On the contrary, the expert evidence of Mr Susman was to the effect that:
"the average time it may take for seafood to move from the catching and growing stage...to the stage of being distributed to restaurants and retail stores...might be in the range 3 to 6 days".
Mr Susman also gave evidence that depending on the type of fish, if properly stored whole fresh fish can remain satisfactory for two weeks or more (T5230/35). The initial manager Mr Sharma gave evidence about how oilier types of fish last longer (T4885/25-31).
The final particular, that inferior product was frequently supplied, was another subject of contention between the parties. It was not mentioned in the original cross-claim filed on 5 February 2007. I leave aside the question of whether supply of defective product breaches a term requiring "adequate supply".
The De Costi Seafoods Terms of Trade allowed (unsurprisingly) for the return of non-merchantable quality product. There was evidence of a practice supported by documented "return sheets" that any product could be returned by franchisees, either for quality or other reasons such as over ordering. The return sheets called for the reason for the return of the product to be recorded.
These documents do not support the claim of regular deliveries of defective product. According to the return sheets, some product was returned from Dee Why on 15 occasions during the 21 months of trading. Of those 15 occasions only two appeared to involve the return of fresh fish on the same day or the next day for quality issues.
It seems to me an easy thing years after the event, in an attempt to resist a claim for monies owed, to allege defective deliveries. As an example, Mr Wachtenheim deposed that his manager, Mr Sharma, described the fish product as "shit" (SW 18/8/12 at [165]). Nicole Dhillon, who worked for the first three months only, did likewise (15/8/11 at [33]). This assertion was not contained in the primary affidavits of either deponent. Mr Wachtenheim asserted that during the initial period the quality was "extremely good" and he sold all his fish, with no wastage (10/6/11 at [412]).
Mr Sharma did not corroborate the evidence of Mr Wachtenheim and Ms Dhillon concerning Mr Sharma's description of the product. Their evidence was not put to him in cross-examination. There was no documentary support for any complaint about defective product by Mr Wachtenheim. If Mr Wachtenheim had continually received defective seafood I would expect some documentary evidence, letters or file notes. I would also not expect evidence from Mr Wachtenheim that he was selling all his fish, at the same price as Mr Theodore with no wastage, mostly by lunchtime.
Mr Wachtenheim asserted that he returned 1-3kgs of fish, 2 to 3 times per week, of the 30 to 40kgs per day he ordered. Records indicated in fact he ordered an average of about 670kgs per week during the period mid-March to mid-August 2006 (encompassing the slower trading winter months). Of the 15 occasions when product was returned from the Dee Why store in 21 months of trading, only once was that by Mr Wachtenheim himself.
The second store manager, Mr Osborne, also gave evidence of poor quality produce. Although seemingly a crucial witness, Mr Osborne was not consulted until more than four years after the cross-claim was filed. Mr Osborne's credit was challenged, as a large component of his income was not brought to account for tax purposes until he became involved in these proceedings. He sought to attribute this failure to Mr Wachtenheim. His evidence about bad quality produce was also general and entirely unrecorded, and was not persuasive.
The cross-claimants read affidavits from persons connected with four other franchisee stores. The witnesses connected with three of those stores - those owned by Mr Batchelor and Mr Turner, Mr Craig Brady and Mr Geoffrey Matthews - gave evidence sympathetic to the claim of Mr Wachtenheim about the supply of poor quality fish. If there was compelling evidence of the quality of the fish they received it might be relevant and probative, perhaps sufficiently probative of Mr Wachtenheim's deliveries to satisfy the test of "significantly probative" to be admissible as tendency evidence under section 97 of the Evidence Act 1995.
However, the evidence was not compelling. It lacked any documentary support. It was no more than an oral assertion of complaints without any corroborating material. Mr Brady and Mr Matthews manifested a similar disaffection towards De Costi as that shown by Mr Batchelor and Mr Turner. Both Mr Brady and Mr Matthews swore affidavits claiming they were forced to close their business. They failed to disclose that their businesses were sold for substantial amounts, one for $285,000, and the other for $450,000. The failure to disclose this fact manifested a lack of balance in their evidence.
However, because I do not think the evidence these witnesses gave is probative of the issues before me, I do not propose to make credit findings in respect of them.
The franchisee of the fourth store, Mr Stephen Vial, recanted on his evidence. He ultimately denied that there were significant quality issues. Whilst his recanting of an affidavit raises its own concerns, his evidence indicated to me the difficulty in determining issues arising in this store by reference to evidence concerning other stores.
(c) One final term
The final allegation of breach of contract relied upon the assertion that the supermarkets were supplied product on advantageous terms. The only supermarket relevant to the Dee Why store was a neighbouring Woolworths supermarket. There was no evidence of the terms of supply to this supermarket, although the Woolworths chain did receive a rebate on invoices. There was evidence that certain features of the supply to franchisees, for example, greater variety, small amounts, free deliveries, ready acceptance of returns and more flexible delivery times were not available to supermarkets. However, the evidence did not allow me to compare the terms of supply to the Dee Why store and the terms of supply to the neighbouring Woolworths store. So far as I could conclude there was no supply of product on terms that was peculiarly disadvantageous to the franchisee.
Supply by Holdings to supermarkets did not go unmentioned in the franchise agreement. Clause 2.2(1) and (2) provide:
"2.2 Acknowledgement of Other Distribution
(1) The Franchisee acknowledges that the Company and Rasin currently distribute, and intend to continue to distribute, seafood by wholesale and retail to supermarkets, wholesalers, retailers and consumers without restriction and that the Franchise is granted subject to those existing and ongoing rights.
(2) The Franchisee further acknowledges that De Costi Seafoods or any Related Entity shall be entitled to supply the De Costi Seafoods Product and other products including, without limitation, boots and knives to any person or business, including supermarket chains, wherever located, including within the Territory."
Accordingly, any term to be implied must be consistent with those rights. It would not be consistent with clause 2.2(1) to imply a term imposing a "restriction" on the sale to supermarkets.
The alleged term advanced by the cross-claimants was that Franchises and Holdings must:
"effect supply of product on terms which facilitated those outcome [enabling the franchisees to obtain the benefit of the Franchise Agreement] and/or were advantageous to [Mr Wachtenheim and Deist] in the market".
In my view, this clause also fails the five elements of Codelfa for similar reasons as the earlier implied terms. The obligations on a non-party [Holdings], the benefit to a non-party [Deist], the ambiguity in the use of the expression "and/or", the ambiguity of the expressions "in the market" and "advantageous", and the lack of detail in the expression "facilitated those outcome [sic]" all militate against its implication.
There was no evidence of the damage suffered by the breach of any of the alleged implied terms.
In my view, none of the terms should be implied, nor was there a breach of them in any event.
X. Conclusion
Accordingly, in my view the cross-claim should be dismissed with costs. Each of the causes of action pleaded by the cross-claimants fail.
On the question of costs the cross-defendants foreshadowed a claim for recovery of costs against the legal representatives of the cross-claimants, on the basis that there were no reasonable prospects for this case to succeed, but accepted that I would give no regard to that matter in this judgment.
In these circumstances I propose to grant liberty to either party to make any further application in respect of costs within 28 days of this judgment.
The orders of the Court shall be:
1. Judgment in favour of the first, second, fourth, fifth and seventh cross-defendants on the cross-claim.
2. Otherwise dismiss the cross-claim.
3. Remove the stay operating on the plaintiffs' judgment.
4. Order the cross-claimants to pay the first, second, fourth, fifth and seventh cross-defendants' costs of the cross-claim.
5. Grant liberty to the parties to apply within 28 days to vary the costs order in order 4, or to seek any further order in respect of costs.
**********
Decision last updated: 07 May 2013
8
7
2