Dong v Song (No 2)
[2018] ACTSC 180
•21 June 2018
SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY
Case Title: | Dong v Song (No 2) |
Citation: | [2018] ACTSC 180 |
Hearing Dates: | 6-8 February, 23-24, 26-27 April 2018 |
DecisionDate: | 21 June 2018 |
Before: | McWilliam AsJ |
Decision: | 1. Judgment for the plaintiff in the sum of $251,503. 2. Interest is payable on the judgment sum in the amount of $51,472.06. 3. The defendants are to pay the plaintiff’s costs. 4. Order 3 is stayed for 7 days. |
Catchwords: | TRADE AND COMMERCE – Trade Practices and Related Matters – Misleading and deceptive conduct – dealings between friends – reasonable expectation of disclosure – failure to provide relevant information – whether causative link between misleading and deceptive conduct and damages claimed |
| Legislation Cited: | Acts Interpretation Act 1901 (Cth) s 2C Australian Consumer Law ss 2, 18, 236 Court Procedures Rules 2006 (ACT) r 1619 |
| Cases Cited: | Argy v Blunts & Lane Cove Real Estate PtyLtd (1990) 26 FCR 112 Ashbury v Reid [1961] WAR 49 Australian Competition and Consumer Commission v TPG Internet Pty Ltd [2013] HCA 54; 250 CLR 640 Compaq Computer Australia Pty Ltd v Merry (1998) 157 ALR 1 Concrete Constructions (NSW) Pty Ltd v Nelson (1990) 169 CLR 594 Fair Work Ombudsman v South Jin Pty Ltd [2015] FCA 1456 General Newspapers Pty Ltd v Telstra Corp (1993) 45 FCR 164 Gurr & Gurr v Forbes (1996) 80 ATPR 41-491 HTW Valuers (Central Queensland) Pty Ltd v Astonland Pty Ltd [2004] HCA 54; 217 CLR 640 Pereira v Director of Public Prosecutions (1988) 82 ALR 217 Poseidon Ltd v Adelaide Petroleum NL (1991) 105 ALR 25 R v Tannous (1987) 10 NSWLR 303 Rural Press Ltd v Australian Competition and Consumer Commission [2003] HCA 75; 216 CLR 53 Semrani v Manoun; Williams v Manoun [2001] NSWCA 337 Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1997] AC 254 Yorke v Lucas (1985) 158 CLR 661 Zamora (No 2) [1921] 1 AC 801 |
Parties: | Xin Dong (Plaintiff) Shaoqing Song (First Defendant) Zheng Zhou (Second Defendant) |
Representation: | Counsel T Morahan (Plaintiff) Self-Represented (Defendants) |
| Solicitors Chen Shan Lawyers (Plaintiff) Self-Represented (Defendants) | |
File Number: | SC 100 of 2016 |
By proceedings commenced on 29 March 2016, the plaintiff brings claims for misleading and deceptive conduct, negligent misstatement and payments under a mistake of fact. The causes of action arise from the purchase on 18 December 2014 of a restaurant business trading as ‘Dumpling Inn’, located in Belconnen in the ACT.
The plaintiff and the defendants in these proceedings were all friends at the time. They decided to purchase the business by first setting up a company vehicle in September 2014, being Ms Vivian Pty. Limited (Ms Vivian), with the name Vivian being the first defendant’s anglicised name. Initially Ms Dong, the plaintiff, was issued with 40 shares in Ms Vivian, and Mr Zhou, the second defendant, was issued with 60 shares.
Ms Song, the first defendant was not issued with any shares in the company. The plaintiff alleges that she expressed some disquiet about this, however Ms Song told her that she was funding Mr Zhou’s share and they were all in business together.
Later, at the request of Ms Song and prior to the completion of the purchase, the plaintiff increased her shareholding to 45 shares, and Mr Zhou reduced his shareholding to 55 shares.
The plaintiff alleges that at the time Ms Vivian was set up in September 2014 and leading up to when the business was purchased, the defendants (who are now married) told her the purchase price for the business was $550,000. She was also told there were additional costs of approximately $80,000 associated with the purchase, including items such as legal fees, payment of a bond to the landlord, and advance rent.
Relying on what she had been told, the plaintiff paid to the first defendant $298,980 in a number of instalments in December 2014, believing that such sum approximately reflected her agreed 45% share in Ms Vivian.
Over February 2015 to September 2015, the plaintiff received payments from Ms Vivian, mostly but not invariably in amounts of $2,250. In total, the plaintiff alleges she received $47,477 in dividends. The defendants allege the plaintiff received $51,411.
Subsequently on 7 March 2016, the plaintiff obtained a copy of the contract for sale of the restaurant business, which she had been requesting for more than a year. From that document, the plaintiff contends that she learned for the first time that the total purchase price of the business was in fact only $220,000, not $550,000 as had been represented to her since September 2014.
She then attended the offices of the accountant to Ms Vivian and obtained a copy of the financial statements, which revealed that her financial contributions were not reflected as assets, loans or issued capital.
The plaintiff commenced proceedings three weeks later. Ms Dong claims that she would not have entered into any contractual arrangement with the defendants whereby she paid almost $300,000 for a 45% share in a business sold to the parties for only $220,000. Nor would she have participated in a business venture with the defendants where she paid all the money to buy the business and the defendants paid none.
Adding insult to injury, Ms Vivian was put into voluntary receivership by the first defendant in March 2018, with no dividend expected to be paid to any creditor.
The claim against Ms Song is based on representations directly made by her. The claim against Mr Zhou is based on him being knowingly involved in the same conduct.
It is not in dispute that the plaintiff paid $298,980. The dispute concerns what the defendants initially told the plaintiff, the purpose of the moneys paid by the plaintiff, the plaintiff’s asserted reliance on what was said, and the alleged loss.
Counsel for the plaintiff ultimately addressed only the statutory misleading and deceptive conduct claim, as the other causes of action did not make any difference in monetary terms to the relief that would be granted if the plaintiff succeeded, and the facts giving rise to those claims were identical to those founding the claim under statute.
For the reasons that follow, I have determined that each of the defendants engaged in the misleading and deceptive conduct in relation to the purchase price of the business.
Applicable legislation
The relevant statute in this jurisdiction is the Fair Trading Act (Australian Consumer Law) Act 1992 (ACT) (Fair Trading Act).
Sections 6 and 7 of the Fair Trading Act incorporate sch 2 to the Competition and Consumer Act 2010 (Cth) (Competition Act), and the regulations made under that statute as part of the statute. The legislation so applied is described as the ‘Australian Consumer Law (ACT)’, hereafter referred to as the ACL.
Section 18(1) of the ACL states:
A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.
Section 2 of the ACL defines ‘trade or commerce’ to include any business or professional activity (whether or not carried on for profit).
Section 2(2)(a) of the ACL relevantly states (emphasis added):
In this Act:
A reference to engaging in conduct is a reference to doing or refusing to do any act, including:
(i) the making of, or the giving effect to a provision of, a contract or arrangement; or
(ii)the arriving at, or the giving effect to a provision or, an understanding; or
(iii)…
If a contravention of s 18 of the ACL is established, s 236(1) of the ACL provides for recovery of the loss or damage ‘because of the conduct’ against the person who contravened s 18, ‘or against any person involved in the contravention.’
Section 2 of the ACL provides that a person is ‘involved’ in a contravention or in conduct that constitutes a contravention if the person:
(a) has aided, abetted, counselled or procured the contravention; or
(b) has induced, whether by threats or promises or otherwise, the contravention; or
(c) has been in any way, directly or indirectly, knowingly concerned in, or party to the contravention; or
(d) has conspired with others to effect the contravention.
Section 137B of the Competition Act has potential application. It provides:
If:
(a) a person (the claimant) makes a claim under s 236(1) of the [ACL] in relation to economic loss …suffered by the claimant because of the conduct of another person; and
(b) the conduct contravened section 18 of the [ACL]; and
(c) the claimant suffered the loss or damage as result:
(i) partly of the claimant’s failure to take reasonable care; and
(ii) partly of the conduct of the other person; and
(d) the other person did not intend to cause the loss or damage and did not fraudulently cause the loss or damage;
The amount of the loss or damage that the claimant may recover under subsection 236(1) of the [ACL] is to be reduced to the extent to which a court thinks just and equitable having regard to the claimant’s share in the responsibility for the loss and damage.
Issues for determination
The ACL thus creates the general framework for the issues in the present case. They are:
(a)Identification of the conduct;
(b)Whether the conduct was ‘in trade or commerce’;
(c)Whether the conduct was misleading or deceptive;
(d)Whether the second defendant was involved in any contravention; and
(e)Whether any loss or damage was suffered because of the conduct.
General principles
The principles applying to the facts of this case are well-established, fairly canvassed in many decisions of courts across Australia and would not otherwise call for detailed exposition. They have been set out for the proper understanding of the parties, as none of them speak English as a first language, and the defendants became self-represented during the hearing.
Conduct
In Campomar Sociedad, Limitada v Nike International Ltd [2000] HCA 12; 202 CLR 45, the High Court identified what has subsequently been described as a ‘practical’ distinction in context (see Campbell v Backoffice Investments Pty Ltd [2009] HCA 25; 238 CLR 304 (Campbell) at [26] per French CJ) between circumstances where representations have been made to individuals, and where they have been made to the community or public at large.
Where the conduct is directed to an individual (as is the case here), it is assessed not by reference to a hypothetical ordinary person, but by reference to the circumstances and context of the questioned conduct. The knowledge of the person to whom the conduct is directed may be relevant: Campbell at [27].
Where the conduct concerns negotiations leading to the execution of a private contract, while full disclosure is not required in every situation and no one expects all the cards to be on the table, the bargaining process is not to be seen as a licence to deceive: Poseidon Ltd v Adelaide Petroleum NL (1991) 105 ALR 25 (Poseidon) per Burchett J. The particular facts must be considered in the light of the ordinary incidents and character of commercial behaviour: General Newspapers Pty Ltd v Telstra Corp (1993) 45 FCR 164.
‘In trade or commerce’
The expression ‘in trade or commerce’ refers only to conduct which is itself an aspect or element of activities or transactions which, of their nature, bear a trading or commercial character: Concrete Constructions (NSW) Pty Ltd v Nelson (1990) 169 CLR 594 at 602-603 (Concrete Constructions). The phrase is restricted to ‘the central conception’ of trade and commerce, rather than the broader field of activities in which corporations may engage, either in the course of, or for the purposes of carrying on, some overall trading or commercial business: Concrete Constructions at 603.
Misleading and deceptive
The characterisation of the conduct must be undertaken by reference to the circumstances and context. On a claim by an individual, the relevant circumstances include the knowledge of the person who claims to have been misled and any common assumptions or practices established between the parties or in the particular activity or business in which they are engaged: Miller & Assocs Insurance Broking Pty Ltd v BMW Australia Finance Ltd [2010] HCA 31; 241 CLR 357 (Miller) at [20].
The approach is an objective one and involves asking whether the impugned conduct viewed as a whole has a tendency to lead a person into error: see Campbell at [25] per French CJ; Australian Competition and Consumer Commission v TPG Internet Pty Ltd [2013] HCA 54; 250 CLR 640 (ACCC v TPG) at [49] per French CJ, Crennan, Bell and Keane JJ); Miller at [15] per French CJ and Kiefel J.
An intention to deceive is not necessary: Google Inc v Australian Competition and Consumer Commission [2013] HCA 1; 249 CLR 435 at [9], Yorke v Lucas (1985) 158 CLR 661 (Yorke v Lucas) at 666, Puxu Pty Ltd v Parkdale Custom Built Furniture Pty Ltd (1982) 149 CLR 191.
However,a person cannot engage in conduct in contravention of the section unless the person has actual knowledge of the matter said to be misleading or deceptive: Gurr & Gurr v Forbes (1996) 80 ATPR 41-491; cited in Semrani v Manoun; Williams v Manoun [2001] NSWCA 337 at [61].
Those well-established principles were also referred to by Refshauge J in Jardine v Vaughan; Clarkson Williams Partners Pty Ltd (Third Party) (No 3) [2015] ACTSC 33 (Jardine) at [151]. His Honour was there dealing with an earlier version of the legislation, but the principles remain applicable to the ACL.
Accessorial liability
A person (including a body corporate: see s 2C of the Acts Interpretation Act 1901 (Cth)) will only be regarded as ‘involved’ in a contravention if the person intentionally participated in the contravention. This requires actual, not constructive, knowledge of the essential matters or facts that make up the contravention: Yorke v Lucas at 667; Compaq Computer Australia Pty Ltd v Merry (1998) 157 ALR 1 (Compaq Computer) at 4-5; and Quinlivan v Australian Competition and Consumer Commission [2004] FCAFC 175;160 FCR 1 at [9].
Being ‘knowingly concerned’ in a contravention (see par (c) of the definition of ‘involved’) requires association with, implication in, or a practical connection with the contravening conduct: Qantas Airways Ltd v Transports Workers’ Union ofAustralia [2011] FCA 470; 280 ALR 503 (Qantas Airways) at [324]-[325]; Trade Practices Commission v Australian Meat Holdings Pty Ltd (1988) 83 ALR 299 Wilcox J at 357 citing Ashbury v Reid [1961] WAR 49 (Ashbury v Reid).
A person cannot become ‘involved’ in an act merely by reason of his (in this case) knowledge of the conduct pursued; there has to be something that implicates the person such that they become associated with the conduct: see R v Tannous (1987) 10 NSWLR 303 (R v Tannous) at 307-308 citing Ashbury v Reid at 51.
The requisite actual knowledge must be present at the time of the contravention. A later acquisition of knowledge of the essential matters is not sufficient: Fair Work Ombudsman v South Jin Pty Ltd [2015] FCA 1456 at [234].
It is the knowledge of the alleged accessory and not what might be postulated of a hypothetical person in the position of the alleged accessory which must be demonstrated, although what might be postulated of such a hypothetical person is not irrelevant. Knowledge must be the only rational inference available: Pereira v Director of Public Prosecutions (1988) 82 ALR 217 (Pereira) at 219-220 per Mason CJ, Deane, Dawson, Toohey and Gaudron JJ.
However, it is not necessary that the person physically do anything to further the contravention. It is sufficient if the person, by what he said and agreed to do, in fact became associated with and thus involved, in the relevant sense, in the conduct constituting the contravention. R v Tannous at 308; cited in Leighton Contractors Pty Ltd v Construction, Forestry, Mining and Energy Union [2006] WASC 144; 154 IR 228 per Le Miere J at [29]; Qantas Airways at [325].
It is unnecessary to prove that the respondent knew that his actual participation was a breach of the statute (in this case, the ACL) or could be characterised as such: Rural Press Ltd v Australian Competition and Consumer Commission [2003] HCA 75; 216 CLR 53. This is consistent with the common law and statutory principle that no person will be excused from liability because of ignorance of the law: Walden v Hensler(1987) 163 CLR 561.
Where there is a combination of suspicious circumstances and a failure to make enquiry, it may be possible to infer actual knowledge, described as willful blindness: see Zamora (No 2) [1921] 1 AC 801 at 812; Pereira at 219-220; Compaq Computer at 5.
Loss and damage
A causal connection must be established between the relevant conduct and the loss and damage suffered: Campbell at [102] per Gummow, Hayne, Heydon and Kiefel JJ.
Such connection may be satisfied by acts done in reliance upon the misrepresentation. If those acts result in economic loss, that will ordinarily be recoverable: Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 (Wardley) at 525-526 per Mason CJ, Dawson, Gaudron and McHugh JJ.
However, the question of reliance includes taking account of the fact that the person to whom the misrepresentation is made must exercise reasonable care for their own interests: ACCC v TPG; see also Taco Co of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177. In Argy v Blunts & Lane Cove Real Estate PtyLtd (1990) 26 FCR 112 at 138, Hill J said:
A case may perhaps be imagined where an applicant is so negligent in protecting his own interests that there will be a finding of fact that the representation complained of was not in the circumstances a real inducement to his entering into a contract. In such a case the element of causation between misrepresentation and damage will have been severed by the intervention of the negligence of the applicant.
Turning then to the measure of the loss or damage, the assessment of damages for misleading or deceptive conduct usually involves a comparison between the position in which the person who suffered the loss or damage is in and the position the person would have been in had there been no contravening conduct: Marks v GIO Australia Holdings Ltd [1998] HCA 69; 196 CLR 494 at [42] per McHugh, Hayne and Callinan JJ.
In the case of misrepresentation which induces the plaintiff to enter into a contract to purchase property (such as a business), the plaintiff’s loss, apart from any question of consequential damage, is measured by the difference between the price paid or payable under the contract and the value of the property at the date of the contract: Wardley at 530.
This measure is often traced (as it was in Wardley) to Potts v Miller (1940) 64 CLR 282 at 297 (Potts v Miller), a case concerning an action in deceit, where the measure of damages was stated to consist of the loss or expenditure incurred by the plaintiff in consequence of the inducement upon which reliance was placed, diminished by any corresponding advantage in money or money's worth obtained on the other side of the transaction.
As to consequential damage, if the cause for a decline in value is due to matters that are ‘independent’, ‘extrinsic,’ ‘supervening’ or ‘accidental’, then the additional loss is not the consequence of the inducement. On the other hand, if the decline in value is sourced in the circumstances crucial to the value of the property at the time when the plaintiff acquired it, then that should be taken into account: Potts v Miller at 298 per Dixon J; cited in HTW Valuers (Central Queensland) Pty Ltd v Astonland Pty Ltd [2004] HCA 54; 217 CLR 640 (HTW Valuers) at [40]. The latter circumstance has been described as an ‘inherent vice’ in the property (business, realty, shares, etc) as purchased: Netaf Pty Ltd v Bikane Pty Ltd (1990) 26 FCR 305 at 308.
However, the overriding compensatory purpose of damages means that such an approach is not applied inflexibly. In HTW Valuers, a case dealing with s 82 of the Trade Practices Act 1974 (Cth), the statutory predecessor to s 236 of the ACL, Gleeson CJ, McHugh, Gummow, Kirby and Heydon JJ said of the Potts v Miller approach at [35]:
The approach of subtracting value from price is commonly employed where the acquisition of … businesses or shares is induced by deceit. It has also been commonly employed under s 82 of the Act. It is sometimes described as the rule in Potts v Miller. Even in the areas in which that approach is often applied, and even apart from cases in which consequential losses have been recovered, the ‘rule’ is not universal or inflexible or rigid. This perception is not novel. It has existed at least since the judgment of Dixon J in Potts v Miller and has been quite plain since that of Gibbs CJ in Gould v Vaggelas. Even Jordan CJ, who called the rule ‘well settled’, acknowledged that it was only a ‘rule of practice’. The flexibility of the rule can be seen by reference to a number of its characteristics.
The High Court went on to refer with approval (at [63]) to Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1997] AC 254 (Smith New Court Securities) and what was stated by Lord Steyn, to the effect that the rule which turns on an assessment of value is only a means of giving effect to the overriding compensatory rule. If that method is inapposite, the court is entitled to simply assess the loss flowing directly from the transaction without any reference to the date of transaction or indeed any particular date.
At [66] of HTM Valuers, the High Court again referred to the majority of the House of Lords in Smith New Court Securities at 267, stating that the general rule “will normally not apply where either (a) the representation has continued to operate after the date of the acquisition of the asset so as to induce the plaintiff to retain the asset or (b) the circumstances of the case are such that the plaintiff is, by reason of the fraud, locked into the property”.
These above authorities on loss and damage were collected by Refshauge J in Jardine at [267]-[274], and more recently in Lockyer v Bermingham (No 3) [2018] WASC 61.
Relevant to the facts of this case, Refshauge J also referred in Jardine at [272] to the High Court’s endorsement in HTW Valuer (at [39]) of an approach it had earlier taken in Kizbeau Pty Ltd v WG & B Pty Ltd (1995) 184 CLR 281 at 291-296, which was that assessments of compensation or value at one date are commonly made taking account of all matters known at the later date when the court’s assessment is being carried out, and that approach was appropriate in relation to claims for damages for misleading and deceptive conduct.
In Jardine, Refshauge J concluded by setting out a number of propositions at [275], one of which was:
[W]here a business is purchased relying on misleading or deceptive conduct, the measure of damage is the difference between the price paid and the actual value of the business at the time of purchase, or any subsequent diminution caused by matters inherent in the business at the time of the acquisition, together with any consequential losses attributable to causes inherent in what was purchased and not to supervening independent, extrinsic or accidental causes…
These are the principles applying to the facts of this case.
The conduct
The questioned conduct here consists of two oral representations, the first being made in September 2014, and repeated in October and December 2014, by Ms Song to Ms Dong concerning the purchase price of the business being $550,000, when in fact she knew it was being purchased for only $220,000. The subsequent representation was that the defendants (Ms Song on Mr Zhou’s behalf) were paying their share of the purchase moneys, when in fact neither of the defendants were contributing any money to the purchase price.
The defendants contended that Ms Dong knew from September 2014 that the purchase price was $220,000.
However, Ms Dong gave evidence that $550,000 was the purchase price she had been told in September 2014 and that the first time she became aware of the $220,000 figure was when she received the contract for sale of business from the solicitor acting on the purchase in March 2016. I accept that evidence and found Ms Dong to be a generally credible witness.
Further, in evidence there was a piece of paper with handwritten figures recording where Ms Song added up all the extra expenses for Ms Dong while they were at a meeting together, prior to purchasing the business. Ms Song accepted the document was in her handwriting. The document bears the date of 30 October 2014, although the oral evidence placed the meeting in December 2014, shortly prior to completion of the purchase.
The expenses listed on the document were the ASIC registration fee, the company registration fee, legal costs, advance rent, the provision of a bank guarantee, and an administration fee. They amount to $84,299.74 taking into account $5000 in bank savings (as recorded on the document and explained by Ms Song).
The total figure recorded was $634,299.74. When the expenses are subtracted from this figure, the amount is $550,000.
Some of the figures on that document had a line put through them. An explanation was offered by Ms Song in this regard, but it was confusing and was surmise rather than recollection, and I have put it to one side as neither reliable nor plausible. The document is a contemporaneous record and the figures on it confirm the purchase price stated by Ms Song at the time was $550,000.
That document also refutes any suggestion that the $550,000 was somehow inclusive of other expenses, such as capital for future renovations, as was faintly suggested in the evidence. If part of the money was for any other expenses, it would have been set out on the handwritten document that was created for the purpose of explaining to Ms Dong what the total expenses were.
Lest there be any doubt about it, also in evidence (see Dong v Song [2018] ACTSC 82) was a video recording where Ms Song again confirmed at a meeting with Ms Dong and two others in March 2016 that the purchase price for the business was $550,000 at the time the business was purchased in 2014. During that recorded conversation, Ms Song still maintained that was the figure paid to purchase the business, and still maintained that she had paid money to the vendor to purchase the business, including the deposit and funds representing Mr Zhou’s 55% share. However, Ms Song admitted in the witness box when taken to transcripts of the video recording that she was telling lies during that conversation.
The representations were misleading
There is no doubt that the representation as to the purchase price was misleading. Ms Song’s oral and affidavit evidence was that she knew in September 2014 that the purchase price of the business was $220,000.
The contract for the purchase of the business was in evidence. It records the purchase price as $220,000. Ms Song accepted in the witness box that she had a copy of the contract from 10 March 2015 but had not given it to Ms Dong.
The representation that Ms Song would contribute money to the purchase price of the business on behalf of the defendants was also misleading. Ms Song’s evidence under cross-examination was that Ms Dong funded the entire purchase price of the business.
Ms Song had claimed to have deposited $33,000 into the bank account of Ms Vivian on 28 November 2014, by way of a deposit for the purchase of the business. However, it transpired in cross-examination that the claimed ‘deposit’ was in fact moneys that Ms Dong had transferred to Ms Song’s personal account some days previously.
Mr Zhou accepted he paid no money towards the purchase price but that he had intended to contribute his labour and skill. The evidence thus establishes that neither Ms Song nor Mr Zhou financially contributed to the purchase price of the restaurant business.
The representations were made in trade or commerce
Part of the circumstances surrounding the transaction is that the parties at the material time were friends. The evidence was that Ms Song and Ms Dong lived together at one stage, and had stayed at each other’s houses in Australia or in China. Ms Song had asked Ms Dong to loan her brother some money, which Ms Dong had arranged through her parents, both of whom gave credible evidence at the hearing. The money was then repaid and Ms Dong’s evidence was that this transaction assisted in building a relationship of trust between the parties.
There was some dispute about whether that transaction was a gift, a loan, a test or an advance of funds for some other purpose. Given that it was promptly repaid, the most plausible finding is that it was a loan and that this transaction was a test by Ms Song to see whether Ms Dong was serious about investing in the restaurant business with her and the second defendant. Ms Song’s evidence was that at the time, Ms Dong was going home to China and she was unsure whether Ms Dong would even return to Australia.
Also relevant to whether the conduct was ‘in trade or commerce’ was that it occurred before the restaurant business was purchased and the representation was not made by the vendor of the business. Rather, the circumstances involved individuals in their own capacity and then as the representatives of what became the intended purchaser, Ms Vivian, negotiating a price with a person investing in that company for the commercial purpose of owning the restaurant business. It may be properly characterised as negotiations between parties prior to the making of an arrangement or contract. The arrangement included not just Ms Dong’s individual investment in shares in a company, but the creation of a company specifically to purchase the restaurant business, and the purchase of shares in that company.
Accordingly, although the parties were friends and were not yet ‘in’ business, in that the conduct was preparatory to the purchase of the restaurant business, they were transacting through a commercial entity set up for the specific purpose or business activity of owning and operating a restaurant. They had engaged in a previous test to confirm to each other their trustworthiness in future business dealings. In those circumstances, the representation was made in trade or commerce as defined in the ACL.
Reliance
The evidence establishes that Ms Dong relied upon the misrepresentation as to purchase price in the amount of money she paid for the 45% share in Ms Vivian. The figure she paid was directly tied to the purchase price and expenses she was told by Ms Song.
Ms Dong’s evidence, which I accept, was that she expressly did not want to own even a 50% shareholding in Ms Vivian, let alone a majority share-holding, because she had no business experience and no experience in managing a restaurant. She did not want the responsibility or that level of risk. She initially suggested a 30% share, and then agreed to accept a 40% share allocation. In late September or early October 2014, Ms Song asked Ms Dong to increase her shareholding in Ms Vivian to 50% however Ms Dong refused. Ultimately, she agreed to increase her shareholding to 45 shares.
Those changes in shareholdings were admitted in the amended defence.
Further, as submitted by counsel for the plaintiff, the evidence establishes that the decision the plaintiff made was whether or not to buy a particular business in conjunction with the defendants. Had she known that neither defendant was paying any money to buy the business, she would never have agreed to the arrangement. I accept that the totality of the evidence establishes this. The evidence does not suggest that the plaintiff had any desire or thought of paying for an asset which the defendants then managed and from which at least the second defendant derived profit. The plaintiff was credible and her evidence was consistent with what might be considered a reasonable commercial position. She wanted everyone to have ‘skin in the game’ as that would help the business to be a success.
There appeared to be two arguments raised by the defendants as to Ms Dong’s reliance on the figure. It is a little unclear, because the defendants became self-represented after Ms Dong was cross-examined and this affected the nature of the closing submissions made by them, but the lines of questioning of Ms Dong around reliance when they were legally represented seemed to be directed to two issues.
The first argument as I understood it was that Ms Dong wanted to obtain permanent residency in Australia. She would have paid any figure named by the defendants because she perceived a benefit to her in terms of her desired migration status.
I accept that Ms Dong may have at the time thought that buying into a business in Australia would assist her chances of obtaining permanent residency in the future. Whether or not that belief was well-founded is another thing, and is not a matter that needs to be considered here.
However, even if Ms Dong had hoped to use the transaction as part of pursuing hopes of migrating to Australia permanently, I do not accept that Ms Dong was prepared to pay an unlimited sum, and certainly not a figure that far exceeded the true total purchase price of the business. There is no logical reason why she would do so. Moreover, her parents were actively involved in the dealings between Ms Song and Ms Dong. Having seen them give evidence in the witness box, they are each switched on, rational individuals, protective of their daughter’s interests and it was their money that was being given to their daughter for her to use in this venture. It is highly unlikely they would have allowed Ms Dong to throw unlimited amounts at the purchase of the business over and above the asking price.
The second argument (which was also relevant to s 137B of the ACL, discussed separately below) was that Ms Dong failed to make her own enquiries of the vendor and failed to exercise reasonable care for her own interests (by failing to seek independent accounting or legal advice, failing to speak with the vendor directly, failing to obtain sufficient documents etc).
Ms Dong’s evidence in this regard, which I accept, was that she did ask to speak to someone involved in the purchase of the restaurant business. Ms Song told her that it was better if she did not speak with any such person because she looked too young, had no business experience, would appear naïve and there was a risk that if she met with the landlord, he would not trust her to be capable of running the business successfully. If he did not consent to the transfer of the lease, the purchase would fail.
A further reason given by Ms Song for refusing to allow Ms Dong to speak with the restaurant vendor was that he was selling the restaurant business to them due to his connection with Mr Zhou’s family (who owned a similar restaurant business in Dickson). If they became aware that another person was involved, it would cause difficulties with the negotiations, because Ms Dong would be treated as an outsider and the vendor did not want to deal with an outsider.
This explanation as to why Ms Dong left the defendants to deal directly with the vendor without her involvement is plausible, it was not contradicted by Ms Song, and I accept it.
Ms Dong also obtained some accounts of the business and discussed them with her father. It is true that an accountant or lawyer was not separately instructed by Ms Dong. However, this was not a transaction between vendor and purchaser, where the purchaser might reasonably seek to protect his or her interests by having an accountant review the accounts for value. There was already both a lawyer and an accountant involved on behalf of the purchaser, Ms Vivian, instructed by the defendants, and the defendants had plainly assumed full negotiating control with the vendor in terms of the purchase price.
While a second accountant may have advised that the business was not worth the purchase price, or a second solicitor may have verified the information that had been provided by Ms Song, that does not establish that this is what Ms Dong, acting reasonably to protect her interests, should have done. It was not for Ms Dong to engage lawyers to correct the wrong information given by Ms Song, as the information was of a basic, factual nature, not of a legal nature (c.f. Ackers v Austcorp International Ltd [2009] FCA 432 at [152]).
The prior dealings between the parties, and the joint nature of the purchase meant that, in my view, it was not unreasonable for Ms Dong to expect her future business partners to tell her the truth about something as fundamental as the sale price and whether they were paying their share of that price. As the authorities (Poseidon) make clear, negotiations are not a licence to deceive. There is no basis to find that the plaintiff failed to act reasonably to protect her interests in the particular circumstances of the transaction and the parties involved.
The second defendant was ‘involved’ in the contravention
On the plaintiff’s affidavit evidence, the second defendant was present at a number of the conversations with the plaintiff and the first defendant where the representations were made. He was not just a bystander in the arrangement, but part of it, as partly evidenced by his becoming the sole director and majority shareholder.
The cross-examination of the second defendant explains the story better than any summary of it:
Later in 2014, you became worried yourself that [Ms Dong] was not going to invest in the business, didn’t you?---Yes.
And you had a conversation with Ms Song where you decided that you would try to frighten her off - both of you - by offering that she pay $220,000 and get a 40 per cent share of the business, didn’t you?---Yes.
At that stage, you knew that the purchase price of the business that you were looking at was $220,000, didn’t you?---Yes.
And so by making this if I can call it the frightening offer, she was going to pay the entire purchase price and only get a 40 per cent share of the business?---Yes.
And that is, in fact, what happened. She paid the entire purchase price and got a 45 per cent share of the business, didn’t she?---Yes.
Later in cross-examination, Mr Zhou also accepted that he did not make any monetary contribution to the purchase price of the business. However, he did make small financial and other contributions once the business had been purchased, including his time and expertise.
It is clear from his knowledge and conduct that Mr Zhou was someone who was an intentional participant in the conduct. He knew the facts and was part of the arrangement. In accordance with the principles set out above, Mr Zhou was ‘involved’ in the contraventions.
Loss and damage
The plaintiff claims the whole of the purchase price amounts contributed by her ($298,980), minus the dividends she received. I accept on the evidence that the dividends she received amounted to $47,477. That is a lesser amount than the sum of $51,411 pleaded by the defendants. The reason is that some of the amounts paid to Ms Dong were incorrectly characterised by the defendants as dividends, when they were actually reimbursement of expenses paid by the plaintiff for insurance, electricity, gas and rent.
Accordingly, the plaintiff seeks the sum of $251,503, as the loss suffered because of the conduct of the defendants, on the basis that she would not have entered into the transaction at all. It is a ‘no transaction’ premise.
The case is somewhat unusual, because the misrepresentation was not about the value of a business reflected in a certain price paid, but the price itself. On one view, if a comparison is made between the position in which the plaintiff is in now and the position she would have been in had there been no misrepresentation as to the purchase price, it may well be the case that the plaintiff would still have bought into the business, just at the lesser price. If the plaintiff had known that the purchase price was $220,000 and accepting her agreed share of 45% would not have changed, the plaintiff would have paid $99,000 plus expenses of $37,935. Taking into account the dividends then paid, the plaintiff’s loss as at the date of the purchase was $114,568. The question would then become whether the subsequent decline in Ms Vivian’s business to the point where it was put into administration was part of an inherent vice at the date of purchase or due to extrinsic circumstances.
However, there was a second misrepresentation as to the defendants’ contributions to the purchase of the business. Once that is factored in, the comparison becomes one where the plaintiff knows that the price is less, and that she is being asked to pay the total purchase price by herself, but only receive a 45% share. As I have found above, she would not have invested at all. The position that she would have been in is that the transaction was not pursued. I therefore accept the plaintiff’s loss is that which she has claimed.
In case it is necessary to go further, there are additional reasons why assessing damages by reference to comparative loss as at the date of the completion of the business purchase is not appropriate here. First, it is significant to the measure of damages that the first time the plaintiff discovered the truth about the purchase price was in March 2016, more than a year after the representation was made. At that time, Ms Song was still actively concealing the purchase price from the plaintiff.
Up until September 2015, the plaintiff had been receiving monthly accounts and dividends which gave her no cause to suspect anything was awry. These combined circumstances meant that the representation continued to operate well after the date of the acquisition of the asset, so as to induce the plaintiff to continue to assume her investment was in a business worth its purchase price and thus retain the asset.
Second, the whole business relationship between Ms Song and Ms Dong had been forged in their previous friendship and on the building of trust. Had Ms Dong discovered that Ms Song lied to her in such a significant way before entering into the purchase of the business and thus suffering loss, she may well have reasonably taken the view that the defendants were not people with whom she wanted to do business at all.
That is a slightly different scenario to a counterfactual where the contravention had not occurred, but it supports the conclusion I reached above based on the nature of the misrepresentations. The personal ongoing relationship between the parties suggests that the strict comparison of price minus value that might be appropriate in a business sale case between vendor and purchaser (and then taking into account dividends paid) is not quite apt to cover the loss suffered by Ms Dong here, where she has been saddled with an ongoing close business relationship with persons in whom she has lost trust. That is evident from Mr Zhou’s oral testimony that he asked Ms Dong to pay further contributions into the business before deciding ultimately to put Ms Vivian into administration, but she refused to contribute any further funds.
Third, the circumstances of the case were that because of the misrepresentation, the plaintiff was effectively locked into Ms Vivian and the restaurant business. The plaintiff could not easily transfer her shares to a third party given that the company was formed out of personal relationships with the defendants and the second defendant was the majority shareholder and operator of the business.
Even so, the circumstances as at the date of the hearing were that there was nothing left to buy within a couple of months of the plaintiff’s discovery of the truth. The administrator’s report to creditors dated 2 May 2018 indicates that the company suffered reduced trade, sustained losses, and had in fact been insolvent since July 2016.
Recalling the principles in HTM Valuers and Smith New Court Securities referred to above, this is not a case where it is appropriate to determine the compensable loss by reference to the date of the purchase on a price minus value basis.
On the above reasons, the sum of $251,503 reflects the loss suffered because of the conduct of the defendants. It is the amount of damages payable to most fairly compensate the plaintiff for the wrong she has now suffered: Johnson v Perez (1988) 166 CLR 351.
No reduction for failure to take care
For completeness, on the findings set out above in relation to reliance, there was no failure by the plaintiff to take reasonable care so as to enliven s 137B of the Competition Act. Even if there was such a finding, s 137B excludes any reduction in damages where the person intended to cause the loss. On the admissions of Ms Song and Mr Zhou above, there can be no other conclusion than that they intended Ms Dong to pay more than a 45% share of the actual price of the business for their personal gain. Ms Song maintained that position right up until proceedings were commenced by the plaintiff, when attempting at the recorded meeting to entice a third party to buy out her husband’s shares in Ms Vivian and the business.
Interest
Interest has been claimed under r 1619 of the Court Procedures Rules 2006 (ACT) (authorised by item 20 of sch 1 in the Court Procedures Act 2004 (ACT)). The plaintiff took a practical approach to the calculation of interest, claiming from 18 December 2014 when the purchase of the business was complete, on the amount of $251,503, which is less than what was originally contributed by the plaintiff, with the dividends being paid in subsequent months. I accept that this is an appropriate case in which to award interest and on the basis of the plaintiff’s detailed calculations that were submitted.
Conclusion
Accordingly, for the above reasons, I am satisfied that the first and second defendants engaged, in trade and commerce, in misleading and deceptive conductcontrary to s 18 of the ACL.
Costs are in the discretion of the Court. This appears to be a case where costs would follow the event, such that the defendants ought pay the plaintiff’s costs.
However, as there may be matters presently outside the knowledge of the Court that affect this issue, the costs order will be stayed for seven days. If either party wishes to make an application to vary the costs order, they are to notify the Court within that time.
The following orders are made:
1.Judgment for the plaintiff in the sum of $251,503.
2.Interest is payable on the judgment sum in the amount of $51,472.06.
3.The defendants are to pay the plaintiff’s costs.
4.Order 3 is stayed for 7 days.
| I certify that the preceding one hundred and eleven [111] numbered paragraphs are a true copy of the Reasons for Judgment of her Honour Associate Justice McWilliam Associate: Date: |
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