Dobrodinski & Britza v Salievic No. Scgrg-00-781
[2001] SASC 8
•19 January 2001
DOBRODINSKI & BRITZA v SALIEVIC
[2000] SASC 8
Magistrates Appeal: Civil
WILLIAMS J
Preliminary
This is an appeal by the plaintiffs against judgment of a Magistrate in civil proceedings given on 3 August 2000. The Magistrate ordered that on the defendant’s counterclaim the plaintiffs pay to the defendant $20,000 damages. The Magistrate has not yet dealt with the question of costs and interest. With the consent of counsel I treat the appeal as being with respect to an issue in the action (namely as to liability upon the counterclaim) upon which formal judgment has been entered. Accordingly, the decision under appeal is not interlocutory.
In accordance with Supreme Court Rules (SA) (“SCR”) r 97.03 the appeal notice was filed within time but notice was not then given “forthwith” to the respondent as the rule requires. The delay of upwards of two weeks is attributable to a breakdown in office routine. There was no relevant prejudice to the respondent from the delay. In my opinion justice requires that under SCR r 3.04 there should be a dispensation to the plaintiffs as appellants with respect to the late notice so that the appeal be treated as being properly on foot.
During the course of oral argument upon this appeal it became evident to me that if successful upon her counterclaim, the defendant should be called upon to elect as between a remedy at common law, under the Misrepresentation Act 1972 (SA) or pursuant to the Fair Trading Act 1987 (SA). The defendant had raised these various claims in the prayer for relief in the counterclaim. I sought an intimation from the defendant’s counsel as to his client’s preferred relief and the case proceeded in the light of the course which the defendant then proposed. It is therefore convenient for the purposes of these reasons firstly to identify the defendant’s case as respondent to the appeal rather than follow the more orthodox course of dealing at the outset with the appellants’ submissions.
The defendant’s (respondent’s) case upon appeal
By an agreement in writing dated 19 July 1995, the defendant agreed to purchase from the plaintiffs on a walk in walk out basis, the business of a florist at Odeon Plaza West Mount Gambier at a price of $30,000. As well as the goodwill, the price included the stock plant and equipment. The negotiations for the business commenced in May 1995 and settlement was effected on or about 31 July 1995. The defendant paid $10,000 before settlement and the balance of the purchase price was allowed to remain as a debt. The plaintiffs called in this debt and secured a judgment in this action for $20,000 which is not now the subject of appeal.
The issue upon appeal concerns the defendant’s counterclaim upon which the Magistrate awarded the defendant $20,000 damages upon the basis that the male plaintiff Dobrodinski had misrepresented the takings of the business. There was some doubt in my mind at the commencement of the hearing as to basis upon which judgment upon the counterclaim was entered. I will treat the defendant for the purposes of this appeal as having elected to take a judgment in respect of an oral misrepresentation as to the takings which amounted to misleading conduct in accordance with the Fair Trading Act s 56. (As to election see Philip Morris Inc v Adam P Brown Male Fashions Pty Ltd (1981) 148 CLR 457 at 499-500 per Gibbs J and Henderson Hallam-Eames & Hughes v Merrett Syndicates Ltd (1995) 2 AC 145 at 194 per Lord Goff).
At the time when the sale to Mrs Salievic was being negotiated, the final financial accounts for the year ended 30 June 1995 were not available. However, Mr Dobrodinski orally represented the takings by reference to the year ended 30 June 1994 (for which formal accounts were available) but overstated the figure in this respect as relevant to the next year. Ms Salievic’s case is that the representation as relevant should be treated as one which represented the continuing financial health of the business for the year ended 30 June 1995 and into the future as being unchanged; the figure mentioned for the gross earnings was $1797 per week (or $93,440 as the gross takings for the year ended 30 June 1994). These figures for 1993/94 may be treated as correct in themselves but not if treated as fairly representative of the next year.
In fact, the business was operating during the year ended 30 June 1995 at a loss (according to the investigating accountant Mr Kennedy) and with a level of weekly takings some hundreds of dollars less than represented. When the accounts for the year ended 30 June 1995 were eventually prepared, it appears that the gross annual takings were $75,547 (or $1453 per week); the weekly takings for the year ended 30 June 1995 were thus $344 less than $1797 abovementioned. The defendant’s expert (Mr Kennedy of the firm Bird Cameron, Mount Gambier) treated the goodwill of the business as being valueless and there was evidence of some items in terms of the accounts as being worth $4000 and a list of items said to be (valued on a “fire sale” basis) at $5537. It is therefore argued by the defendant that upon this evidence if these figures are rounded up to $10,000 the difference between her purchase price of $30,000 and this value of $10,000 was $20,000. (However, this approach only coincidentally arrives a the same result as did the Magistrate by a different path). As I observe later there is some overlap between the contents of the depreciation schedule and the other list; the two lists cannot literally be added together.
I comment that this suggested method of assessment of damage (by ascertaining the difference between purchase price and actual value of the property purchased) would be consistent with the adoption of the tortious measure which would be appropriate if the action were one brought in deceit at common law. In principle that would appear to be the correct approach in the exercise of a discretion which is available to the Trial Judge if dealing with a material misrepresentation (upon which the purchaser had relied) in the negotiations leading to the purchase.
The difficulties
The features of this case which have given rise to argument upon appeal are as follows:
(a).... The defendant has not at trial been put to her election as regards entry of judgment as regards the cause of action upon which she wishes to rely in circumstances where several overlapping causes of action were available. Indeed the Magistrate said that he did not “stay to consider the other matters put forward by the defendant, for example as to the provisions of the Fair Trading Act”.
(b)There was a contractual warranty in the written contract whereby the vendor declared that the gross weekly takings averaged over fifty-two weeks immediately preceding [19 July 1995] were not less than $1788 per week. A claim in respect of this warranty was included in the counterclaim as well as a claim with respect to an oral misrepresentation. Paragraphs 4.1 and 5.1 of the counterclaim dealt with these different allegations. There was no evidence as to what the business would have been worth if its turnover had been as represented.
(c).... The defendant resold the business at a profit after operating it herself for some time. However, she moved the site of the business, changed its name and secured some new business to supply flowers. One new contract in particular for the supply of flowers to Coles Myer is worthy of note. She resold part of the business in May 1997 and the remainder in April 1999. There were two parts to the business, firstly the growing of flowers and bulbs in leased premises and secondly the merchandising from a store. It is alleged that the defendant over a period of time received $53,500 for a business which she developed and sold against the agreed outlay of $30,000 under her contract with the plaintiffs.
(d)The Magistrate in his assessment of loss gave the following reasons:
“The trading statements for the defendant’s term, in the business, are set out in Exhibit D2. I refer, in particular, to the statements that relate to the last three financial years and commencing in the 95/96 financial year. This was a figure that Mr Smith submitted showed that the defendant’s loss was approximately $350 per week from the amount warranted in the contract. The following year, 96/97, appears to have been a profitable year for the defendant with earnings reaching, approximately, the figure as warranted by the plaintiff. I disregard the figures for 97/98 as the wholesale side of the business had been sold. It is my view that the defendant’s loss, although it cannot be accurately estimated, should approximate to the difference between the 93/94 figure and the 95/96 figures. This is approximately $20,000 and possibly, coincidentally, there is a parity between this sum and the sum submitted by Mr Smith as being the appropriate assessment. There might be some minor adjustments to be made but, in my view, little is to be achieved by seeking to carry out those said adjustments.”
The parties took a common position on the appeal in acknowledging that the arithmetical difference between the 93/94 annual figures and the 95/96 annual figures was not a basis for assessment of damages which could be supported in principle.
The plaintiff’s (appellant’s) case upon appeal
Reduced to its essence the plaintiff’s case upon appeal was:
(a).... that contrary to the Magistrate’s findings the defendant did not rely upon the representations (see grounds 1 and 4 of appeal notice; grounds 2 and 3 were not pursued).
(b)(i)that the defendant erred in finding that the plaintiff had sustained a loss; that the defendant’s loss (if any) was not $20,000 and as a matter of principle should not have been assessed upon the basis abovementioned; the value of the business upon disposal should have been brought to account (grounds of appeal 5-8).
(ii). that the proper measure of any loss was the difference between the cost of the business and its market value as a going concern (ground 9).
At the forefront of the plaintiff’s argument (in extension of ground 9) was a submission that the evidence as to the market value of the business in July 1995 was absent, and that the defendant had chosen only to bring forward evidence of value of some selected items from inappropriate witnesses who relied upon unsatisfactory material.
Consideration of the grounds of appeal
The Magistrate in his reasons said:
“I have no hesitation in finding that representations were made that the weekly takings of the florist shop were $1797 or thereabouts. When the 94/95 return was completed however, that proved to be an erroneous figure. From the documents placed before me it would appear that the takings were, approximately, $350 less per week than what Mr Dobrodinski stated.
I therefore record that the figures provided were false. As I say, the defendant acted upon those figures.”
and
“Mr Dobrodinski would have this tribunal believe that his main concern was with the wholesale side of the business. I consider that is an accurate statement. He further says, however, that he had little or no knowledge of the retail side. I do not accept that proposition. He clearly had all the documentation from previous years’ trading. Until he and his wife separated, I consider that I can presume that they would have discussed the business at great length. This would especially be so because, for some time, they had apparently wished to place the enterprise on the market. For Mr Dobrodinski to make a bold statement based on previous years’ takings was not appropriate in all the circumstances. It appears to me that documentation was available to him at the time so that he could more properly inform himself....”
and
“If the matter was to be simply decided simply pursuant to the provisions of the Misrepresentation Act, I do not consider Mr Dobrodinski could bring himself, for example, within the provisions of s.7(2)(a). In particular, I do not think he had reasonable grounds to believe, and did believe, that the representation, as to the takings, was true. The test is objective and, in my view, he fails to discharge the onus.”
The finding regarding the representation as to weekly sales of $1797 is a response to the allegation in par 5.2 of the amended defence and counterclaim that the “true sales figure prior to contract were approximately $1300 per week”. Although he does not expressly say so, it is implicit in the Magistrate’s reasons that he treats the representation as to $1797 being with respect to a period following 30 June 1994 and that such representation was unjustified. The Magistrate makes a specific finding of reliance thereon by the defendant. The defendant now seeks to pursue a judgment based upon these findings.
In my opinion there was ample evidence to support these findings. The plaintiff argued upon the appeal that Ms Salievic did not rely upon the representation. There was evidence that a representation was made based on an assumption that the shop was doing roughly the same in 1995 as it did in 1994 (see Dobrodinski T27 and T52). The reliance of Ms Salievic is to be inferred from her complaints as to the “forgery of the figures” as recounted by Dobrodinski (T14) and directly from her own sworn evidence (eg T97). The respondent’s outline of argument contains an extended list of references to the evidence on this topic. The respondent is also entitled to rely upon the inference which may be drawn when a material representation is made which is calculated to induce the representee to enter into a contract which in fact results (see Gould v Vaggelas (1983-85) 157 CLR 215 at 236 per Wilson J).
In arguing that the defendant did not suffer a loss, the plaintiff seeks to bring to account the subsequent profit which the defendant made upon resale. If the defendant had immediately resold the business after its acquisition and in the same state as when purchased in July 1995, then there might be some force in the plaintiff’s contention. However, the business which the defendant sold was one which she had developed over a period of time in a different location, under a different name and with some new custom introduced into the business.
The principle is discussed in Monroe Schneider Associates (Inc) v No 1 Raberem Pty Ltd (1991) 104 ALR 397 especially at 403-404 and at 412-423. In that case involving a compensation claim based upon a breach of s 52 of the Trade Practices Act 1974 (Cth), Burchett J discussed the authorities which establish whether (as a question to be decided on the facts of the case) the so called mitigating transaction is to be treated as an independent or disconnected transaction. In a commercial dispute the subsequent transaction if it is to be taken into account by way of mitigation, must be one arising out of the consequences of the relevant breach and in the ordinary course of business (see British Westinghouse Electric & Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673 at 690 per Viscount Haldane LC).
In the present case, the respondent’s dealings and business operations are wholly independent of and unrelated to the earlier transaction when she acquired the business. There is discontinuity between the transaction under which the defendant purchased and the two transactions whereby she subsequently sold. If there is some mitigating factor to be applied to the damages then it is for the plaintiff appellant (as defendant by counterclaim) to prove the facts in mitigation. The facts found in this case demonstrate that there were supervening events after July 1995 as regards the development of the business which were independent of the fact of the purchase. The defendant’s diligence in the working of the business is not something for which the plaintiff is entitled to receive credit and it is not possible to disentangle and identify the effect of that element.
The more difficult question which remains concerns the value of the business which the defendant purchased. The Magistrate did not fix this value although invited to do so by counsel for the defendant. The Magistrate found:
“...counsel for the defendant submitted that the proper measure of damages was to make an estimation of the value of business as at the date of the contract. His submission was that, on the figures put forward, particularly relying on the evidence of Messrs Ashby and Kennedy, no further moneys should be payable to the plaintiffs. I have some difficulty with the ‘valuations’ of the two persons referred to. Mr Ashby, whilst having a considerable degree of practical experience, as to clearing sales, did not have any qualifications as a valuer. I consider that I am able to know that prices obtained at clearing sales are invariably on, what I might call, a ‘fire sale’ basis. Indeed, the figures put forward by Mr Ashby do not equate to the figures set out in the contracts, at the time of the sale, of the various components of the business. In addition, Mr Kennedy frankly admitted that he had some reservations as to fixing the value of the said business. He commented that the figures for the 93/94 financial year appeared to be ‘likely to be false’. He accepted a number of propositions, from Mr Ryan of counsel for the plaintiffs, that could have affected the figures in question. Unfortunately, these aspects were, by and large, not put to Mr Dobrodinski. Mr Kennedy concluded his evidence that he would have liked to have had more information, that he had requested certain primary documents which had not been supplied and that it was most important that he had access to the business’ general ledger.. I consider his evidence can be summed up when he said ‘To give an opinion, I would have to look at those documents’.
There is material upon which the value of the business and its assets could be assessed. Mr Kennedy has given evidence that the business itself is valueless upon the face of the plaintiffs’ figures. He is apparently suspicious of these figures which disclose significant variation in gross profit as a percentage of gross takings. However, the figures have been put forward by the plaintiffs and must constitute evidence against them. The plaintiffs can hardly be heard now to complain as to the unreliability of their own figures.
The Court also has the balance sheets including the depreciation schedules and the evidence of Mr Ashby. I note that the balance sheet for the year ended 30 June 1995 (part of Exhibit P3) shows stock on hand at $4000 and plant and equipment at $3690; the plant details appear on the depreciation schedule (where the depreciation must be deducted in order to find the individual closing values). The items shown in the depreciation schedule and their values may then be compared with the much more extensive list and values as shown in Exhibit D6 (prepared by Mr Ashby). However, I note that there are some items shown on the depreciation schedule which on the face of the documents have not been dealt with by Mr Ashby - in particular the Hi Ace Van and a lawn mower (purchased in 1994). There are some items which apparently appear on both lists - eg rotary hoe and cool room.
The Magistrate has expressed himself as having “some difficulties with the ‘valuations’....” I consider that he should be invited to resolve these difficulties in his own way and with the benefit of any further evidence which he may see fit to receive. The Magistrate has commented upon the fact that there are “aspects” which “by and large were not put to Mr Dobrodinski”. This also raises a question as to whether further evidence should be received. I should make it clear that I am not suggesting how a further hearing might be conducted. I am simply identifying questions which can be anticipated. There seems to be a possibility (and I put it no higher) that further evidence might be usefully received. I have considered whether I should make the assessment myself upon the existing evidence. Upon balance I have decided not to do this. It is preferable that the Magistrate be asked to reconcile the evidence and to exercise a discretion as to whether any further evidence should be permitted. As the matter must go back to the Magistrate to deal with outstanding questions of costs and interest, I consider that it is convenient to leave him with the task of assessing damages. However I have been concerned to offer guidance without embarrassing the Magistrate in performing the task which I refer back to him.
The parties are in agreement that the difference between the sum of $30,000 and the value of the business as purchased in July 1995 represents the proper measure of damages. The Magistrate has a discretion as to the method adopted but in light of the attitude of the parties and the clear statements of principle that the tortious basis of damages is appropriate, I would not expect the principle to present any difficulty. I note that the matter of assessment of damage to which I have referred has been treated as a rule of practice which requires “the usual measure of damages...to be applied in all but exceptional circumstances...” see per Gibbs CJ in Gould v Vaggelas (supra) at 221. If the value of the assets of the business be established (whether upon the existing evidence or by receiving further evidence at the Magistrate’s discretion) then there should be little difficulty in the calculation of damages. There will remain a question (which I will not determine) whether a “fire sale” basis of valuation is appropriate or whether the assets should be valued as part of a going concern (as contended in the notice of appeal). I mention this matter only as a matter of record of a point which was raised before me. Depreciated values as disclosed by the plaintiffs’ accounts are also available.
There is not a great deal of money involved in the cross appeal. Upon the evidence now available, the eventual outcome may not be much different from the assessment which the Magistrate previously made. On the other hand, the Magistrate may be persuaded to take a different view - particularly if additional evidence is allowed. I suggest that the parties should make an effort to agree the outstanding issues.
Formal Order
I will allow the appeal for the purposes of determining that upon the defendant’s election she be entitled (pursuant to s 84 of the Fair Trading Act 1987 (SA) to recover damage from the plaintiffs in respect of their involvement in a breach of s 46 of the Fair Trading Act by reason of the misrepresentation of the average weekly takings of the business since 30 June 1994 as being $1797 or thereabouts.
The order of the Magistrate with respect to counterclaim will be set aside and in lieu thereof judgment will be entered in favour of the defendant for a breach of the Fair Trading Act for damages to be assessed.
The action will be remitted to the Magistrate for further consideration to determine in a manner consistent with these reasons, the amount of damages to which defendant is entitled upon the counterclaim.
I note that the Magistrate already has reserved for further consideration the question of costs upon the trial and the question of interest which he will determine in the ordinary course.
I will hear the parties upon the question of costs of the appeal.
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