Hai Quan Global Smash Repairs v Ledabow Pty Ltd
[2004] FCA 1224
•17 SEPTEMBER 2004
FEDERAL COURT OF AUSTRALIA
Hai Quan Global Smash Repairs v Ledabow Pty Ltd [2004] FCA 1224
TRADE PRACTICES – misleading conduct – silence
Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31, followed
Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 79 ALR 83, followed
Costa Vraca v Berrigan Weed Pest Control Pty Ltd (1998) 155 ALR 714, distinguishedTrade Practices Act 1974 (Cth), ss 52, 75B
HAI QUAN GLOBAL SMASH REPAIRS PTY LTD & ORS v LEDABOW PTY LTD & ANOR
N418 of 2002
MADGWICK J
17 SEPTEMBER 2004
SYDNEY
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
N418 of 2002
BETWEEN:
HAI QUAN GLOBAL SMASH REPAIRS PTY LTD
FIRST APPLICANTHAI QUOC DANG
SECOND APPLICANTVAN QUAN DANG
THIRD APPLICANTAND:
LEDABOW PTY LTD
FIRST RESPONDENTHARALAMBOS HANDRINOS
SECOND RESPONDENTJUDGE:
MADGWICK J
DATE OF ORDER:
17 SEPTEMBER 2004
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.Leave is granted to further amend the Statement of Claim to allege breach of s 52 of the Trade Practices Act 1974 (Cth) by the second respondent’s conduct including silence.
2.The Statement of Claim is deemed to be so amended.
3.Judgment for the applicants in the amount of $56,850.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
N418 of 2002
BETWEEN:
HAI QUAN GLOBAL SMASH REPAIRS PTY LTD
FIRST APPLICANTHAI QUOC DANG
SECOND APPLICANTVAN QUAN DANG
THIRD APPLICANTAND:
LEDABOW PTY LTD
FIRST RESPONDENTHARALAMBOS HANDRINOS
SECOND RESPONDENT
JUDGE:
MADGWICK J
DATE:
17 SEPTEMBER 2004
PLACE:
SYDNEY
REASONS FOR JUDGMENT
HIS HONOUR:
Introduction
The applicants, Hai Quoc (Ken) Dang (‘Ken Dang’) and his brother Van Quan Dang (‘Van Dang’), purchased a panel beating and spray painting business, Global Smash Repairs at 8-12 Buckley Street, Marrickville from the first respondent, Ledabow Pty Limited (‘Ledabow’). Haralambos Handrinos (referred to throughout the proceedings as ‘Bob’), the second respondent, was a director of Ledabow and, practically speaking, its alter ego: he conducted all negotiations between Van Dang, Ken Dang and Ledabow for the sale of the business. Upon the purchase, the applicants renamed the business Hai Quan Global Smash Repairs Pty Ltd, following the incorporation of the first applicant (‘Hai Quan’). The personal parties naturally referred to each other by their given names or nicknames, Ken, Van and Bob, respectively, and it is convenient and indicates no disrespect to any of them to adopt that convention here.
The applicants rely on ss 52 and 75B of the Trade Practices Act 1974 (Cth) (‘the Act’). They seek s 82 damages against the respondents and s 87(2) orders, including an order that the contract for sale of business exchanged on 12 July 2001 between the second and third applicants and the second respondent be declared void ab initio.
Negotiations began in April 2001. On 12 July 2001 a contract for the sale of the business for $175,000 made between and signed by Ken and Van as purchasers and Ledabow as vendor was exchanged.
On 16 July 2001, Ken and Van incorporated Hai Quan, the first applicant, and arranged alteration of the description of the purchaser in the contract by deleting their names and entering that of Hai Quan; the alteration was evidently acquiesced in by the respondents. Settlement took place on 20 August 2001. On that day Ledabow and Hai Quan entered into a ‘Deed of Assignment of Goodwill’ which contained various covenants thought necessary to protect the business interests and goodwill of Hai Quan.
The applicants allege that the respondents induced them to purchase the business by making several misrepresentations about the business’s turnover, customers and ongoing prospects of success. Central to the complaint were allegations that Bob represented that he would ensure that the smash repair work provided by various insurance companies would continue; that he would undertake certain obligations to train the staff of Hai Quan and that he would introduce the applicants to important contacts in the industry, especially customers such as NRMA and AAMI insurance companies. In the upshot, as will be seen, the crucial question comes down to whether Bob’s conduct, in remaining silent as to certain matters before contracts were exchanged, contravened s 52 of the Act.
Many of the material events leading to the purchase were in dispute.
Background
Ken and Van were both born in Vietnam, Ken in 1974 and Van in 1976. When they arrived in Australia in 1992 with their family, neither could speak English. They both completed high school in Australia to Year 10, thereupon undertaking and completing TAFE apprenticeships, Ken in vehicle painting and Van in panel beating. Prior to August 2001, Ken had had six years experience working as a spray painter including his two year apprenticeship and Van had six years experience as a panel beater including his apprenticeship.
Each of Ken and Van Dang had worked for several employers in their respective fields before 2001, however neither had owned or managed a panel beating or spray painting business.
Neither, it seems, know how to prepare to good effect a formal quotation for panel beating/spray painting work. Effective quoting, according to Bob and undenied, is a skilled affair, needing a good deal of experience.
Bob had in excess of 10 years experience of running Global Smash Repairs and was a successful, capable and shrewd small businessman. He fluctuated in his mind about whether he really wanted to sell the business but was attracted to do so by the prospect of respite from long hours and the cares of ultimate responsibility. He did not abandon all thought of continuing to work in some capacity in the industry; he became keen to manage the business for the Dangs.
Approximately six months before the Dangs purchased Hai Quan, they had made enquiries about purchasing another smash repair business in Bankstown, managed and part-owned by Abdul Omar. Both brothers made enquiries of Mr Omar, especially about turnover and customers. Mr Omar told Van that he did work for private customers and insurance companies including AAMI. He also told Van that he did work for NRMA because he was ‘registered with them’, but that he was not a ‘NRMA recommended repairer’. Both Ken and Van were aware that Mr Omar did work for insurance companies, but deny that they asked Mr Omar, or even considered, whether they would continue to receive work from various insurance companies if they bought the business. Mr Omar gave the applicants the company’s invoice books so that they could seek independent advice from their accountant. Following that advice, there was some disagreement between Ken and Van about whether they should purchase the business but, after Omar responded to an enquiry made by Van that he could not guarantee the company’s turnover if he sold it to them, the Dangs decided against purchasing the business.
In May 2001, Van visited Global Smash Repairs and spoke with Bob about purchasing the business. There was some difference of recollection as to who first suggested the sale of the business. In any case, during the course of the next few days Van introduced his brother to Bob and preliminary discussions took place about the profitability and price of the business.
Bob informed the Dangs that he did work for all the major insurance companies (these included, especially, AAMI and NRMA) and that his turnover was approximately $25,000 per week. Ken and Van visited Global Smash Repairs several times during the following week and noted a constant flow of cars being repaired and painted. Bob ultimately decided he would sell at a price with which he was satisfied. He showed Ken and Van his tax returns for 1998 and 1999. A few days later a sale price of $175,000 was agreed upon, to include all the equipment and stock in the shop. The following day Ken and Van attended the business premises and an inventory of the equipment in the workshop was prepared.
A few days later, Ken instructed Mrs Cam Hong Nguyen of LTN Lawyers to act for himself and his brother in respect of the purchase of the business. They relied upon her advice to enter into the contract.
Over the next three weeks, while waiting for the exchange of contracts, Van and Ken visited the business premises on several occasions, sometimes parking nearby to monitor customer movement, sometimes entering the office to observe the number of workers repairing smashed cars and the business generally. They saw approximately ten workers were employed at the workshop and that the firm was constantly busy.
The parties also agreed during this time that Bob would remain at the workshop for two weeks after settlement to train Ken and Van about the business and how it operated. On several occasions during this period, Bob asked Ken whether they would employ him as a manager after the business changed hands. Bob suggested that such employment would be good for the Dangs because he had many contacts in the industry.
Bob also warned them not to tell anyone that he was selling the business because, he claimed, he was concerned that if word got out in the industry that he was selling, he may lose some of his customers and his staff may seek employment elsewhere, which would damage the business, especially if the sale was not completed. Ken claimed, however, that Bob warned them against telling anyone he was selling the business to them because ‘the customers and insurance [companies] don’t like to see a change of hands’. Ken and Van were in any case very keen to purchase the smash repair business, but were apparently also under some pressure or influence from their family to do so.
On the exchange of contracts the Dangs paid a deposit of $17,500.
During the next three weeks, Ken worked full-time at Global Smash Repairs to confirm the turnover and workflow of the business. The applicants complained of several unsuccessful enquiries of Bob during this period about obtaining client information and contacts, about being introduced to clients, particularly the insurance companies, and also when he would instruct them in using the company’s computerised quoting system, AutoQuote. However, no or no appreciable loss has been shown to be attributable to any such complaint, if any were justified, in that regard.
Each day during that period, Ken and Bob discussed matters to do with the business. Bob again advised Ken not to tell anyone that he had sold the business.
Around late July, early August 2001 Ken and Van arranged for their brother in law, Mr Russell Newman (hereafter ‘Russell’), to assist them and to make enquiries on their behalf about the business, particularly about which employees should be terminated and which should be re-employed, and on what terms. Ken and Van were not confident of their English. Russell had had an unsuccessful small business venture of his own in recent years. Again, the applicants unsuccessfully sought information from Bob about the business’s customer contacts and client lists.
On 20 August 2001, settlement took place, the balance of the purchase price was paid and the deed of assignment of goodwill entered into.
On the following day, a discussion occurred between Ken, Bob and Russell about some outstanding repair work which had been referred to Global Smash Repairs from several insurance companies. They reached an arrangement whereby the profits for these jobs were
to be split between Bob and the Dangs depending on when the work was done and parts and materials were bought.
Within a few weeks of settlement, the amount of work coming into the business declined substantially compared with the workflow of the business prior to July.
On 10 September 2001, Ken asked Bob to organise a meeting with AAMI, a large insurer which had accounted for a large percentage of the business, in order to obtain work. Bob telephoned AAMI and arranged for the applicants and Mr Newman to meet with Mr Michael Finlay of AAMI, which they did. Ken informed Mr Finlay that they had purchased the business and asked whether work could be referred to them. After some discussion about the applicants’ experience, Mr Finlay informed them that a representative from AAMI would inspect their business in a few months, but there was no guarantee that they would receive any work from AAMI.
In the third week following settlement, the applicants employed Bob to assist them to manage the business. He was paid $750 per week.
Before July 2001, Global Smash Repairs was a highly successful business. It had an average monthly income of over $108,000. The primary source of the business income was from insurance companies, accounting for 88% of revenue.
In late May 2002, Hai Quan ceased trading and the remaining employees of the business were asked to leave.
The more important disputed issues
(i) Knowledge of insurance work
Prior to the exchange of contracts, Van and Ken Dang met Bob on several occasions to discuss the sale of the business. Many issues were traversed, including the workshop inventory, the value of the workshop equipment, employee entitlements and the identities of past and then present customers of the business.
In particular, all parties understood that Global Smash Repairs performed work for both private customers and insurance companies. Relevantly, work paid for by insurance companies was of three kinds. Firstly, an insured motorist might nominate a particular repair shop to the insurer to perform the work. In some cases, the insurer might not agree or readily agree to this unless it approved of the repairer. Materially, NRMA and AAMI were in that category.
Secondly, an insured party might be responsible for damage to a third party’s vehicle. Generally, the insurer of the offender would have no say in which repair shop did the work. That work was known as ‘third party’ work.
Thirdly, in the case of AAMI, they had a system of bringing the damaged vehicles of their customers to various central points where they organised for two quotations from repairers when AAMI would invite to quote.
The NRMA insurance company had a system, and a pro forma agreement (the ‘Competitive Partnering Agreement’) with Bob, which constituted certain repairers, on a personal basis, as approved or preferred repairers and, prevented assignment of the agreement’s benefits without the written consent of the NRMA Insurance Limited (‘NRMA’). The agreement also provided that the beneficiaries, when they became intending business vendors:
‘must ensure that the person with whom you are negotiating understands that your … business will cease to be a Partnership Repairer after Change of Control unless –
A)you seek our consent before the Change in Control; and
B)we give you our consent in writing.
Termination
… NRMA may terminate this Agreement immediately by giving written notice if:
A) a Change of Control or an Insolvency occurs in relation to you without our prior consent in writing.’NRMA so terminated the agreement on 5 October 2001.
During an early meeting in May 2001, when Van introduced his brother Ken to Bob, the latter informed them that he was ‘working for all the major insurance companies’. At no stage, however, prior to the exchange of contracts, did Bob expressly guarantee that the work he was doing for the insurance companies would continue or be transferred to the Dangs following the sale of the business. A period of at least six weeks passed from the time Ken and Van first discussed purchasing the business until the exchange of contracts. It seems that, during this period, the parties did not in terms discuss the insurance work continuing after the sale of the business. The following exchanges took place during Ken’s cross examination:
‘Well did you ever ask Bob whether the insurance business would automatically come with it? --- Well I asked him once.
When was that? --- When I had I think first couple of visits with Bob and asked if I buy business, can I work for insurance and he said: “Yes. Of course.” …
…
…After you saw your solicitor you gave Bob the contact details for your solicitor? --- Yes.You say you then had a conversation about the job for Bob? --- Yes.
Nothing was said there about the insurance continuing was there? --- No.
Then you say in paragraph 17: over the next 3 weeks you attended the smash repair shop about two or three times per week and the only conversation you have referred to there is questions about employment? --- Yes.
Then you say in paragraph 19 that your solicitor received the contract in about mid June and you had a conversation with Bob and you asked: when are you going to introduce [me] to the insurers? --- Yes.
Bob said: you pay the deposit first and he will take you to them, but first we will go to AAMI? --- Yes.
You later paid the deposit? --- Yes.
Right? --- That's right.
Still no reference to any conversation about Bob and the insurance continuing or the insurance work continuing, is there? --- Well, before that period I had no conversing about insurance.
No. In fact, before you exchanged contracts, you had no conversations with Bob about the insurance work continuing, did you? --- No.
You agree with that, don't you? Say "yes" or "no". Yes. Before you exchanged contracts you had no conversations with Bob about insurance work continuing, did you? --- No.’
The evidence of neither Van nor Russell improved the applicants’ position on that matter.
As indicated above, both Ken and Van had worked for several employers in their respective trades prior to purchasing Global Smash Repairs, but neither had owned or managed a smash repair business. Both knew that such businesses may obtain work from insurance companies as well as from uninsured customers, but that not all smash repairers so obtain insurance work. They understood that that was dependant on the quality of the work performed by the panel shop concerned.
In the several businesses in which he had previously worked, Van had seen various insurance assessors visit those businesses to inspect and approve repair work. He also knew generally how insurers worked:
‘Did you know then that if that car owner was insured that your boss would make up a quote and send it to the insurance company, and the assessor might come and have a look and approve the work? --- Yes.’
The Dangs knew that insurance work paid better than that of uninsured customers.
The two largest sources of Bob’s insurance work were from AAMI and NRMA. AAMI provided about 45% of the work under Bob and NRMA about 19%. Ken knew that an actual, ongoing contract was not required by AAMI of its approved repairers in order for them to carry out work for AAMI. AAMI would simply contact several repairers to prepare a quote and decide whether to accept the quote or not. Ken also knew that Bob had a contract with NRMA Insurance in consequence of which NRMA would refer him repair work, but at no stage during negotiations to purchase the business did he ask to see this contract or ask Bob any questions about the actual contractual arrangements with the NRMA.
In his affidavit of 13 February 2003, Van said:
‘A major reason why we decided to purchase the business from Ledabow Pty Limited was because of the Partnered Repairer Agreement it had with the NRMA and the significant amount of work coming in from the NRMA …’.
However, during cross examination, Van said:
‘When you swore your affidavit of 13 February 2003, you set out all the important conversations that you had with Bob before exchange in relation to the insurance work? --- I never talk about that.
Before exchange did you talk much about insurance work with Bob? --- I didn't talk much about that.
He didn't say anything about a contract or an agreement with NRMA, did he? --- He never talk about that.
That is something you learnt about after [emphasis added] you exchanged contracts? --- After the settlement.
After settlement you learnt that there was an agreement in place with the NRMA? --- Yes.
Now you didn't know that at the time you exchanged contracts, did you? --- I didn't know that.
No. So if you didn't know that at the time you exchanged contracts, that couldn't have been one of the reasons as to why you wanted to purchase the business, could it? --- Sorry .....
Yes. You told us that you didn't know, at the time you exchanged
contracts, that Bob had some form of partnered repairer agreement with the
NRMA. You only found that out later than exchange? Right? --- Later in
the exchange.You decided to purchase the business when you exchanged contracts? --- Yes.
Right? So at that time, when you exchanged, you didn't know Bob had a partnered repairer agreement with the NRMA, did you? --- I didn't know Bob had partner with NRMA. No.
No? --- No.
You just knew that he did some work for them? --- I know that Bob have
work from them. Yes.Right, but you didn't know whether he had an agreement with them or
not? --- I didn't know that.Right. So you couldn't say that one of the reasons that you entered into the
contract was because you knew he had a partnered repairer agreement with
the NRMA, could you? --- Sorry. Could you ask again?You can't say that you entered into the agreement because Bob had an agreement with the NRMA, when you didn't know he had an agreement with the NRMA at that time? --- I didn't know. Yes.’
There is, however, no doubt either that both Ken and Van were very keen to purchase a business that did work for insurance companies or that the insurance work coming to Bob was an important motivator in their purchasing the business. Prior to purchasing the business, neither Ken nor Van made enquiries of NRMA or AAMI as to how to become an approved repairer or to ensure that the work would continue once the business was in their hands.
Ken simply asserted that he and his brother did not know that they were required to reapply to the various insurance companies to continue to receive work from them after they purchased the business and, if they had known that prior to settlement, they would not have bought the business. It is quite clear from what the applicants said during cross examination that they simply believed that, if they worked hard and did quality work, the insurance work would continue to come to them after they had bought the business.
Ken gave evidence as follows:
‘…Well why didn't you check with AAMI before you entered into any contract to buy a business, to see whether or not they had a policy of continuing - - - ? --- As I told you I always believed that if advised must repair, all business come with the company then I should carry on, continue to work for them. That's what I believed. I didn't read that.
…
I don't understand what you are saying. You were asked why you didn't go to AAMI, for example, or any other insurer and say: if I go into business with my brother, what will we have to do to get work from you? --- Well, at the time I believed that I buy a smash repair, they will come with the business and that's why I didn't.
…
So you believed that if you were to purchase - and this was before you met Bob - if you were to purchase a business, you believe[d] that you should get the same customer flow afterwards? --- Yes, I believe that.Right. Is that why you were looking to purchase the business, because you believed you would continue to receive the same customer flow after you purchased the business? --- Yes, I believed that.’
Bob was long experienced as a successful operator in the trade. I have little doubt that he could not avoid making and did make, an early assessment that Ken and Van had little understanding of management aspects of the trade, including the practicalities of what was necessary, in addition to a capacity to do good work, to continue (or otherwise) to obtain work from insurers. I think Bob became well aware that the Dang brothers simply thought that it was a matter of their being introduced to the various insurers for the volume of work that had been Bob’s to be theirs. They were, as it must have been evident, and as Bob was more than shrewd enough to see, naïve to an astonishing extent when it came to this and other aspects of actually managing a panel-beating business. Were it not for the breath-taking extent of their incapacity and naivety exhibited once they were in control of the business, I would have found it difficult to accept that they could be so ignorant of what must have been well-understood insurance company practices in the trade. But so ignorant and naïve they were. I accept that, at the outset, Bob would have assumed that Ken and Van knew, what he would have considered common knowledge in the industry, that the NRMA would have to pre-approve its work coming to them. However, it is inconceivable that, as time went by, Bob did not become aware by the time contracts were exchanged of the extent of their actual ignorance of this.
For his part, Bob knew that Ken and Van Dang could have a difficult time getting NRMA approval, and knew that NRMA would have to consent to a new owner getting work. He claims that he told Van this when they were doing the inventory together, but Van denies this and I accept his evidence on that point. Bob was not above tailoring his evidence to suit his interests on some occasions. Even after contract, he was less than scrupulous generally in his dealings with the applicants – he sought to deny the business continuing use of its telephone number, took a computer that he should not have, and so on. It is not, however, proven that Bob had any understanding in relation to AAMI that it needed formally to consent to a change in ownership. He knew however that, in practice, AAMI wished to exercise a choice as to whether a new owner would be among those it would invite to tender.
Bob also well knew that the Dangs were paying a price predicated on the business having an anticipated continuing turnover, as Bob had (correctly) suggested his past turnover was, of the order of $25,000 per week. He knew that such a continuing turnover would largely depend on the continuance of the influx of AAMI and NRMA work. He knew that, so far as NRMA were concerned, the Dang brothers were simply assuming, quite without warrant and strongly against the probabilities, that that work would simply continue to come in. He knew that they had not, to completion, sought NRMA approval, as they should have done. He believed that such consent would not readily be forthcoming. It was, as indicated, a term of the Competitive Partnering Agreement between Bob and the NRMA, which had been renewed as recently as 23 May 2001, that the agreement was personal to Bob and could not be assigned without NRMA consent. Bob did not seek that consent.
Bob put himself in breach of that agreement and did not tell the Dangs of its substance. He not only took advantage, by his silence, of the Dangs’ ignorance and naivety, by his breach of his obligation to NRMA Insurance, he connived at a continuation of that ignorance. He knew that, if he told the NRMA he was selling, the probable result would be the cessation of the inflow of their work, which the Dangs would see before settlement.
The NRMA insurance work was withdrawn at the end of August, as soon as that company discovered that the business had been sold.
(ii) Returning the deposit
Approximately one week after Russell was introduced to Bob (and following the exchange of contracts) there was a discussion at the workshop between the applicants, Russell and Bob, in which Russell expressed concern that the applicants would not be able to operate the business as successfully as Bob, and advised them to consider walking away from the deal, even at the cost of forfeiting the deposit they had paid. The applicants indicated that they were extremely concerned at the prospect that, if they did not proceed with the purchase of the business, they would lose their deposit. Bob claims that he told the applicants ‘I don’t want anyone to lose their money, if you want I will give you your deposit back’. In separate affidavits Ken and Van agreed that that conversation had taken place. However, during cross-examination each denied that this conversation had ever occurred. Russell remembered a conversation in which he expressed concerns about the applicants’ ability to run the business, but he denied that Bob offered to return their deposit.
I accept Russell’s evidence on this, as on other matters. Despite his familial interest in the outcome of the proceedings, he struck me as a reliable and fair witness. Bob had wavered about his desire to sell the business but, having made up his mind and obtained a price to satisfy him, he was not the man to act with undue charity in business affairs. I think that there was likely some confusion in the Dangs’ legal camp in relation to the preparation of the affidavits. There are cultural and linguistic problems in communicating with each of them in relation to precise questions in a business or formal context. In any case, such confusion is very common.
(iii) The development of the applicants’ case
The applicants claimed a breach of several, pre-contract representations allegedly made by Bob, to induce Ken and Van to purchase the business. These representations included that:
(a)the business was insurance work and did work for all major insurance companies and Bob would ensure that the insurance work on which the business was based would continue after a sale of the business to Hai Quan;
(b)the equipment in the work shop was worth $130,000;
(c)Bob would train Ken and Van to run the business;
(d)Bob would introduce Van to all his contacts in the industry and to important customers such as NRMA and AAMI; and
(e)Ledabow would pay its staff their entitlements at the time of completion of the sale of the business.
The applicants also claimed that the contract negotiated by the parties contained a number of terms, the existence of which constituted and evidenced pre-contract representations made (and breached) by Bob to Ken and Van:
‘(a)By clause 1.1 the Business being sold was identified as including, inter alia, goodwill and the equipment disclosed in the Equipment List attached-to the Agreement;
(b)By clause 10.1.6 Ledabow promised as at 20 August 2001 that there was no subsisting breach of any agreement with a third party which would entitle that third party to refuse to transfer the benefit of the Agreement to Hai Quan;
(c)By clause 10.3 Ledabow promised that if it became aware before completion of any fact which made a promise in clause 10.1 incorrect or misleading, Ledabow must disclose that fact to Hai Quan before completion;
(d)By clause 17.2 Ledabow agreed to a restriction on its future competition with. Hai Quan for two years and within a 5 kilometre radius;
(e)By clause 17.3 Ledabow, agreed not to engage within two years, in any conduct derogating from Hai Quan’s right to obtain the full benefit of the goodwill of the Business;
(f)By clause 26.4 Ledabow agreed to provide 14 days post completion training to train Hai Quan in the running of the Business and to introduce to Hai Quan the clients, customers and suppliers of the Business;
(g)By clause 31 Ledabow agreed to terminate the employment of all employees of the Business with effect on completion and to pay all employee entitlements to each employee;
(h)By Special Condition 1 Ledabow warranted that the average gross takings of the Business was $25,000 per week subject to a variation of 15%.’
Finally, the applicants submit that Ledabow or Bob was in breach of the following clauses of the Deed of Assignment of Goodwill:
‘(a)By clause 3, Ledabow and Handrinos covenanted that for a period of two years from 20 August 2001 they would not engage in any conduct which derogates from Hai Quan’s right to obtain the full benefit of the goodwill of the Business;
(b)By clause 6, Ledabow and Handrinos covenanted not to carry on or be engaged, concerned or interested, directly or indirectly in any of the capacities set out therein, within a five kilometre radius of the Business premises;
(c)By clause 10, Ledabow and Handrinos covenanted that for a period of two years from 20 August 2001 they would inter alia, not use or attempt to use any confidential information regarding the Business, including inter alia, details of customers, past or current negotiations or transactions relating to customers or the Business.’
By the end of the hearing, however, it had become clear as to the various matters, that in some cases there was no breach and, in others, any breach caused the applicants no or no appreciable loss or damage. Thus, effectively, the case resolved into a question of the effect of Bob’s silence in relation to the necessity for pre-approval by the NRMA of the purchases if they were to continue to get NRMA work.
(iv) Respondents’ Submissions
The respondents contend that:
‘15.The representation that the business did work for all major insurance companies was correct. No representation was made that the respondents would ensure that the insurance work would continue after a sale. The applicants were aware of the fact that they would have to re-apply for insurance business from previous conversations with a different vendor and also from conversations from Mr Handrinos.
The applicants either knew that they would have to reapply for any work from the insurers or alternatively, simply assumed that the insurers would wish to continue to do business with them as the new owners of the business. Such an assumption was not based upon any representation made by the respondents.
…
16.Clause 26 of the contract of sale of business allowed the purchaser to attend precompletion for a period of 14 days and required the vendor to attend 14 days after completion to inter alia, train the purchaser in the running of the business.
17.The applicants regularly attended the business before exchange which took place on 21 July 2001. After exchange, they were constantly on the premises up until completion which took place on 20 August 2001. Mr Handrinos remained on the premises at the business for the required period after completion and engaged in training the applicants.
18.There is no doubt training took place. The dispute seems to be the extent of it. The respondent says for example that the applicants expected him to train them to quote on motor vehicles, a process that had taken him 10 years to learn and was impossible to teach in such a short period, although he did what he could.
(d)…
19.…Under clause 26.4 of the contract, the vendor was required in the 14 day post completion period to introduce to the purchaser the clients, customers and suppliers of the business. The respondents say that as clients, customers and representatives of suppliers of the business premises, the applicants were introduced to these persons by representatives of the respondent including Mr Handrinos.
…
20.NRMA was not a customer of the business. Individual insureds were the customers of the business, however, the cost of repairs were paid for by the insurer.
21.Mr Handrinos did arrange for the applicants to be introduced to AAMI. AAMI. requested that the Dangs attend on their own. After a poor reception by AAMI, Russell Newman, on behalf of the applicants suggested that maybe the other insurance companies should not be told of the transfer straight away.
22.However, one of the applicants contacted NRMA shortly after settlement and informed them of the transfer. The NRMA then on about 31 August 2001 attended the business premises and took away all NRMA documentation.
23.If the applicants make out this representation, then all that the respondent was required to do in order to make it good was to "introduce" the applicants to the named insurers. The respondents say that is effectively what happened. Even if that not be so, it cannot be said that an introduction by the respondent would have made any difference to the NRMA or any of the other insurers, who it would appear, were not impressed by the applicant’s lack of experience. In other words, there is no causal connection between any misrepresentation and any alleged loss sustained thereby.
…
27.Even if any misrepresentations be made out, it is submitted that the applicants did not rely on any of the representations made by Mr Handrinos, but relied on their own knowledge of the industry, their solicitor and accountant.
28.Furthermore, most of the affidavit evidence concerning the alleged misrepresentations comprises conversations which occurred after exchange of contracts and could not therefore have been relied upon by the applicants in deciding to purchase the business.’
(v) The Dang brothers’ managerial shortcomings
It will already be apparent that I consider that the applicants were ill-treated by Bob in the matter of the NRMA insurance work and, as will become apparent, the Act gives them a remedy in respect of this, although a markedly circumscribed one in monetary terms. The value of the business was reduced by 19 per cent on account of Bob’s misleading conduct in relation to the NRMA work. But within a short period after the Dangs took it over, the business failed utterly. They lost the AAMI work because of (at the least) poor quality control. They lost work brought in by tow truck drivers, perhaps a third of the work, because they would not pay the drivers a ‘commission’ fee on top of a fair towing fee for bringing the vehicles to their shop. That may have been morally creditable. In the context of the industry and what even they must have understood of it, and of Bob’s frank advice to them, it was extremely naïve. They ignored Bob’s advice to lower their price for a good non-insurer source of ongoing work. They compromised the name of Bob’s successful business. Ex hypothesi, they did not fully understand how the insurance aspect of the business worked. Their brother-in-law soon saw they had inadequate business skills. They ran the business down, in very large measure, themselves.
(vi) Credit issues generally
As indicated, I think that the most reliable witness on most matters in dispute was Russell Newman. Ken and Van were fundamentally honest witnesses but prone to some exaggeration. They were at some handicap in giving evidence on account of language difficulties. I disbelieve Bob on some of his claims. Overall, he was a sophisticated operator in both the creditable and discreditable senses of that adjective. Mr Craig Bewert, Bob’s manager, had a degree of bias towards Bob. Bob still owed him money and he had watched the Dangs, through what must have seemed to Mr Bewert to be their stupidity, destroy a good business and his job.
I accept Mr Wetton, an AAMI employee, as a truthful and reliable witness.
The law as to silence and s 52
It appears that the Full Court case which has achieved most respect over the years is Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31. Gummow J (with whom Black CJ and Cooper J agreed) stressed that the meaning of s 52 is not constricted by non-statutory, general legal doctrines and said (at 40):
‘“Conduct” within the meaning of s. 52 includes refusing to do an act and refusal to do an act includes a reference to "refraining (otherwise than inadvertently) from doing that act": sub-s. 4(2). But in any case where a failure to speak is relied upon the question must be whether in the particular circumstances the silence constitutes or is part of misleading or deceptive conduct. The expanded meaning given by s. 4(2) to "conduct" should not distract attention from the fundamental issue in the case at hand.
…
In my view, to inquire in such a case whether an independent “duty to disclose” has arisen is to digress from the application of the terms of s. 52.’His Honour continued (at 41):
‘… consistently with regard to the natural meaning of the terms of s. 52, the question is whether in the light of all relevant circumstances constituted by acts, omissions, statements or silence, there has been conduct which is or is likely to be misleading or deceptive. Conduct answering that description may not always involve misrepresentation; see Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 79 ALR 83 at 93, per Lockhart J … I agree also with the remarks by French J in Kimberley NZI Finance Limited v Torero Pty Ltd … his Honour said:
“If in a particular case silence would, as a matter of fact, constitute misleading or deceptive conduct, sec. 52 by virtue of its prohibition of such conduct imposes its own statutory duty to make disclosure.
The cases in which silence may be so characterised are no doubt many and various and it would dangerous to essay any principle by which they might be exhaustively defined.
However, unless the circumstances are such as to give rise to the reasonable expectation that if some relevant fact exists it would be disclosed, it is difficult to see how mere silence could support the inference that the fact does not exist.”As this passage suggests, one may give s. 52 full effect without entirely doing away with what Barton J described as “superior smartness in dealing”: …’
In the NSW Court of Appeal, Handley JA (Hodgson JA and Gzell J agreeing) recently considered, in Metalcorp Recyclers Pty Limited v Metal Manufactures Limited [2003] NSWCA 213 at [14], that Black CJ in Demagogue had ‘felicitously summarised’ the relevant principles. Black CJ said:
‘The primary question was whether there had been conduct that was misleading or deceptive or likely to mislead or deceive. In this case, as in every case in which s52 is relied upon, this was a question of fact that could only be determined - as the judge did determine it – having regard to all the relevant circumstances.
Silence is to be assessed as a circumstance like any other. To say this is certainly not to impose any general duty of disclosure; the question is simply whether, having regard to all the relevant circumstances, there has been conduct that is misleading or deceptive or that is likely to mislead or deceive. To speak of "mere silence" or of a duty of disclosure can divert attention from that primary question. Although "mere silence" is a convenient way of describing some fact situations, there is in truth no such thing as "mere silence" because the significance of silence always falls to be considered in the context in which it occurs. That context may or may not include facts giving rise to a reasonable expectation, in the circumstances of the case, that if particular matters exist they will be disclosed.’
I take such ‘reasonable expectation’ to be that which the Court might as its own act of judgment attribute to an applicant.
Here, Bob represented truthfully to Ken and Van that the business could and did earn $25,000 per annum and that it had insurance work which included NRMA work. But, as he knew and they did not, 19 per centum of that revenue was attributable to the NRMA insurance work, and it was very problematic, given the Dang’s obvious unreadiness for management, that that work would continue to come in once they became the owners of the business. Bob also knew, of course, that Ken and Van expected takings of the level achieved by him to continue after they were masters of the business. Bob knew, I infer from the conclusion that he must have known, that the Dang brothers did not comprehend how difficult it would be to assume the continuation of the NRMA work. He remained silent. His silence was, as silence can be, eloquent. By his silence, Bob is likely to have deepened the force of Ken’s and Van’s mistaken assumption that the NRMA work would, as a matter of course, flow to them. By remaining silent in these circumstances, Bob caused his otherwise true representations about the availability to the business in his hands of the NRMA work and the turnover of the business in his hands to be misleading.
The subject of Bob’s silence was a specific factual matter within his actual knowledge. I believe that, by the time the contracts were exchanged, he became aware, as he must have, that the prospective purchasers mistakenly believed the contrary, and that they were, in general, remarkably naïve and ignorant as to business affairs and the managerial aspects of a panel beating/spray painting business. There is, by general standards of commercial morality, no injustice in visiting the legal sanctions provided by the Act on a probable consequence of such misleading conduct, namely the Dangs’ continued willingness to buy at $175,000. To my mind, there was a reasonable expectation, in the circumstances of the case, that the particular matter of the fragility of the prospect of continuation of the NRMA work would be disclosed. The case has some degree of similarity to Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (No 1) (1988) 39 FCR 546 in which a ‘duty’ was said to have existed to reveal the true position before any contract was signed. ‘Duty’ and ’reasonable’ expectation are normative terms: was it fair and just in the circumstances to expect the vendor to speak up as to vital matters within his/its specific knowledge? In this case I believe that it was.
Reliance was placed by counsel for the respondent on the case of Costa Vraca v Berrigan Weed Pest Control Pty Ltd (1998) 155 ALR 714. The facts are clearly distinguishable. Axiomatically, each case must be considered in the context of its own circumstances.
In my opinion, the applicants suffered loss or damage ‘by’ the respondents’ contravention of s 52. That contravention materially contributed to their ultimate decision to buy at the price they did. They paid too much. The extent of the loss or damage is discussed below.
It follows that, as to the NRMA work, the applicants have made out their case.
Remedy
The applicant’s initial submission was that the Court should set aside the contract and, among other things, order the refund of the purchase price, upon the basis that, had s 52 not been contravened in the way I have found that it has, the applicants would never have agreed to purchase it. There are two insuperable problems with this. First, I do not accept the premise as to what the applicants would have done. The brothers were, apparently with a degree of familial encouragement, very keen to buy a business. Without the NRMA work, Global Smash Repairs was probably still a good business, subject to reducing the price and number of employees. I am by no means persuaded that that is not the course they would have followed.
The second problem is that there is no business now. Restitution of the respondents to their former position, to the extent hypothetically just, is impossible. The respondents are to compensate; they are not to be punished. The reason for the impossibility was, to put the matter as kindly as it can be put, Ken’s and Van’s lack of management ability. At least, the destruction of the business cannot be fairly sheeted home to Bob.
I conclude that damages are the appropriate remedy.
In my view, the measure of the applicants’ loss is that:
(a)they paid about 19 per centum more than they should have for what the business was, on a true understanding, going to deliver them, that is they paid $33,250 too much. They should have this back.
(b)There were no doubt some on-costs of the sale, such as stamp duty and other minor expenses. Perhaps $5,000 in all would be a reasonable assessment. For the price and/or capacity to earn of that additional money, an award of interest, in any case well justified, will take care of that.
(c)It is likely that the absence of the NRMA work would have led to some degree of what I might call diseconomies of scale. I have in mind that such things as the size of the business premises; the equipment levels; the probable standing stock levels (things such as tools, consumables like grinding wheels, emery paper and paint undercoat); staff levels; indirect staff costs and so on were predicated on the flow of work being 23 per cent (19/81 x 100, not 19/100 x 100) higher than it likely would be and, in the event, was. It is likely that the process of adjustment to the true and lower workflow would have involved some additional cost. Only the broadest estimate (and one that frankly involves a speculative element) can be attached to this, perhaps $5,000.
That is, leaving aside interest, a sum of the order of $43,250 appears appropriate.
In the course of argument I was attracted to the submission that, had the applicants got what they bargained for, they stood, because of their managerial inexperience, an excellent chance of losing the NRMA work anyway, and therefore even the modest award that seems otherwise appropriate should accordingly be reduced. Upon reflection, such an analysis seems to me to be mistaken, certainly as to the $33,250 figure mentioned. It is awarded to put the applicants back where they should have been as to purchase price had they not been misled by the respondent’s conduct. Any managerial incompetence on their part thereafter would have been their own loss. There is no warrant, however, to reduce what they should receive, especially when the very evident fact of such managerial incapacity is one of the circumstances which made the respondent’s conduct misleading. As to the other components of what I would award, they are in any event modest and any reduction, if appropriate at all, would be trifling.
As to interest, the rates prescribed as interest on judgments of the Court are, in this case, an acceptable guide. Interest for about 3 years would suffice. I allow $13,600.
Accordingly there will be judgment for the applicants in the amount of $56,850. I will hear the parties as to costs.
I certify that the preceding seventy-five (75) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Madgwick.
Associate:
Dated: 17 September 2004
Counsel for the Applicant:
Mr J Levingston
Solicitor for the Applicant:
Christopher Levingston & Associates
Counsel for the Respondent:
Mr G McNally
Solicitor for the Respondent:
Colin Daley Quinn
Date of Hearing:
5 February 2004
Date of Judgment:
17 September 2004
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