Evolution Traffic Control v Skerratt

[2018] NSWSC 49

Supreme Court

New South Wales

• Amendment notes

Medium Neutral Citation:

Evolution Traffic Control v Skerratt [2018] NSWSC 49

Hearing dates:

4, 5, 6 and 7 December 2017

Date of orders:

06 January 2018

Decision date:

06 February 2018

Jurisdiction:

Equity - Commercial List

Before:

McDougall J

Decision:

Plaintiff to have judgment against each defendant for $3,537,970 plus interest. Parties to bring in draft orders.

Catchwords:

COMMERCE — Pre-contractual representation — Inducement of purchase — Incomplete disclosure of material information — Whether misleading or deceptive conduct — Whether plaintiff reasonably relied on representations

 

COMMERCE — Misleading representations — Damages — Fair value — Whether Potts v Miller approach to assessment question is appropriate

  No question of principle

Legislation Cited:

Australian Consumer Law

Cases Cited:

HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640
Jones v Dunkel (1959) 101 CLR 298
Potts v Miller (1940) 64 CLR 282

Category:

Principal judgment

Parties:

Evolution Traffic Control Pty Limited (Plaintiff)
Anne-Louise Skerratt (First Defendant)
Jonathan Mark Skerratt (Second Defendant)

Representation:

Counsel:
C Amato / P Strickland (Plaintiff)
R Colquhoun / M Daniels (Defendants)

  Solicitors:
Webb Henderson (Plaintiff)
James Legal (Defendants)

File Number(s):

2015/281296

Judgment

1. HIS HONOUR:   By a written agreement made on about 3 December 2014 (the precise date is a little uncertain), the plaintiff (Evolution) agreed to buy from the defendants (respectively, Mrs Skerratt and Mr Skerratt) all the issued shares in the capital of a company then called Silver Trowel Trade Training Pty Limited (Silver Trowel). The purchase price was $10 million. On 30 January 2015, the balance of the purchase price (less a retention amount of about $460,000) was paid over and the shares were transferred.

2. In the course of negotiations leading up to the sale, the defendants and their broker, Mergers and Acquisitions (WA) Pty Ltd (MAWA), provided financial and other information to Evolution. Specifically, Mr Prentice of MAWA provided a number of financial forecasts. Those forecasts incorporated projections of the revenue that Silver Trowel might derive from the provision of Recognition of Prior Learning (RPL) courses (relatively short training courses that enable a person who has substantial practical experience, but no formal qualifications, to gain a recognised trade qualification). The share purchase agreement included warranties as to the accuracy of all financial information provided in the course of negotiations.

3. Evolution says that the forecasts were misleading or deceptive, and in breach of the relevant warranties in the share purchase agreement. The complaint is that the forecasts made no reference to the fact that, for the calendar year 2015, revenue derived from RPL courses was likely to drop sharply because Evolution had not complied, and could not comply, with a condition imposed by the relevant government department (the Western Australian Department of Workplace Training and Development, to which I will refer as “the Department”) on the allocation of, and hence payment for, RPL places in 2015. The parties referred to that condition as “the RPL condition”, and I shall do likewise. I shall return to the detail of that condition.

4. In those circumstances, Evolution says, the shares were worth substantially less than it paid for them. Had it known the true situation, Evolution says, it would not have agreed to pay $10 million for the shares.

5. Evolution sues the defendants for damages for misleading or deceptive conduct, alternatively for breach of warranty, or alternatively again for indemnity against loss pursuant to a clause of the share purchase agreement. It calculates the damages or indemnifiable loss as the difference between the amount paid for the shares and the amount in fact earned by their subsequent sale.

The real issues in dispute

6. The parties agreed on the real issues in dispute. I set them out:

1.   During the period up to and including 30 January 2015 (being the date of completion), did the Skerratts fail to disclose to Evolution the RPL condition and the fact that it could not be achieved for the 2015 calendar year?

2.   At any time during the period up to and including 30 January 2015, was the RPL Condition not achievable for the 2015 calendar year?

3.   If the answers to 1 and 2 are yes, was the failure by the Skerratts to disclose the RPL condition, and the fact that it could not be achieved, misleading or deceptive conduct in contravention of s 18(1) of the ACL?

4.   Did the 2015 RPL forecast information that the Skerratts and/or M&A

WA Provided to Evolution convey:

a.   the RPL Capability representation; or

b.   the RPL Funding Representation; or

c.   the RPL Revenue Representation?

5.   If the answer to (b) and (c) is yes, did the Skerratts have reasonable grounds for making:

a.   the RPL Funding Representation; or

b.   the RPL Revenue Representation;

at the time the representations were made?

6.   Did any aspect of the Skerratt’s conduct at 1-5 above constitute misleading or deceptive conduct in contravention of s 18(1) of the ACL?

7.   If the answer to 6 is yes, did Evolution suffer any loss because of that misleading or deceptive conduct in contravention of s 18(1) of the ACL?

8.   If so, what is the amount of loss or damage for which Evolution should be compensated?

9.   Did the Skerratts breach a warranty under the SPA by:

a.   Providing the 2015 calendar year RPL forecast information to Evolution, or

b.   Failing to disclose the RPL condition, or

c.    Failing to disclose that the RPL condition was not achievable for the 2015 calendar year (assuming the answer to issue 2 is yes)?

10.   If the answer to 9 is yes, what damages is Evolution entitled to for breach of contractual warranty?

11.   Alternatively, is Evolution entitled to be indemnified under clause 11.5 of the SPA for the loss or damage it has incurred?

12.   If the answer to 11 is yes, what is the amount of loss or damage for which Evolution should be indemnified?

7. Mr Colquhoun of Counsel, who appeared with Mr Daniels of Counsel for the defendants, accepted that the representations, as pleaded, had been made, and that they had the effect ascribed to them in the pleadings. However, he said, the representations were not inaccurate, principally because the RPL condition had been disclosed to Evolution. In any event, Mr Colquhoun said, both for that reason and because Evolution had been warned on 20 November 2014 not to rely on financial forecasts provided by Mr Prentice, it was not reasonable for Evolution to rely (if it did) on the forecasts.

8. Ms Amato of Counsel, who appeared with Mr Strickland of Counsel for Evolution, submitted that the court should find that Evolution had not been notified of the existence and content of the RPL condition. In any event, she submitted, mere notification of the existence and content of the RPL condition was insufficient, because prior to 3 December 2014, Silver Trowel’s relevant officers and employees had every reason to believe that it was at least unlikely, and in reality near impossible, that Silver Trowel could satisfy the RPL condition. In those circumstances, Ms Amato submitted, the provision of forecasts that included projected RPL revenues but did not indicate that, as the defendants (she submitted) had every reason to believe, those revenues could not be achieved, was misleading or deceptive in any event.

The witnesses

9. Evolution called three witnesses: Mr Steven Thomas (who was its Chief Financial Officer and thereafter Chief Executive Officer at relevant times); Mr Craig Moss (who was the General Manager of Evolution’s training business at relevant times, and was employed as the General Manager of Silver Trowel following completion of the share purchase agreement); and Mr Andrew Rose (who was an apprenticeship field officer of Silver Trowel at the relevant time). Messrs Thomas and Moss have since left the employ of Evolution.

10. The defendants called five witnesses of fact and one expert witness. The witnesses of fact were Mr and Mrs Skerratt; Mr Daniel Kemp (who was the program manager of Silver Trowel at the relevant time); Mr Jeffery Roberts (a director of MAWA at the relevant time); and Ms Chantel Brown (who was the compliance manager of Silver Trowel at the relevant time). The expert witness was an accountant, Mr Peter Blythe.

11. The evidence of Mr Blythe can be put to one side. The great bulk of his report, being irrelevant to any legal or factual issue that required decision (as Mr Colquhoun readily accepted), was rejected. One section of the report was admitted, on the basis that it might somehow relate to the question of reliance. In the event, Mr Colquhoun did not refer to it in any detail in his final submissions. I do not propose to give Mr Blythe’s report (to the extent that it was admitted) any greater attention than did Mr Colquhoun.

12. I turn to the question of the credibility of the competing witnesses, a topic to which counsel addressed a deal of submissions.

13. Mr Thomas has no stake, financial or otherwise, in the outcome of this litigation. As I have said, he is no longer employed by Evolution. Mr Thomas gave evidence in a clear and straightforward manner. His evidence on crucial factual disputes was not shaken in cross-examination. Nor was it shown to be inconsistent with contemporaneous documents.

14. There is a significant difficulty in the way of accepting the proposition that, contrary to Mr Thomas’ evidence, the existence and content of the RPL condition were disclosed to him in the course of pre-contractual discussions with Mr Skerratt or others. That difficulty arises because, had such a disclosure been made, it is to my mind inconceivable that Mr Thomas would have proceeded thereafter without, at least, making further inquiries as to the condition, and as to whether it was likely to be satisfied.

15. At the time the first of the alleged disclosures is said to have been made, Evolution was not committed to the purchase. Had the disclosure been made, and had the obvious inquiries[1] that in my view would have been made following disclosure resulted (as most likely would have been the case) in unsatisfactory answers, Evolution could have walked away from the negotiations. That position did not change in any relevant way after the share purchase agreement was made. It was common ground that Evolution could decline to complete the purchase if, among other things, it was unsatisfied with the result of its due diligence inquiries, or if any warranty was found to be or had become false, misleading or materially incorrect.

    1. See at [94] below.

16. I simply do not accept that Mr Thomas would have continued to act precisely as in fact he did, no more and no less, had the existence and content of the RPL condition been disclosed to him either before or after the making of the share purchase agreement. It was not put to him that he had any motive for causing Evolution to proceed regardless of the existence of the RPL condition or of the ability of Silver Trowel to satisfy it. At the very least, Mr Thomas would have caused further inquiries to be made. The absence of any action attributable to the disclosure that Mr and Mrs Skerratt say was made tells heavily against acceptance of their evidence of disclosure. Conversely, it tells heavily in favour of Mr Thomas’ evidence of non-disclosure.

17. In short, I conclude that Mr Thomas was an honest witness with a good recollection of relevant events; a witness who sought to give truthful evidence to the best of his ability; a witness whose evidence on disputed matters of fact is consistent with the probabilities, viewed objectively; and a witness whose evidence ought be accepted.

18. Very similar observations may be made about the evidence of Mr Moss. He, too, has no stake in the outcome of the proceedings. His evidence was clear and unshaken. And in his case too, his evidence – specifically, his denial of disclosure to him of the existence or content of the RPL condition – is consistent with the probabilities, viewed objectively. In his case too, it is inconceivable that he would have continued to act exactly and only as he did, had those matters been disclosed to him.

19. Mr Rose is independent (in the sense that he is not employed by Evolution, and has no apparent affinity to the defendants). His recollection of relevant events was general rather than specific. There is in my view a significant difficulty with one aspect of Mr Rose’s evidence. However, since Mr Rose’s evidence does not really bear on the key factual disputes, there is no need to go into the detail.

20. Mr Skerratt has a very significant financial stake in the outcome of the litigation. If Evolution succeeds, it will be entitled to recover – in effect, claw back from the $10 million that it paid Mr and Mrs Skerratt for the shares in Silver Trowel – very substantial damages. I have no doubt that Mr Skerratt’s stake in the outcome of the proceedings has affected the reliability of his evidence. In my view, that evidence was affected, consciously or otherwise, by perceptions of self-interest.

21. At a level of some generality, Mr Skerratt’s cross-examination was punctuated by passages of nonresponsive answers, in which he sought to foist upon Counsel material that was quite clearly intended to bolster his case. Mr Skerratt’s propensity to evade questions was demonstrated in his cross-examination on a telephone conversation which, it was common ground, he had had with Mr Thomas on 16 November 2014. (In fact, there were two such conversations; the one to which I have referred was the first; and Mrs Skerratt participated in the second.)

22. Mr Skerratt initially maintained that the (first) discussion on 16 November 2014 had focused only on expenses. However, he conceded ultimately, it also concerned student numbers (which of course were directly relevant to revenue). Mr Skerratt sought to give the impression that he had not given Mr Thomas any reassurance about the revenue figures.

23. Everyone understood at the time that the forecast revenue figures were accurately based on the historical RPL allocations. Mrs Skerratt confirmed that understanding. If (as Mr Skerratt stoutly but in my view falsely maintained) there was no reason to doubt the continuing relevance of historical RPL place allocations, there was no reason for him not to have given the reassurance of which Mr Thomas spoke.

24. Of course, if Mr Skerratt did know that the RPL condition was unlikely to be satisfied, there was every reason for him not to give any reassurance about projected RPL revenue. But that explanation could not rehabilitate Mr Skerratt's credibility.

25. I note that in the most detailed affidavit affirmed by Mr Skerratt (on 8 September 2016), he purported to give evidence on a number of topics (including in reply to Evolution’s affidavit evidence) by referring to paragraphs of Mrs Skerratt’s affidavit affirmed 24 August 2016 and saying, in substance, that he agreed with her evidence given in those paragraphs. I suppose that there may be circumstances of urgency where that manner of giving evidence could be regarded as acceptable. However, in my view, it is entirely unacceptable when a witness is giving evidence in chief without (so far as the circumstances are known) any time or other pressures. It is by no means far removed from the improper practice of conferring with two witnesses at once. It says nothing for the credibility of the “adopting” witness. It is not a practice that should be encouraged.

26. Mrs Skerratt also has a very significant financial stake in the outcome of this litigation, and in my view that has affected her evidence. She, too, was given to volunteering non-responsive answers when (it appeared) she might have thought it could improve her case to do so.

27. Further, on one occasion, Mrs Skerratt volunteered information in the course of cross-examination which had not appeared in her affidavit evidence. That was evidence on a crucial point: alleged disclosure of the RPL condition and its terms. Mrs Skerratt’s affidavits said in effect no more than that there had been a meeting in which the number of RPL places was discussed, and in which Mr Thomas was told that in 2014, Silver Trowel managed to obtain a further 50 RPL places over its initial allocation. That is not contentious. Her affidavits contained no reference to disclosure of the RPL condition, nor any account of any other meeting, in which that RPL condition or its content was disclosed to Mr Thomas. When this was put to Mrs Skerratt in cross-examination, she volunteered that the condition had been discussed at an earlier meeting. It is highly improbable that Mrs Skerratt would have overlooked such an important matter when preparing her affidavits. In my view, it was a spur of the moment invention designed to improve her case.

28. Where the evidence of Mr or Mrs Skerratt is inconsistent with the evidence of Mr Thomas or Mr Moss, I prefer the evidence of the latter two.

29. Mr Kemp and Ms Brown gave evidence of a meeting with Mr Moss in early December 2014. They say that, in the course of the meeting, they told Mr Moss about the RPL condition. Mr Moss denied that evidence. What is striking about the evidence of Mr Kemp and Ms Brown is that, although each of them then believed that it was unlikely, or even extremely unlikely, that Silver Trowel would be able to fulfil the RPL condition, neither of them claimed to have said anything about that to Mr Moss. In any event, the difficulty with accepting their evidence of disclosure (of the existence and terms of the RPL condition) is that it is improbable that Mr Moss would have proceeded solely and only as he did, without undertaking further investigations.

The RPL condition

30. The Department had allocated Silver Trowel some 200 RPL places for the calendar year 2014. On 15 August 2014, an officer of the Department, Mr Peter Henson (who rejoiced in the sobriquet “Chook”), emailed Mr Skerratt. That email stated the RPL condition as follows:

…

Following an extensive review of the unused places and the budget remaining for the 2014 RPL Apprenticeship Program it has been determined that the Department can offer an additional 50 training places to Silver Trowel for commencement in 2014.

The purpose of these places is to further expand on the role of the Apprenticeship RPL program as a lever to increase the number of Apprentices taken on by experienced tradesman. To this end these additional places should only be utilised to undertake RPL assessment of candidates who are willing to commit to taking on Apprentices after they undergo the RPL assessment process. This is important as there is no current barrier to employers without formal trade qualifications taking on apprentices in many Building and Construction qualifications at the present time.

On this basis the conditions that apply to the allocation of these places are as follows:

1.   A separate CPS will be established for each qualification and number of training places allocated to be nominated by you;

2.   Payment will only be made for those individuals reported against the relevant CPS who have signed a letter (on company letterhead) stating that they give a commitment to taking on an apprentice within 4 months of them completing their training.

Please note: For employers that already have apprentices registered on TRS their commitment letter needs to state that they will employ an additional apprentice to their current workforce numbers.

A copy of the required letter must be provided to the Department for all students reported on the CPS before payment is made for that CPS. This information must be submitted through the HYPERLINK mailto:[email protected] mailbox with a subject title additional 2014 RPL places for Silver Trowel.

Prior to any further places (subject to available budget in 2015) being made available to Silver Trowel under these conditions it needs to be demonstrated that 70% of those individuals that undertook the RPL qualification have employed an apprentice (or in the case of employers that already employ apprentices employ an additional apprentice) within 4 months of undertaking their qualification.

31. It will be seen that the RPL condition contains two parts:

1. first, payment would only be made for individuals who had signed what the parties called a “letter of intent”; that signed letter must have been provided to the Department before payment would be made.

2. The second part of the condition stipulated that no further places would be allocated in 2015 unless 70% of the additional 50 RPL candidates who completed their courses did in fact employ an apprentice (or additional apprentice) within four months of completion.

32. Silver Trowel filled the 50 additional places. All the candidates signed letters of intent, and all those letters were forwarded to the Department. Thus, to satisfy the second part of the RPL condition, at least 35 of those successful candidates were required to engage an apprentice within four months of completion of their respective courses.

33. Silver Trowel monitored compliance with the RPL condition. Mr Rose and Ms Brown had responsibility for this task. A spreadsheet prepared by Ms Brown, which included in it information gathered by Mr Rose, showed that of the 50 RPL candidates, 14 had stated that they did not intend to take on an apprentice. Although the properties for that spreadsheet suggest that it was last amended on 6 November 2014, data within it suggest it may have been modified at least up until 21 November 2014.

34. The spreadsheet shows, further, that 11 RPL candidates had taken on apprentices, and that a further seven had “pending” applications to take on apprentices. A number of other RPL candidates had people with them on work placements, but six of those had apparently stated that they did not intend to take the person on as an apprentice.

35. If one looks purely at the figures for those who did not intend to take on apprentices and those who had or were in the process of taking on apprentices, some 32 were committed one way or the other. Of the remaining 18, 17 needed to take on apprentices, within the requisite time frame, if the second part of the RPL condition were to be satisfied. The RPL courses for those 18 had finished at varying dates between 19 September and 24 November 2014. Thus, the four month limits would expire at dates between 19 January and 24 March 2015.

36. It is not at all difficult to see why, as Ms Brown and Mr Kemp clearly thought was the case, it was unlikely, as at early December 2014, that Silver Trowel could satisfy the RPL condition. Putting the matter more bluntly, there was no rational basis for anyone to think that it could do so.

37. Mr Kemp and Ms Brown gave evidence that they reported these matters to Mr and Mrs Skerratt on a regular basis: weekly or more frequently. It is inherently plausible that they would have done so, because satisfaction of the RPL condition was a matter of considerable importance to Silver Trowel. To the extent that Mr and Mrs Skerratt suggested that they were not aware that Silver Trowel was unlikely to be able to satisfy the RPL condition, I do not accept their evidence. I find that they were.

The representation case

38. Evolution relied on three representations, which it called “the RPL Capability Representation”, the “RPL Funding Representation”, and the “RPL Revenue Representation”. Those representations are pleaded as follows:

12.   By the provision of the Due Diligence Materials, the Defendants represented that Silver Trowel was capable of obtaining funding for 245 RPL Forecast Places for the 2015 calendar year (the RPL Capability Representation).

13.   By the provision of the Due Diligence Materials, the Defendants made the following representations as to future matters without reasonable grounds for making:

(a)   Silver Trowel would receive funding the Department of Training and Workforce Development (DTWD) for 245 RPL Forecast Places in the 2015 calendar year (the RPL Funding representation); and

(b)   Silver Trowel would receive approximately $1,586,892 of revenue in respect of RPL places in the 2015 calendar year (the RPL Revenue representation).

39. It was common ground that those representations had been made in the way pleaded, and that they had the content ascribed to them in the pleading.

The warranty case

40. Evolution pleaded a number of warranties. However, in final submissions, Ms Amato focussed on the warranties set out in cls 23.1 and 23.2 of schedule 1 to the share purchase agreement. Those clauses read:

23.1   All information given by the Seller, the Company or any of their Officers, employees or advisers to the Buyer or its officers, employees or advisers in the course of negotiations leading to this Agreement or Completion (including the Due Diligence Materials) is true and accurate in all respects: None of that information is misleading in any particular, whether by omission or otherwise.

23.2   All details relating to the Shares, the Company, the Business or the Business Assets (including the Due Diligence Materials) that would be material for disclosure to a prudent intending purchaser of the Shares have been disclosed to the Buyer.

41. Clause 11 of the share purchase agreement provided that Mr and Mrs Skerratt gave those and all the other warranties “as at the date of this Agreement and for each day up to and including Completion”.

Issue 1: disclosure as to the RPL condition

42. Issue 1 has two aspects:

1. did the defendants disclose the RPL condition to Evolution?

2. Did they disclose to Evolution that in fact it might not or could not be achieved for the 2015 calendar year?

43. In effect, the second part of the issue assumes a positive answer to the second issue. For the reasons that I give at [57] to [61] below, that assumption has been made good.

44. The evidence as to disclosure of the existence and content of the RPL condition turns on two discussions. One is said to have taken place in late October or early November 2014, between at least Mr Thomas and Mr Skerratt. Mr Skerratt appeared to think that the meeting took place in early November 2014. Mr Thomas said that the only meeting of substance around that time was one that took place on 24 October 2014. Mr Thomas fixes that date by reference to an email that he sent to Deloitte (who had been retained by Evolution to carry out due diligence on financial information provided by the defendants) on 26 October 2014. That email was sent after what Mr Thomas referred to as “a second and lengthy meeting” with Mr Skerratt.

45. As I have said, I accept as correct the evidence given by Mr Thomas. On the basis of that evidence and of Mr Thomas’ email confirming a meeting held on 24 October 2014, and in the absence of any email referring to a meeting in early November 2014, I find that:

1. there was a meeting attended by (among others) Mr Thomas and Mr Skerratt at the Silver Trowel premises, on 24 October 2014;

2. neither the existence nor the content of the RPL condition was discussed at that meeting; and

3. there was no subsequent meeting, including in early November 2014, between Messrs Skerratt and Thomas (and others) at which the existence and content of the RPL condition were disclosed.

46. Mr Thomas was clearly a meticulous, capable and diligent man. His email of 26 October 2014, and the subsequent financial modelling that he produced, make it clear that he was very concerned to understand all factors that might have an impact on the business of Silver Trowel. As I have said, it is inconceivable that he could have been told about the existence and content of the RPL condition, but failed to make any reference to it, or to cause to be carried out (or himself to carry out) any investigation in respect of it.

47. I should note that Mr Colquhoun criticised Evolution for not calling a witness, Mr McCaw, who attended the meeting of 24 October 2014 (or, as Mr Skerratt had it, the meeting that took place in early November 2014). Mr McCaw was, at the time of the meeting, the Chief Financial Officer of Evolution, having taken over that role when Mr Thomas was promoted from it to be Chief Executive Officer. Mr Thomas said that Mr McCaw had “moved on in around… January or February, I think of 2015” [2] .

    2. T46.14.

48. Given that Mr McCaw is not employed by Evolution, nor has he been for three years, there is no particular reason to think that he is “in the camp” of Evolution. It was as much open to the defendants to call him as it was to Evolution to do so [3] . Mr McCaw’s absence from the witness box, in the circumstances that I have summarised, provides no basis for drawing a Jones v Dunkel [4] inference unfavourable to Evolution.

    3. Mr Skerratt said in para 22 of his first affidavit, affirmed 4 May 2016, that he knew that Mr McCaw’s “employment with Evolution… had been terminated in late December 2014”.

    4. (1959) 101 CLR 298.

49. I add that, given the state of the contemporaneous documentary record and the fact that Mr Thomas’ evidence is consistent with it, even a different conclusion on the Jones v Dunkel issue would not have changed the conclusions that I have reached, as set out at [45] above.

50. The other occasion on which disclosure is said to have occurred is at a meeting between Mr Kemp and Mr Moss, at which Ms Brown was also present from time to time, in late November or early December 2014. Essentially for the reasons I have given, I accept Mr Moss’ evidence, denying that the existence or content of the RPL condition was discussed, over the evidence of Mr Kemp and Ms Brown asserting that it was. Again, it is implausible in the extreme that, had the term been disclosed and its content discussed, Mr Moss would not have either carried out or commissioned further investigations, or reported the matter to Mr Thomas.

51. Finally, before I move to the second aspect of the first issue, I should note that it was the defendants’ contention that the RPL condition had been disclosed to Deloitte. As I have said, Evolution had retained Deloitte to conduct a due diligence investigation. Evolution provided Deloitte with the financial forecasts and other material obtained from the defendants or MAWA, and I think with Mr Thomas’ modelling also. There was no direct evidence from the defendants or their witnesses that Deloitte had been told in terms about the existence or content of the RPL condition.

52. Mr Colquhoun relied on two passages in the Deloitte report, each of which was to the same effect. It is sufficient to set out only one (the more detailed) [5] :

Revenue growth is driven by:

-   Additional apprenticeship courses in FY15F, in brick laying and block laying courses. This is an increase of 85 places between FY14 and FY15F. Management advise that Silver Trowel’s success in the conversion of RPL students to Apprentices will be the basis for the DTWD providing additional funded apprentice positions in future years. Management advised they converted 150 RPL students to apprentices in the current year. The forecast includes the addition of a further 130 Apprentice places in FY16F.

-   An increase in the number of RPL places up 146 principally in brick laying and block laying courses in FY16F, driving revenue of c.$998k between FY15F and FY16F. Management have based this growth on research suggesting a shortage in skilled labour in these areas.

5. Exhibit PX3 page 718; page 16 of the Deloitte final report dated 8 December 2014.

53. It is not necessary to do more than to compare the wording of the Deloitte report with the wording of the RPL condition as I have set it out at [30] above. It cannot be suggested that the references in the Deloitte report reflect either the language or the substance of the RPL condition.

54. In the absence of any evidence (testimonial or documentary) to the effect that the RPL condition was disclosed to Deloitte, I am not prepared to infer, from the words to which reference was made, that Deloitte was aware of the existence, let alone the substance, of that condition.

55. As to the second aspect of the first issue – disclosure of the likelihood that the RPL condition might not be met – the evidence of Mr and Mrs Skerratt and their witnesses, taken at its highest (and for the reasons I have given, I am not prepared to do so) does not suggest that there was any discussion at all, either at the meetings in question or at any other meeting, on that topic. Nor is there any documentary evidence of disclosure.

56. In summary, as to the first issue, I conclude that:

1. at no time prior to 30 January 2015 did the defendants disclose to Evolution the existence or content of the RPL condition; and

2. a fortiori, at no time during that period did the defendants disclose to Evolution the fact that the RPL could not or might not be satisfied.

Issue 2: was the RPL condition capable of achievement?

57. I have referred to some of the relevant evidence already, at [32] to [37] above. That evidence is sufficient of itself to justify the conclusion that by December 2014, it was most unlikely that the RPL condition could be satisfied. That position became even clearer during January 2015. A number of the RPL candidates whose position (as to taking on an apprentice) was undecided as at the date the spreadsheet was last updated had become relevantly unable to do, because the four month period for them to do so had expired.

58. There is no need to set out the tedious detail. A report that Ms Brown provided to Mr Moss on 29 October 2015 shows quite clearly that by 19 January 2015, at least 17 of the 50 RPL candidates fell into one or the other of two categories: did not intend to take an apprentice on, or had failed to do so within the relevant time period. Thus, it was by then arithmetically impossible for the RPL condition to be satisfied. I add that the position deteriorated further between 19 and 30 January 2015.

59. Mr Skerratt was cross-examined on the documents and data, but was unable to provide any other explanation of their import. His evidence was simply that “sometimes the – the sign up – the apprenticeship sign-up comes through much later, so I don’t know” [6] .

    6. T131.18-19.

60. The position as at 30 January 2015 was put to Mr Skerratt, and again he was unable to do anything other than speculate as to the reasons why, as it appeared, the condition had not been satisfied [7] :

    7. T132.15-44.

Q.    So the combination of those means that as at 30 January 2015 at least 23 of the 50 RPL candidates - that's 46% - would not hire an apprentice within four months. Either because they had said they did not attend to app, or they had simply failed to employ an apprentice within that four month period.

A.    Again, two things. One is, that they could - they could have had some deal with them and not - and not done the sign‑up as of 30 January because that - that often happens; they might have an apprentice or a pre‑apprentice for four months before they make the sign‑up so I don't know.

Q.    Mr Skerratt.

A.    Sorry.

HIS HONOUR

Q.    Just let Mr Skerratt finish. You were putting a proposition to him and he's explaining why it might not be inevitable. Please continue, Mr Skerratt.

A.    So they could have had some..(not transcribable)..with them during this time. I don't know.

AMATO

Q.    Yes.

A.    And the - the second part to - to what I had to say is, we gave strict instructions across all staff that the only people to be signed up under that program had to be 100% sure that they wanted an apprentice.

Q.    So the position could be, couldn't it, that people signed on with the intention, changed their minds, the four months expired and you just didn't know about it. Is that possible?

A.    Yes. Me personally, yes, that's possible.

61. The defendants did not seek, either by further evidence or in submissions, to substantiate Mr Skerratt’s various hypotheses. The inferences that I draw from all the evidence are that:

1. it was at least unlikely, and realistically very unlikely, even as at 3 December 2015, that the RPL condition could or would be satisfied;

2. by 19 January 2015, that unlikelihood had been converted into impossibility; and

3. that impossibility continued, and in fact became (if it can be said) even more firmly entrenched by 30 January 2015.

Issue 3: misleading or deceptive conduct

62. Mr Colquhoun did not suggest that, if I were to come to the conclusions that I have set out on the first two issues, the failure to disclose the RPL condition and the fact that it might or would not be achieved did not constitute misleading or deceptive conduct. Plainly, it did.

Issue 4: the three representations

63. The only issue as to the representations arose to the extent that they were based on information provided by Mr Prentice of MAWA to Mr Thomas. That information included three versions of a spreadsheet containing detailed forecasts for Silver Trowel’s revenues and expenses in the 2015, 2016 and 2017 years. The forecast revenues assumed numbers of RPL places for 2015, and revenue to be derived accordingly. The number of places, and hence the revenue, fluctuated somewhat but were reasonably consistent. It was common ground that the defendants represented, in effect, that for the calendar year 2015 there would be allocated about 245 RPL places, and that Silver Trowel would derive revenues accordingly [8] .

    8. See Mr Colquhoun’s opening at T6.11-14.

64. It was the defendants’ case that, because (they said) Evolution had been warned not to rely on Mr Prentice’s material, the representations could not have been relied upon. It may be, and that is why I am dealing with it now, that this could also provide some basis for saying that the representations (so far as they are based on Mr Prentice’s forecasts) were not made.

65. Mr Thomas had become concerned at substantial fluctuations in Mr Prentice’s projections of expenses. He was not concerned at the relatively minor fluctuations in revenue, because he regarded the figures as to the number of RPL courses projected to be allocated and the revenue to be derived as reasonably consistent. Mr Colquhoun did not suggest that Mr Thomas was wrong to take this approach to the revenue forecasts.

66. Mr Thomas raised his concerns as to the expenses with Mr Skerratt. There was a subsequent discussion with both Mr and Mrs Skerratt. All this happened on 16 November 2014. Mr and Mrs Skerratt accept (reluctantly, in the former’s case) that there was some discussion of revenue. They accept, also, that the real focus of the discussions was on the expense figures. That is why Mrs Skerratt was called in: because she had ready access to figures for items such as rent (which should not have fluctuated, but which did, between Mr Prentice’s various forecasts).

67. Mr Roberts of MAWA became involved. On 20 November 2014 he sent an email to Mr Thomas. So far as it is presently relevant, that email stated:

Finally, I wanted to clarify something with you in relation to the P&L forecasts, and by the way, Jon and Anne were happy for me to contact you about this. They told us that they sent you some updated expense figures on Sunday 16 November and they understood you had based your revised offer this week on those numbers, and perhaps some revenue forecasts that had previously sent to you. If that is the case that is fine. However, I just wanted to make sure you were not relying on the forecasts that Ray had sent to you on Sunday 16th November, or earlier. Jon and Anne said you had raised some concerns about these forecasts because you had received multiple versions, some with incorrect formula’s and other errors, but the main point is that Jon and Anne say they have not approved them. We understand Ray did not prepare those forecasts himself, but rather, they came from a consultant who was working for the Skerrats. It seems that Ray thought that it was OK to send them to you because they had originally been prepared by Silver Trowels consultant using assumptions provided by the Skerrats, and that consultant later modified them to fix some calculation errors and the like. However, we agree with the Skerrats who say that you should ignore those forecasts because they had not approved them.

68. Mr Colquhoun characterised this email as, in substance, a warning to Mr Thomas that he could not rely on any of the information in Mr Prentice’s forecasts. It is certainly correct to say that the passage that I have set out should be so read. However, the submission ignores the fact that Mr Thomas had discussed Mr Prentice’s forecasts with Mr Skerratt and then with Mr and Mrs Skerratt, and was given no reason at all to query the revenue figures. On the contrary, as Mr Thomas said (and Mr and Mrs Skerratt accepted), the discussions proceeded on the basis that the revenue forecasts did not need any further work. Mr Thomas said, and I find, that Mr Skerratt had confirmed that the revenue figures were “reasonable”. Mr Skerratt, finally, conceded that the student numbers (directly relevant to revenue) were likewise “reasonable”. Mrs Skerratt accepted that it was logical that Mr Skerratt would have agreed that the revenue figures were reasonable.

68. That is entirely consistent with Mr Roberts’ email. It was, he said, “fine” for Mr Thomas to base his revised offer on updated expense figures “and perhaps some revenue forecasts” that Mr and Mrs Skerratt had provided.

69. As I have said, the only possible issue as to the representations arises from the terms of Mr Roberts’ email of 20 November 2014. That email provides no basis for suggesting that the representations were not made. Otherwise, as I think Mr Colquhoun accepted, it is clear that they were made, by the provision of financial information of the kind to which I have referred.

Issue 5: reasonable grounds

71. It was common ground that of the three representations on which Evolution relied the second and third (the RPL Funding Representation and the RPL Revenue Representation), were representations as to future matters. In those circumstances, s 4(2) of the Australian Consumer Law in effect casts on Mr and Mrs Skerratt the onus of proving that they had reasonable grounds for making those representations in November 2014.

72. The striking feature of the evidence given by Mr and Mrs Skerratt is that, although each of them affirmed four affidavits, nowhere in those affidavits did they address in terms facts relevant to the onus imposed by s 4(2).

73. In the course of cross-examination, Mr Skerratt said that there were two matters of fact which had indicated to him that Silver Trowel was likely to satisfy the RPL condition. First, he said, he had received reports from Mr Rose in December 2015 stating in substance that Silver Trowel expected to sign up 50 apprentices [9] :

    9. T122.25-48.

Q.    Did you make any inquiries of either of those two people in December 2015 as to whether or not Silver Trowel was, if I might say, on track to satisfy the 70% condition?

A.    Yes, there was reports came back to me that Andrew had signed up nearly 60 apprentices in December - was expecting to sign 60 apprentices, so I thought - the apprentice numbers were rising so I had absolutely no concern I thought things were going really well, and he was reporting that he expected to sign 60 apprentices in the month of December or by the end of the month of December so, yes, I thought everything was well on track.

Q.    When you say signing apprentices, what you really mean there was signing apprentices up to the apprenticeship courses that were being offered by Silver Trowel, don't you?

A.    No, you have to have an employer to have an apprenticeship.

Q.    Mr Skerratt, I'm not sure that you understood my question. You said that Mr Rose was sending around the courts indicating that he had signed up 60 apprentices.

A.    New apprentices, yes.

Q.    Yes. But you didn't mean to suggest by that, did you, that he had signed up 60 apprentices and matched them with RPL candidates. You didn't suggest that, did you?

A.    No, because that wouldn't have been finished.

74. However, it later appeared, this may have gone to a slightly different issue [10] :

    10. T123.24-43.

Q.    Mr Skerratt, the apprentices that you are referring to had nothing to do with the RPL condition 70% component, did it?

A.    I wouldn't know that.

Q.    What you have just said in your evidence is that as at December 2014, you did not have any concerns‑‑

A.    No.

Q.    ‑‑that the 70% condition would not be satisfied, and that the basis for your lack of concern was that Andrew Rose was sending you reports and that in those reports he had reported that 60 new apprentices had been taken on for that month.

A.    For that month, yes.

Q.    And you now say that that's got nothing to do with the RPL condition.

A.    No, no, sorry, maybe you misunderstood. No, I - I don't mean that. I’m saying that in the month of December, Andrew Rose has signed up 60 new apprentices.

75. It is not immediately apparent how matters to have occurred in December 2014 could have afforded reasonable grounds for believing the truth of representations made in November 2014.

76. In fairness to Mr Skerratt, he may have been conflating two matters: the sign-up of people to undertake apprenticeship courses, and the undertaking to employ apprentices given by RPL candidates in their “letters of intent”. Regardless, the fact that Silver Trowel was signing up people to undertake apprenticeship courses does not of itself provide any basis for concluding that those people would be offered apprenticeships by RPL candidates when the latter completed their own courses. At most, it demonstrates that there was a pool of potential apprentices available to be taken on by RPL candidates.

77. The second matter on which, it appeared, Mr Skerratt relied was that the RPL candidates had signed letters of intent [11] :

    11. T123.24-124.4.

Q.   Mr Skerratt, the apprentices that you are referring to had nothing to do with the RPL condition 70% component, did it?

A.   I wouldn’t know that.

Q.   What you have just said in your evidence is that as at December 2014, you did not have any concern--

A.   No.

Q.   --that the 70% condition would not be satisfied, and that the basis for your lack of concern was that Andrew Rose was sending you reports and that in those reports he had reported that 60 new apprentices had been taken on for that month.

A.   For that month, yes.

Q.   And you now say that that’s got nothing to do with the RPL condition.

A.   No, no, sorry, maybe you misunderstood. No, I - I don’t mean that. I’m saying that in the month of December, Andrew Rose has signed up 60 new apprentices.

Q.   Yes

A.    Now, a lot of those RPL candidates would have only just finished. Or some would still be in training. Or some would still be in training. So across the board, when I get a set of figures to say there's been 60 new sign‑ups this month - which is very good, which means the apprenticeship levels are coming up - I had also received correspondence that with the RPL candidates I felt very confident because everybody had agreed and signed a deed to say that they were prepared--

Q.    A deed?

A.    A letter of intent, sorry. A letter of intent stating that they would definitely take on an apprentice.

78. There are three points to make about that aspect of Mr Skerratt’s evidence. The first is that it too relates to matters that occurred after the representations were made. The second is that it appears to confirm that the availability of people undertaking apprenticeship courses does no more than provide a pool of potential apprentices available to be taken on by RPL candidates. The third point is that it is very difficult to understand how the mere fact that an RPL candidate had signed a letter of intent could, of itself, engender the requisite degree of reasonable satisfaction that Silver Trowel would meet the RPL condition. Mrs Skerratt did not think so: see at [82] below.

79. Given the way in which this evidence emerged (in cross-examination rather than in chief), I do not treat it as having any real probative weight. It reeks of hindsight reconstruction.

80. In any event, such satisfaction as Mr Skerratt may have obtained from the letters of intent was illusory. I have already dealt with the evidence demonstrating that the RPL condition was unlikely to be (and by 19 January 2015 at the latest, could not be) satisfied [12] . Ms Brown said that she had raised her concerns, as to the likelihood that Silver Trowel would not comply with the RPL condition, with Mr Skerratt (and Mr Kemp), and had given email reports to Mr and Mrs Skerratt which demonstrated the existence of the problem [13] . Mr Kemp acknowledged that he had been told by Mr Rose of the latter’s concerns that the RPL condition could not be complied with [14] . He accepted that it was “more than likely” that he would have “[passed] those concerns onto Jon and Anne Skerratt in December 2014” [15] .

    12. See at [32] to [37] and [57] to [61] above.

    13. See, generally, T215-216.

    14. T227.35-37.

    15. T227.39-43.

81. I accept those aspects of Ms Brown’s and Mr Kemp’s evidence. I am satisfied that each of them reported, either orally or by email (or both), from time to time to Mr and Mrs Skerratt as to compliance with the RPL condition. I am satisfied that Mr and Mrs Skerratt must have understood, from those various communications, that by early December 2014, there were (at the very least) serious reasons for thinking that Silver Trowel would not be able to satisfy the RPL condition. There is no evidence that, thereafter, either Mr or Mrs Skerratt was given information to the contrary.

82. Mrs Skerratt said that she relied on Mr Rose, Mr Kemp and Ms Brown to monitor compliance with the RPL condition, and did not herself do so [16] . She accepted that the mere signature of the letter of intent was not enough to satisfy the 70% condition, and that whether or not the condition was satisfied would require “so fairly consistent monitoring” which would require “a fair amount of work”; she “relied entirely on Chantel Brown, Daniel Kemp and Andrew Rose to do that monitoring” [17] . However, she accepted, she did not make specific inquiries to see whether the condition was being met [18] .

    16. T169.1-18.

    17. T169.43-170.14.

    18. T170.23-45.

83. I conclude that neither of the defendants had any reasonable ground for making the two representations in question, at the time those representations were made. To the extent that it matters, I find that in fact, by virtue of the reports given to the defendants by Ms Brown and Mr Kemp, each of the defendants must have become aware over time that it was unlikely that the RPL condition would be satisfied.

Issue 6: misleading or deceptive conduct

84. It follows from what I have said as to the fifth issue that each of the RPL Funding and Revenue Representations was misleading or deceptive at the time it was made. It is therefore unnecessary to consider whether, as well, the RPL Capability Representation was misleading or deceptive.

Issues 7 and 8: loss

The parties’ competing contentions

85. Evolution’s case was that it would not have agreed to buy Mr and Mrs Skerratt’s shares for the sum of $10 million had the true position, as to the RPL condition and the prospects of its satisfaction, been disclosed before entry into the share purchase agreement. Evolution said, further, that if the true position as to those matters had been disclosed at any time thereafter up until completion, it would not have completed the share purchase agreement, and would have exercised its contractual right, pursuant to cl 2.5 of the share purchase agreement (read in conjunction with cl 2.1(h)), to terminate the agreement without incurring any liability to Mr and Mrs Skerratt for that termination. Evolution’s case is, therefore, that it suffered loss because of Mr and Mrs Skerratt’s misleading or deceptive conduct, because it was thereby induced to enter into and complete the share purchase agreement, and in consequence paid more for the shares than they were worth.

86. As to quantification of loss, Evolution’s case is that it sold the shares for the best price reasonably obtainable, and sustained the pleaded loss. The gross loss was $4 million; Evolution accepts that it must give credit for the retention amount. The net claim, before interest, is $3,537,970.

87. Mr and Mrs Skerratt’s case (assuming, against their primary submissions, that their conduct is found to have been misleading or deceptive) is that Evolution did not rely on the relevant representations; or alternatively, to the extent that it did, they say that the reliance was not reasonable, because of Mr Roberts’ email of 20 November 2014, the relevant part of which is set out at [67] above). As to quantification, Mr and Mrs Skerratt say that Evolution has failed to show that the price obtained on sale of the shares was the best price reasonably obtainable. They suggest that the purchaser, a company known as Arowana, was a related corporation of Evolution.

The relevant facts

88. It was common ground that Mr and Mrs Skerratt required $10 million for their shares, and would not sell for anything less. It was common ground, also, that they (and Mr Prentice of MAWA) had said this to Mr Thomas on more than one occasion.

89. Mr Thomas gave evidence that Evolution valued businesses “on a multiple of sustainable EBIT”, and that the board of Evolution would not pay more than an EBIT multiple of five for the shares in Silver Trowel. He said, and I accept, that he explained this valuation approach to Mr Skerratt in a meeting that took place on 24 September 2014. In any event, there can be no doubt that Mr and Mrs Skerratt understood Evolution’s approach. In October 2014, Evolution provided them with a “term sheet” which, among other things, specified that Evolution would pay a purchase price of “5 x Sustainable EBIT”.

90. In October and November 2014, Mr Prentice provided a number of financial forecasts to Evolution. Mr Thomas prepared financial models based on those forecasts. Mr Thomas said, and I accept, that the critical model was one based on the figures that Mr Prentice sent through on 16 November 2014 (the forecast that was the subject of discussions between Mr Thomas and Mr and Mrs Skerratt on that day).

91. One aspect of the modelling that Mr Thomas performed required the forecast figures to be converted from a calendar year to a financial year basis. Another aspect involved adjusting the various lines of income, apparently in an attempt to understand the impact on EBIT that would follow from changes in the various revenue streams. However, Mr Thomas said, the modelling that he carried out did not change in any substantial way the total forecast income. In other words, it affected the timing and the components of that income but not, in substance, its amount.

92. Mr Thomas’ principal concern related to the widely varying figures for expenses that Mr Prentice had provided. It is self-evident that any attempt to calculate likely sustainable EBIT would require accurate inputs of figures for expenses. For the reasons I have given, the revenue figures were substantially accepted. It was the expense figures that needed to be nailed down. That was the purpose of the discussions on 16 November 2014.

93. On 17 November 2014, having obtained clarification of the expenses figures (and having been told in substance that, the revenue figures were reasonable), Mr Thomas sent an email to Mr Skerratt proposing alternative offers for the shares in Silver Trowel. Each offer involved a payment of $10 million. Mr Thomas was able to make those offers because his modelling, based on the revenue figures and corrected expense figures provided by Mr Prentice and Mr and Mrs Skerratt respectively, satisfied him that the sustainable EBIT was a little over $2 million.

94. Mr Thomas said, and I accept, that if the RPL condition had been disclosed to him, he would have caused further inquiries to be made, including as to whether Silver Trowel was likely to meet it. Were he not satisfied that Silver Trowel could do so, he would have used the same modelling process but reduced the projected revenue from RPL courses. It is not necessary to go through the detail of the calculations. Their effect, Mr Thomas said, would have been to reduce the maximum amount that Evolution would pay (based on a multiple of five times sustainable EBIT) to about $6.8 million.

95. Given that Mr and Mrs Skerratt were not prepared to accept less than $10 million for their shares, the obvious inference is that, had the true position been disclosed to Mr Thomas and had he carried out the modelling to which he referred, no contract would have resulted.

96. Mr Thomas was cross-examined at some length about differences between the figures provided by Mr Prentice (and the expense figures provided by Mr and Mrs Skerratt) and the figures in his model. He accepted that the figures varied, particularly in the way that he had allocated, or estimated, various streams of revenue. However, he explained why this was so: a form of sensitivity analysis, undertaken to enable him to understand the impact on EBIT of changes in the revenue streams.

97. I should note that Mr Blythe in his report criticised the way that Mr Thomas had converted the figures from a calendar year basis to a financial year basis. However, Mr Colquhoun’s submissions showed, correctly, that the effect of the conversion was to reduce EBIT by about $180,000. The approach taken by Mr Thomas was more rather than less conservative.

98. Mr Thomas was cross-examined as to his use of and reliance upon the final report provided by Deloitte. He accepted (as was plainly correct) that Deloitte had been retained to perform due diligence investigations on the purchase, and that he had relied upon the opinions expressed by Deloitte. It does not follow that he did not rely also on the information provided by or on behalf of Mr and Mrs Skerratt.

99. Mr Thomas was informed of the way in which RPL places had been allocated in 2014[19] . He understood that in 2014, there had been an initial allocation of places and that, following a submission to the office of the relevant Minister, further places had been allocated. He understood that it was at least likely that this practice might be followed in 2015.

    19. See at [27] above.

100. Mr Thomas was cross-examined about risks relevant to the allocation of RPL places for 2015 and subsequent years. He accepted that there was a risk that the number of places to be allocated would fluctuate, and that the Department might not allocate funding for any or all of the 245 places that the forecasts and his modelling assumed [20] .

     20. As I have said, the numbers varied a little from time to time, but no one suggested that the assumed figure of 245 places was unsupportable having regard to historical experience.

101. Mr Thomas said that he knew that there was always the “political risk” that funding might be cut. However, he contrasted that with “legal risk”. He was prepared to accept that, as a result of policy changes, a lesser amount of funding might be made available. He understood that it was likely that less than 245 places would be allocated in the first instance, and that the allocation of further places would be at the discretion of the Department. He was not prepared to accept (more accurately, would not have been prepared to accept) that there would not be any allocation of further, discretionary, places because Silver Trowel could not comply with what was, in effect, a condition precedent to their allocation: namely, satisfaction of the RPL condition. In my view, that aspect of Mr Thomas’ evidence was inherently plausible. It accords with common sense and commercial reality. I accept it.

102. It was no part of Evolution’s case that the misleading or deceptive concept conduct of which it complained was the sole cause of its decision to enter into the share purchase agreement. Evolution’s case was, rather, that the misleading or deceptive conduct contributed, in a way that was not merely incidental or minimal, to that decision.

103. I am satisfied, on the evidence as a whole, that if the existence and content of the RPL condition had been disclosed to Mr Thomas, he would not have caused Evolution to enter into the share purchase agreement on the terms that it stipulated without making further inquiries.

104. I am satisfied, further, that if Mr Thomas had been told that it was unlikely that the RPL condition could be satisfied, he would not have caused Evolution to enter into the share purchase agreement at all, given Mr and Mrs Skerratt’s insistence on a purchase price of $10 million, and Evolution’s insistence that it would pay no more than a multiple of five times sustainable EBIT.

105. Finally, I am satisfied that if the existence and content of the RPL condition had been disclosed to Mr Thomas after 3 December 2014 and prior to 30 January 2015, and if he had been told (or upon inquiry had ascertained) that it was unlikely that Silver Trowel could satisfy that condition, he would have caused Evolution to exercise its cl 2.5 right of termination.

106. It follows from those conclusions that Evolution has suffered loss. But for the misleading or deceptive conduct, it would not have entered into the share purchase agreement on the terms that it contained. Equally, but for the perpetuation of that misleading or deceptive conduct, it would not have completed the share purchase agreement according to its terms (as from time to time varied). Evolution’s loss is, therefore, the sum of $10 million, less the true value of the shares at the time of their acquisition. In other words, I think, this is a case where damages fall to be calculated on the Potts v Miller [21] basis, giving credit for any benefits gained after completion[22] . Mr Colquhoun did not submit that this was an incorrect approach to the assessment of damages. His submission was, rather, that Evolution had failed to prove the true value of the shares at the time of their acquisition.

     21. (1940) 64 CLR 282.

     22. HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640.

88. There is no evidence that the sale to Arowana was negotiated at anything other than arms’ length. Thus, on the face of things, the sale provides some guide to the true value of the shares (particularly in circumstances where there is no evidence to suggest that the sale price was depreciated by supervening events that were not in any way attributable to the misleading or deceptive conduct of Mr and Mrs Skerratt.

89. Evolution and Arowana had a common director. Mr Colquhoun said, further (and the evidence may have proved), that when Evolution needed a short term loan facility to enable it to complete the purchase of the shares, Arowana provided a guarantee for the benefit of the lender. That is as far as the evidence of association between the two companies goes. It does not show that they were related corporations. Nor does it show that the sale from Evolution to Arowana was anything other than a sale at arms’ length.

90. Arowana obtained a report from Nexia Sydney Corporate Advisory Pty Ltd (Nexia). That report, dated 13 October 2016, expressed the opinion that the sale from Evolution to Arowana was fair and reasonable to the latter’s shareholders. Nexia considered that the fair value of the shares lay somewhere between 4 and 4.4 times EBITDA. Using “FY2016 normalised EBITDA” of $1,379,000, that led to a range of values from $5,518,000 to $6,000,069, with a midpoint (at a multiple of 4.2) of $5,793,000. On Nexia’s approach, the amount of $8 million that Arowana agreed to pay in fact exceeded by almost $2 million the high end of the range of fair values.

91. As I have noted, the sale was structured so that $6 million was payable immediately and the remaining $2 million was to be paid on an “earnout” basis. In the events that happened, the earnout did not become payable. Nonetheless, the amount actually paid equates substantially to Nexia’s high end calculation of fair value.

92. In short, the Nexia report provides strong support for the proposition that the sale to Arowana in fact achieved fair value for the shares.

93. I note, although it is not dispositive, that on Mr Thomas’ reworked EBIT calculation (on the basis that no discretionary RPL places would be awarded in 2015)[23] , the maximum amount that Evolution would have paid for the shares, had it been told the whole truth, was approximately $6.8 million. That is more than was in fact obtained, but less than might have been obtained, by the sale to Arowana some 18 months later.

    23. See at [94] above.

94. I am satisfied that the sale to Arowana, considered in conjunction with the Nexia report, provides an appropriate measure of the true value of the shares in Silver Trowel. Alternatively, if the question is whether Evolution acted reasonably to mitigate its loss by reselling the shares as happened, those facts confirm that it did.

95. I conclude that damages for misleading or deceptive conduct should be assessed in the amount claimed, $3,537,970.

Issues 9 to 12 breach of warranty; obligation to indemnify; loss or damages

115. On the conclusions to which I have come, it is not necessary to deal with these issues, because neither side contended that the outcome might vary according to how (if it happened) Evolution’s claim was vindicated. Further, neither side contended that the outcome on issues 9 to 12 would vary from the outcome dictated by my decision on the preceding issues.

Conclusion and orders

116. Evolution succeeds. It is entitled to damages for misleading or deceptive conduct in the sum of $3,537,970 together with interest. On the face of things, there is no reason why costs should not follow the event.

117. The parties are to agree on a calculation of interest, and to provide draft orders that will give effect to these reasons.

118. I make the following orders:

1. direct the parties to bring in draft orders, including an agreed calculation of interest, to give effect to these reasons.

2. Stand matter over to 10am on 9 February 2018 for entry of judgment.

3. Order the defendants to pay the plaintiff’s costs.

4. Reserve liberty to apply to chambers if the parties agree on the form of orders to be made.

5. Direct that the exhibits be returned.

**********

Endnotes

Amendments

13 February 2018 - Amendment to name in paragraph 7.

Decision last updated: 13 February 2018