Hinds v Ross
[2005] FMCA 668
•20 May 2005
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| HINDS & ANOR v ROSS & ORS | [2005] FMCA 668 |
| TRADE PRACTICES — Trade & Commerce — misleading or deceptive conduct — purchase of business — where applicants purchased Lunch Bar business from respondents — representations made in relation to sale of business — whether misleading representations made concerning the gross takings or income of the business, the value of the stock and the condition of plant and equipment — whether respondents corrected misleading representations — whether applicants relied upon representations made — where applicants alleged fraud on the part of defendants — discussion of dicta in Neat HoldingsPty Ltd v Karajan Holdings Pty Ltd (1992) 110 ALR 449 — applicants’ application dismissed. |
| Trade Practices Act 1974 (Cth) Fair Trading Act 1987 (WA) |
| Neat HoldingsPty Ltd v Karajan Holdings Pty Ltd (1992) 110 ALR 449 Yorke v Lucas (1985) 158 CLR 166 Argy v Blunts & Lane Cove Real Estate Pty Ltd (1990) 26 FCR 112 |
| Applicants: | PAUL MAXWELL HINDS & KAREN LYNN HINDS |
| First Respondents: | DAVID ADAM ROSS & LYNN MAREE ROSS |
| Second Respondent: | GEOFFREY ALLAN INGLIS |
| File Number: | PEG 52 of 2004 |
| Judgment of: | Walters FM |
| Hearing dates: | 8 September 2004, 9 September 2004, 14 October 2004 & 15 October 2004 |
| Delivered at: | Melbourne via video link to Perth |
| Delivered on: | 20 May 2005 |
REPRESENTATION
| Counsel for the Applicant: | Mr Cuerden |
| Solicitors for the Applicant: | Rattigan & Associates |
| Counsel for the First Respondents: | In Person |
| Counsel for the Second Respondent: | Mr Grayden |
| Solicitors for the Second Respondent: | Hammond Worthington Lawyers |
ORDERS
The application of the applicants be dismissed.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT MELBOURNE |
PEG 52 of 2004
| PAUL MAXWELL HINDS & KAREN LYNN HINDS |
Applicants
And
| DAVID ADAM ROSS & LYNN MAREE ROSS |
First Respondents
| GEOFFREY ALLAN INGLIS |
Second Respondent
REASONS FOR JUDGMENT
Background
The “Three Ways Lunch Bar” is in Kelmscott, an outer suburb of Perth. It is situated in an industrial area.
Mr and Mrs Ross purchased the lunch bar business in November 2002. They owned and operated the business for approximately eight and a half months before putting it on the market for sale in August 2003.
On 7 August 2003, Mr and Mrs Ross signed an authority authorising Geoff Inglis & Associates, a firm of real estate agents, to offer the business for sale. They dealt with Mr Featherston — a consultant employed by Geoff Inglis & Associates. Mr Inglis is the proprietor of Geoff Inglis & Associates.
According to the authority document signed by Mr and Mrs Ross, and by Mr Featherston on behalf of Geoff Inglis & Associates, the listing price for the lunch bar business was to be $87,000.00 – comprising $58,000.00 in respect of goodwill, $25,000.00 in respect of plant, fixtures and fittings, and $4,000.00 in respect of stock.
At the same time as Mr and Mrs Ross provided the authority document to Mr Featherston, they completed a vendor’s disclosure statement relating to the business. Included within the disclosure statement, under the heading of “sales information” were statements to the following effect:
a)the “average weekly turnover” of the business was approximately $4,000.00;
b)the nett annual profit was $50,090; and
c)the “period covered” was 30 June 2002.
The sales information referred to in the preceding paragraph was expressed to be based on the involvement of two full-time proprietors.
Other details contained in the disclosure statement included the fact that the lunch bar’s hours of operation were from 6.00 a.m. until 2.00 p.m. Monday to Friday, and that two part–time employees constituted the staffing arrangements for the business.
Having received the above documents, Mr Featherston began to market the sale of the lunch bar business. It was advertised in newspapers and on the internet.
On or about 4 January 2004, Mr and Mrs Hinds saw the advertisement for the lunch bar on the internet – on a website called realcommercial.com.au.
The advertisement had been written by Mr Featherston, with some input from Mr Inglis. It was headed “urgent sale” and continued:
Make an offer – on this thriving lunch bar situated in the heart of a busy, industrial area, south of the river …
The internet advertisement included the following statement:
The weekly turnover is around $4,000.00.
The internet advertisement made no mention of the purchase price of the business.
After seeing the advertisement on the internet, Mr or Mrs Hinds contacted Mr Featherston by telephone. Alternatively, a message was left for him and he eventually rang back. When he spoke with them, Mr Featherston described where the business was located. Mr and Mrs Hinds then “did a drive-by”, and had a look at the lunch bar.
After viewing the premises, Mr and Mrs Hinds made further contact with Mr Featherston, who proceeded to arrange a meeting with Mr and Mrs Ross. The meeting took place at the lunch bar on 8 January 2004. Present at the time of the meeting were Mr and Mrs Hinds (and their one year old son), Mr and Mrs Ross and Mr Featherston. What happened at that meeting comprises one of the critical issues in these proceedings, but suffice it to say — at this point in the narrative — that Mr and Mrs Hinds allege that Mr Ross showed them three or four pages of A4 paper, upon which certain figures had been handwritten. They allege that Mr Ross told them that the figures were the daily takings of the business for the previous three months. They also allege that the figures showed takings of approximately $750.00 - $800.00 per day.
According to Mr and Mrs Hinds, the figures on the papers produced by Mr Ross at the meeting on 8 January 2004 (which I shall call “the Meeting”) were consistent with the business having a weekly turnover of approximately $4,000.00 (on the basis that the lunch bar was open from Monday to Friday only).
Mr and Mrs Hinds allege (amongst other things) that they agreed to purchase the lunch bar in reliance upon the representation contained in the internet advertisement (to the effect that the weekly turnover of the business was around $4,000.00), and also upon the representation made to them by Mr Ross at the Meeting to the effect that the daily takings amounted to approximately $750.00 - $800.00 (being approximately $4,000.00 per week). Mr Ross denies that he told Mr and Mrs Hinds that the daily takings were $750.00 - $800.00 at the Meeting. He agrees that he showed Mr Hinds (but not Mrs Hinds) some sheets of paper on which figures were written. He asserts, however, that the figures demonstrated that the average daily takings for the previous three months were significantly less than $750.00 to $800.00 — such that the weekly turnover was in the order of $2,000 to $2,500.00 (and not $4,000.00). Mr Ross alleges that he told Mr Hinds that the figures did not support a conclusion to the effect that the turnover of the business was in the order of $4,000.00. In other words, Mr Ross alleges that he corrected any misapprehension that Mr Hinds may have had regarding the gross takings of the business.
Mr Ross alleges that Mr Hinds told him that he was still interested in making an offer to purchase the business, but that the offer would only reflect Mr Hinds’ opinion of its value based on current turnover.
I shall return to consider the evidence relating to the events at the Meeting later in these Reasons.
A Sales Booklet is given to Mr and Mrs Hinds
At the time of the Meeting, Mr Featherston gave Mr Hinds a booklet (produced in the offices of Geoff Inglis & Associates) containing a description of the business, a Profit and Loss Statement for the business for the year ended 30 June 2002 (together with a page setting out certain adjustments to the figures contained in the Profit and Loss Statement), a plant and equipment list, some photographs of the business premises and a lunch bar menu. According to Mr Featherston, the booklet also contained a page entitled “Conditions of Supply”, a page setting out the price of the business and certain other details, and a page — in a different format — showing adjustments to the Profit and Loss Statement for the year ended 30 June 2002.
Much time was spent during the trial on the question of whether the booklet given to Mr Hinds on 8 January 2004 contained the additional three pages. I am satisfied that it did not. In other words, I am satisfied that Mr and Mrs Hinds were not aware of the disclaimer contained on the page headed “Conditions of Supply”, and that they were not aware of the various details appearing on the other pages to which I have referred (including the asking price of the business). The actual booklet provided to Mr and Mrs Hinds comprises Exhibit A2.
That is not to say, however, that Mr and Mrs Ross were aware that the booklet provided to Mr and Mrs Hinds did not contain the three pages to which I have referred. I am satisfied that the copy of the booklet that had been provided to Mr and Mrs Ross by Mr Featherston (or his employer) did contain the pages that were missing from Exhibit A2. Indeed, I am satisfied that Mr Featherston and Mr Ross believed that the booklet handed to Mr Hinds on 8 January 2004 contained the three pages to which I have referred. They therefore believed that Mr and Mrs Hinds were aware of the asking price for the business and the other details contained on that page. For what it is worth, Mr Featherston probably believed that Mr and Mrs Hinds were also aware of the disclaimer set out under the heading “Conditions of Supply”.
The fact of the matter is, however, that Mr Hinds merely glanced at the booklet that he was given, and neither he nor Mrs Hinds placed any reliance upon the documents contained within it. Their case, as I have indicated, has at its core their alleged reliance upon the two representations to the effect that the lunch bar’s weekly turnover was in the vicinity of $4,000.00 — the first in the internet advertisement and the second by Mr Ross at the Meeting.
Mr and Mrs Hinds decide to purchase the Lunch Bar
At some time between 8 and 10 January 2004, Mr and Mrs Hinds decided to present an offer to Mr and Mrs Ross to purchase the business. With the assistance of Mr Featherston, they completed an offer to purchase the business (in the form of an Agreement for Sale of Business) on 10 January 2004. They offered to purchase it, on a “walk-in, walk-out” basis for $45,000.00 — comprising $12,000.00 for goodwill, $25,000.00 for plant and equipment, $4,000.00 for stock and $4,000.00 for a delivery van.
The offer referred to in the previous paragraph was prepared at the Hinds’ home in Doubleview. Later that day, Mr Featherston took the offer to Mr and Mrs Ross at their home in Armadale. Whilst he was at their home he negotiated a price over the telephone with Mr and Mrs Hinds. The price that was eventually agreed upon was $51,000.00. The allocation for plant and equipment, stock and the vehicle remained the same as that set out in the original offer, but the allowance for goodwill was altered from $12,000.00 to $18,000.00.
At no stage during the negotiation process (which might be regarded, in effect, as spanning the period from the Meeting to the signing of the Agreement for Sale of Business on 10 January 2004), did Mr Featherston represent to Mr and Mrs Hinds, or either of them, that the gross income of the business was in the order of $4,000.00 per week. Quite how the negotiation process proceeded is unclear, but it seems that it did not involve any discussion of the originally stated (in the internet advertisement) or actual gross takings of the lunch bar.
The settlement and possession date under the Agreement for Sale (which I shall call “the Contract”) was 30 January 2004.
The Period leading up to the Handover of the Lunch Bar
A couple of weeks before the settlement date, Mrs Hinds attended at the business and did some work associated with it. She alleges that she worked in the business on a Wednesday, Thursday and Friday from about 9.00 a.m. until closing time on each day. At that time, the opening hours were 6.00 a.m. until 2.00 p.m., Monday to Friday. She also alleges that she spent most of her time during those three days delivering food and other items to local businesses and that, as a result, she did not notice how busy or quiet the shop was at that time.
On 29 January 2004, Mr and Mrs Hinds went to the lunch bar. Mrs Hinds became concerned that the value of the stock did not amount to $4,000.00. They contacted Mr Featherston and raised with him their concerns regarding the value of the stock. Mr Featherston then attended at the lunch bar to let Mr and Mrs Ross know that Mr and Mrs Hinds were concerned about the level of the stock. Whilst Mr Featherston was at the lunch bar, Mrs Ross and one of the workers at the lunch bar prepared an inventory of the stock. The inventory was later typed up by Mr Featherston and faxed to Mr and Mrs Hinds[1].
[1] A copy of the fax sent by Mr Featherston to Mr and Mrs Hinds is Annexure NF8 on page 35 of Mr Featherston’s affidavit sworn 28 May 2004.
Mr and Mrs Hinds agree to take over the Lease of the Lunch Bar
On 30 January 2004, Mr and Mrs Ross and Mr and Mrs Hinds signed an irrevocable authority directed to the solicitors handling the conveyancing aspects of the sale of the lunch bar. The authority[2] was in the following terms:
We the undersigned Vendor(s) of the abovementioned leasehold business in full knowledge that the Assignment of Lease documents relating to the sale of the abovementioned leasehold business have not yet been prepared for execution by the parties hereby jointly and severally authorise the Purchaser(s) to take possession of the business on the above possession date.
We the undersigned Purchaser(s) hereby accept possession of the above business and premises and jointly and severally irrevocably authorise Ronson Mackinlay Conveyancers to effect settlement of the full net settlement proceeds to the Vendor(s) notwithstanding that the Assignment of Lease documents have not yet been prepared for execution by the parties.
We the Vendor(s) and Purchaser(s) agree to sign the relevant lease documents forthwith upon presentation and agree that we have no claim against Ronson Mackinlay Conveyancers and have not been induced by same to give and take possession of the business and release the net proceeds prior to the execution of the Assignment of Lease documents and we jointly and severally irrevocably absolve Ronson Mackinlay Conveyancers from any further responsibility/liability whatsoever in respect to this matter.
[2] See page 97 of Mr Ross’s affidavit sworn 2 June 2004.
The Stock
During the course of the proceedings, Mr and Mrs Hinds raised a number of concerns regarding the quantity and quality of the stock which remained in the lunch bar when they took possession of the business on 30 January 2004. I do not accept that Mr and Mrs Hinds have fairly or accurately described the position in relation to the stock and find that they have exaggerated their complaints in that regard. For example, in her affidavit sworn 27 August 2004, Mrs Hinds alleged that —
(a)… there was no stock left, and we had to order stock in. Whilst we could order stock in, it was too late for the first day and that ruined our first day of business.
(b)All fruit, vegetables and dairy products were off, slimy and rotten in the fridges.
(c)Most of the frozen food boxes were empty or did not contain the correct food items.
Mrs Hinds eventually conceded that the above statements were exaggerations. Similarly, statements made by Mr Hinds in his affidavit regarding the condition of the stock were exaggerated.
Mr and Mrs Hinds are Disenchanted
Things started to go wrong — from the Hinds’ point of view — almost as soon as they took over the business. They experienced problems with some of the plant and equipment, and they ascertained that the delivery van was in need of repair. Most importantly, however, their takings in the first week of operation (being the week of Monday
2 February 2004 to Friday 6 February 2004) varied from a high of approximately $580.00 on the Thursday to a low of approximately $260.00 on the Tuesday.
On Wednesday 4 February 2004 (being the third day of operation of the lunch bar under the proprietorship of Mr and Mrs Hinds), Mrs Hinds telephoned Mr Featherston and asked him to come into the shop as soon as possible. When Mr Featherston arrived at the shop, Mrs Hinds raised a number of complaints with him. She complained that the oven door had fallen off and that a problem had arisen with the electrical supply to one of the freezers. She also complained about certain stock that was out of date. As well, and according to Mr Featherston, Mrs Hinds was “very distressed because she could not understand how the takings, as represented by (Mr and Mrs Ross), could be sustained on the customer activity they were experiencing”.[3]
[3] See paragraph 31 of Mr Featherston’s affidavit sworn 28 May 2004.
Mr Featherston immediately wrote to Mr and Mrs Ross. The letter is dated 4 February 2004 and comprises Annexure NF9 on page 37 of Mr Featherston’s affidavit. The letter contains the following paragraph:
(Mrs Hinds) cannot see how you were turning over around $4,000.00 per week on the present customer activity. Would you be able to spend time with her in the next couple of days to explain this to her, as she may be doing something wrong. You do have a responsibility to support these figures that you maintained were valid. If, for instance, the daily takings do not improve over the next month, you could leave yourself open to litigation.
Upon receipt of the letter from Mr Featherston, Mr Ross visited the lunch bar.
Mr Cuerden (for Mr and Mrs Hinds) cross examined Mr Ross regarding his visit to the lunch bar on this occasion. In my opinion, this evidence was telling:
Mr Cuerden: When you received this letter, were you concerned that you were being accused of having maintained figures that were wrong?
Mr Ross:I was concerned, but in my statement …
Mr Cuerden: No, you were concerned about that?
Mr Ross:Concerned about?
Mr Cuerden: About being accused of maintaining false figures. Were you concerned about that?
Mr Ross:I was concerned that Karen Hinds was still under the impression that we had been turning over $4,000.00 a week after Mr Hinds had been given the current daily turnover of substantially less than that.
Mr Cuerden: And was your concern enough to cause you to write to Mr Featherston and correct his assertion?
Mr Ross:No, I actually went down to the shop and spent some time down there with them.
Mr Cuerden: Did you write to Mr and Mrs Hinds, trying to correct any misapprehension about the figures that you had maintained?
Mr Ross:No, because I didn’t want to get involved in any dispute between Mr and Mrs Hinds on the information that was passed between them. Because, if you recall, I maintained that Mrs Hinds was not present at the table when the figures were given to Mr Hinds of those current daily figures.
Mr Cuerden: Why didn’t you write to Mr Featherston and say exactly that, and defend yourself?
Mr Ross:Because I went down the following day and spent time with them at the shop. The other factor was that, as she may be doing something wrong, I had lengthy discussions with her mother as to the situation down there as I (had) seen it, in regards to what food was being prepared, how it was being prepared and so forth.
Mr Cuerden: In fact, that was the reason you went to the shop, because complaints had been made, wasn’t it, in particular by this letter?
Mr Ross:Yes, as I stated, a request was made for me to go down and offer some assistance.
Mr and Mrs Hinds consult their Solicitor
On 19 February 2004, some two and a half weeks after the Hinds took over the lunch bar, they arranged for their solicitors (Rattigan & Associates) to write to Mr and Mrs Ross. The letter includes the following:
In the instructions we have received from Mr and Mrs Hinds it appears quite clear that there was a breach of the Fair Trading Act and gross misrepresentations were made to our client in relation to the profitability of the business, stock and the working order of plant.
We are putting your (sic) notice in relation to this matter as there is a lease due to be signed by our client in relation to the premises. We understand that your lease had expired so you may wish to take into consideration entering into the lease with the landlord to protect your interest in the property. Our client will not be taking up the three year lease with option.
It is apparent from the portions of the 19 February 2004 letter quoted above that — in contradistinction to the claims made by Mr and Mrs Hinds in this Court — they did not allege (at that early stage) that misrepresentations had been made in relation to the “turnover” or gross takings of the business. It was clear from Mr Hinds’ evidence before me that he placed no reliance upon any representation by Mr or Mrs Ross (or any other person, for that matter) as to the profitability of the business. He confirmed that it was his own, subjective view — based on his experience — that profit should be approximately 25% of gross turnover.
Mr and Mrs Hinds Purport to Rescind the Purchase Agreement
On 2 and 10 March 2004, Rattigan & Associates wrote two further letters on behalf of Mr and Mrs Hinds. The first was to the landlord’s agent, John O’Neill & Son. It reads as follows:
… we advise that Mr and Mrs Hinds do not intend at this stage to sign the assignment of lease. They will be seeking to rescind the contract, notice of that intention to rescind has been given to Mr and Mrs Ross.
In the meantime we would appreciate it if you could request of the Lessors that the signing of the assignment at this stage be put on hold for 2 or 3 months in the hope that this matter may resolve itself sooner than later. Our clients will continue to honour the terms of the lease and they will comply with the obligations to pay the rent and keep the premises in good repair and order.
The second letter from Rattigan & Associates was to Mr and Mrs Ross:
Further to our letter dated 19 February 2004 we hereby give notice that our client hereby rescinds the agreement dated 10 January 2004 in respect to the Three Ways Lunch Bar.
Please advise whether you accept this rescission and will refund the deposit and purchase price in exchange for the return of the business and all books associated therewith.
If not, we have firm instructions from our client to commence proceedings for recision of the agreement, damages and costs.
The repetition of the expression “at this stage” in the letter from the Hinds’ solicitors to John O’Neill & Son, together with the request that the matter “be put on hold for two or three months”, indicates that the Hinds were not then closing their mind to the possibility of entering into the lease agreement (by way of assignment of lease) at some time in the future.
On 2 March 2004, Mr and Mrs Ross had written to Rattigan & Associates[4]. They denied that they had made any misrepresentations in relation to the issues raised in the letter from Rattigan & Associates dated 19 February 2004 (being issues in relation to stock, plant and profitability). The letter asserts that Mr and Mrs Hinds accepted the level of stock, and the condition of the plant, at the time of changeover. It also asserts that Mr Hinds was aware of the profitability of the business as a result of having seen its “daily takings (day sheets)”.
[4] The letter is on page 89 of Mr Ross’s affidavit sworn 2 June 2004.
The letter dated 2 March 2004 from Mr and Mrs Ross to Rattigan & Associates then details a series of matters relating to the manner in which Mr and Mrs Hinds saw fit to run the business. The assertion in the letter is that (to use the words attributed in the letter to a previous, long standing customer of the lunch bar):
It’s a shambles down there.
The response from Mr and Mrs Hinds was the letter from their solicitors dated 10 March 2004 purporting to rescind the Contract. According to Mr Ross, the 10 March 2004 letter was not received until two days before Mr and Mrs Ross left for their daughter’s wedding in Victoria. I accept that they were in Victoria from 16 March 2004 to
28 March 2004.
Mr & Mrs Hinds Allege Inappropriate Behaviour
After Mr and Mrs Ross returned from Victoria, they received a further letter from Rattigan & Associates, dated 31 March 2004. The letter is as follows:
We have been informed by our client that you have been sitting outside the shop premises observing our client and business, and secondly you have been following Mrs Hinds around the suburbs when she leaves the premises. This letter is to put you on notice that you should desist from this conduct immediately otherwise our client will institute immediate action for a restraining order in the Court of Petty Sessions Perth.
Clearly, the conduct alleged in the letter from Rattigan and Associates dated 31 March 2004 could not have occurred during whilst Mr and Mrs Ross were in Victoria.
Mr and Mrs Ross do not Respond to all Correspondence from Rattigan & Associates
During the course of the trial, Mr Ross was asked why he did not respond to the letter dated 10 March 2004 from Rattigan & Associates (being the letter containing the purported termination of the Contract). His explanation was as follows:
Mr Ross:Yes, well, the first letter I received, I responded to. The second letter was on the same subject matter, which I didn’t believe there was a need to respond to because I had already made the explanations as I seen (sic) it to be. Any suggestion of me going back into the shop or anything would have been an admission of what was being claimed of me — that I was being deceptive — and I should be like a little scared rabbit and run back and take it back.
Mr Grayden: So at that point though you didn’t accept you had any liability to accept the decision?
Mr Ross:No, none whatsoever. As I said, the full disclosure had been made. As far as I was concerned the business had been purchased and paid for. That was my involvement over.
I accept Mr Ross’s explanation for not responding to the 10 March 2004 letter. I note that he did respond to the 31 March 2004 letter (alleging a form of stalking). He replied to this letter by telephoning Rattigan & Associates, ascertaining that the conduct complained of had allegedly occurred within the past two weeks and by informing Rattigan & Associates that he had been in Victoria from 16 March to 28 March 2004.
The Lunch Bar is Poorly Run after Handover
In support of their assertion that the lunch bar was poorly run after the Hinds took it over, Mr and Mrs Ross called evidence from three witnesses — each of whom swore an affidavit. The witnesses were Ms Whyte, Mr Shoosmith and Ms Ridley. All were cross examined by Mr Cuerden, and all were impressive witnesses. I accept their evidence, and accept that the business was indeed poorly run by the Hinds. For example, Ms Ridley said — in effect — that the quality of the food was poor (in comparison to the food available at the lunch bar whilst it was run by Mr and Mrs Ross). After persevering with the new owners for approximately two weeks, she later ceased patronising the shop. Mr Shoosmith also said that the quality of service deteriorated after the departure of Mr and Mrs Ross and that there were unacceptable delays whilst food was being prepared. He said that some food lines were not available, and that less food was on display (in the bain-marie) than had been available whilst the shop was run by Mr and Mrs Ross.
I find that the lunch bar was poorly run by Mr and Mrs Hinds after they took it over from Mr and Mrs Ross. I do not accept that the business was poorly run because of anything that Mr or Mrs Ross may have said or done, or because of an initial lack of stock, or because of problems with faulty plant or equipment. The business was poorly run because of Mr and Mrs Hinds’ attitude, and because of their inexperience in running a lunch bar. Although each may have worked in industries or enterprises having some connection with food preparation or distribution, neither had experience in the running of a lunch bar. Their business plan (as it were) involved a number of significant changes to the manner in which the lunch bar had been operated by Mr and Mrs Ross. For example:
a)they altered the opening hours of the shop from 6.00 a.m. to 2.00 p.m. to 7.00 a.m. to 3.00 pm. (or 3.30 p.m.);
b)they changed the menu in such a way as to reduce the emphasis on pre-prepared foods in favour of freshly prepared lines (which meant that less food was on display and that potential customers had to wait longer than had previously been the case whilst the food was being prepared); and
c)they increased the prices for all or almost all items on the menu.
I accept the evidence of Mr Ross and the witnesses Whyte, Shoosmith and Ridley to the effect that the changes to the running of the business instigated by Mr and Mrs Hinds, together with the inept manner in which the business was conducted, had a serious and detrimental effect upon the gross takings (and, therefore, the potential profitability) of the business.
The problems described in the previous paragraphs of these Reasons were exacerbated by Mr and Mrs Hinds’ rather cavalier (to employ a term used during the course of the trial) attitude to the conduct of the business. So intent were they upon running the business “their way” that they failed to recognise the very early indications of the lack of success of their venture. They refused to recognise their own role in the declining fortunes of the business and turned a deaf ear to the suggestions and input of others (including Mr Ross). That the business failed (as it ultimately did) was not as a result of anything done (or omitted to be done) by Mr or Mrs Ross — or by Mr Featherson or Mr Inglis, for that matter. I find that the business failed because Mr and Mrs Hinds underestimated the difficulties associated with running it and because they were insufficiently attentive to the needs of some of their customers.
Mr and Mrs Hinds’ Case
In essence, the Hinds’ case was as follows:
a)It was a misrepresentation that the weekly turnover of the lunch bar was approximately $4,000.00.
b)The misrepresentation referred to in (a) above was made on three occasions —
i)in the internet advertisement;
ii)in the booklet (Exhibit A2) which Mr Featherston gave to Mr and Mrs Hinds; and
iii)by Mr Ross at the Meeting.
c)In reality, the gross takings of the lunch bar were no more than an average of approximately $2,500.00 per week.
d)Mr and Mrs Hinds purchased the lunch bar in reliance upon these misrepresentations — which, they assert, were misleading and/or deceptive.
The Hinds also asserted that they were induced to enter into the Contract on the basis of Mr Featherston’s “representation and assurance on 29 January 2004 that there was $4,000.00 worth of stock at handover”.[5] The Hinds assert that the stock was “worth not more than $2,000.00”.
[5] See applicants’ Outline of Submissions, paragraph 6.
It was not in dispute that this Court has jurisdiction to deal with all aspects of the Hinds’ claim.
The relief claimed by Mr and Mrs Hinds is as follows:
a)An order declaring that the Contract was void ab initio, and a refund of the purchase price paid.
b)Alternatively, an order at common law or equity for (or a declaration confirming the) rescission ab initio.
c)Damages for consequential loss, plus damages for non-pecuniary loss, stress and anxiety.
The damages sought by Mr and Mrs Hinds are set out in a document headed “Applicants’ Amended Schedule of Damages”. They include claims for “additional selling expenses”, net trading loss, unrewarded labour and an electrician’s bill. They also include a claim for an unliquidated amount in respect of non-pecuniary loss, stress and anxiety. Interest is also claimed.
Finally, Mr and Mrs Hinds included an alternative claim for breach of contract, asserting that they are entitled to damages of $1,000.00 in relation to the cost of repairs to the oven in the lunch bar and further damages of $2,000.00 in relation to the alleged shortfall in stock.
Gross Takings Did Not Amount to $4,000.00 Per Week
It was not in dispute that the gross takings of the lunch bar did not amount to $4,000.00 per week. Nor was it in dispute that the actual takings of the lunch bar at all relevant times leading up to the purchase of the business by Mr and Mrs Hinds were in the order of $2,500.00 per week.
It follows that the statements appearing in the internet advertisement and in Exhibit A2 to the effect that the weekly turnover of the business was around $4,000.00 were inaccurate.
Did Mr Ross Correct the Inaccuracy Regarding the Gross Takings of the Lunch Bar?
The core issue in the proceedings is whether Mr Ross informed Mr and Mrs Hinds (or one of them) that the figure of $4,000.00 per week was inaccurate. He asserts that he did — at the Meeting. Mr and Mrs Hinds assert that he did not.
According to paragraph 4 of Mr Cuerden’s closing submissions —
The issue of fact is: did Mr Ross correct the misrepresentation at the meeting on or about 8 January 2004? Or did he present (false) figures consistent with the represented turnover?
Mr Cuerden submitted that Mr Ross’s evidence regarding the meeting on 8 January 2004 should be rejected, and that Mr and Mrs Hinds’ evidence in relation to the meeting should be accepted.
The Evidence of Mr Ross
Mr Ross’s evidence (as it relates to what was accepted as the principal issue of fact in the proceedings) was as follows:
a)He and his wife purchased the lunch bar business in November 2002, and put the business on the market for sale in August 2003. It follows that they owned the business for approximately eight months.
b)They purchased the business in November 2002 for $47,000.00.
c)They decided to sell the lunch bar business on the advice of their doctor, given that they both had medical problems. Mr Ross “was under medical care for degenerate (sic) arthritis from the hips down and had been advised that new replacement surgery was inevitable” and Mrs Ross “was in remission from cancer”.
d)The BAS statements for the business for the last two quarters of the 2003 financial year and the first two quarters of the 2004 financial year (which statements are annexed to Mr Ross’s affidavit) reveal that the “total sales” for the business were as follows:
i)1 January 2003 to 31 March 2003: $29,768.00
ii)1 April 2003 to 30 June 2003: $32,031.00
iii)1 July 2003 to 30 September 2003: $34,423.00
iv)1 October 2003 to 31 December 2003 $27,449.00
e)Mr Ross accepted that the BAS statements accurately record the income that he and his wife received from the business. The BAS statements were prepared by their accountant on the basis of information that Mr Ross provided.
f)It follows that the “total sales” for the lunch bar business for the calendar year 2003 were $123,671.00, or slightly less than $2,380.00 per week.
g)The documents appearing on pages 13 to 19 of Mr Ross’s affidavit were prepared by Mr Ross on a daily basis for banking purposes. The documents, at pages 9 to 12 of the affidavit were extracted from those documents and were prepared by Mr Ross at the request of Mr Hinds a day or so before the Meeting.
h)The summary appearing on page 9 of Mr Ross’s affidavit and the figures headed “Daily Takings” on pages 10, 11 and 12 of the affidavit were shown to Mr Hinds at the Meeting.
i)
The financial statements for the lunch bar for the year ended
30 June 2003 (comprising Exhibit A4) are true and correct to the best of Mr Ross’s knowledge. They were signed by the accountant for Mr and Mrs Ross (Mr Watson) on 10 March 2004 and relate to Mr and Mrs Ross (as partners) trading as Three Ways Lunch Bar. The financial statements reveal that for the approximate period of seven months from 25 November 2002 to 30 June 2003 the total trading income of the business was $68,633.00. The “trading profit” was $17,461.00. “Total expenses” amounted to $20,887.00 — and hence the net loss from the business was $3,426.00 (which loss was shared equally between Mr and Mrs Ross).
j)Mr and Mrs Ross never had any paid employees working in the business. In other words, they never paid wages to any employees. There were, however, two or three women who worked in the shop, and who received certain benefits for doing so. For example, the workers could take food home and, in at least one case, Mr Ross would “go and put some petrol in her car and things like that”.
k)After Mr and Mrs Ross decided to sell the business in or about August 2003, Mr Ross sat with Mr Featherston whilst Mr Featherston completed the Vendor’s Disclosure Statement (comprising Exhibit A5). Mr Featherston went through the document with Mr Ross and asked him questions, and Mr Ross gave him the answers. It took them approximately ten minutes to complete the document.
l)Mr Featherston had asked Mr Ross to provide him with a full year’s trading figures. Mr Ross confirmed that he appreciated (in a general sense) that the document had to be accurate and that it was to be used for the purpose of marketing the business.
m)
The “Sales Information” appearing on the first page of Exhibit A5 was sourced in the accounts of the business for the year ended
30 June 2002. Those accounts had been given to Mr and Mrs Ross by the previous owner of the business (from whom they had bought it in November 2002). Mr Ross did not know whether the accounts were accurate (beyond the fact that they were prepared by a CPA).
n)Mr Ross denied telling Mr Featherston that he was paying wages at the rate of $225.00 per week, and suggested that the figure may have come from the previous accounts.
o)Mr Ross confirmed that he told Mr Featherston that he was not aware of any circumstances that were likely to adversely affect the profitability of the business.
p)Mr Ross said that he did not know — as at August 2003, when he and his wife placed the business on the market for sale — that it was making a loss. Nor did he know that the business was not achieving sales of $200,000.00 per annum.
q)Mr Ross conceded that he “… had an indication that the sales achieved by the business were possibly less than $4,000.00 per week”, but he was not sure that that was the case.
r)Mr Ross gave the following explanation as to why he was not aware that the business was not achieving the figures that the 2002 accounts suggested that it should be capable of achieving:
The reason for buying the business was looking forward to retirement. The method in which we operated the business was in full knowledge that we both had medical problems. Specifically, my wife, who has cancer and is in remission — we were advised by the doctor and specialists to try and avoid as much stress as possible. Having acknowledged that starting a business was going to be stressful anyway, we decided that we would only go into the business if we could borrow enough money to set us up for twelve months’ operation, without the worry of day to day financial problems. Providing the money was in the bank to pay the creditors and the bills, we were not going to concern ourselves with the financial, day to day running of things. At the end of that twelve months, we had planned to have the accountant draw up our profit and loss for the twelve months and, from that, make certain decisions as to the future trading of the business or our future direction. So what I am saying, in essence, is that during that initial twelve months, it was always our intention to divorce ourselves from the day to day financial requirements, other than paying bills, of course, providing the monies were in the bank to cover our debts.
s)The business, as conducted by Mr and Mrs Ross, utilised a separate trading account. Mr and Mrs Ross had other accounts, into which (for example) Mr Ross’s disability pension was paid.
t)No “drawings” were made from the business for the period that Mr and Mrs Ross operated it — as they had originally planned.
u)Mr Ross did not resile from his evidence to the effect that, as at August 2003, and in spite of having traded for approximately eight or nine months, he had no idea that the business was not making a profit. Indeed, Mr Ross said that he did not know that the business was not making a profit until Mr Hinds requested the current daily takings (for the Meeting) and he (Mr Ross) proceeded to prepare the appropriate figures.
v)During the nine month period leading up to August 2003, Mr Ross did not pay careful attention to the bank statements relating to the lunch bar’s trading account. He said that he used internet banking facilities and that, provided there were sufficient funds in the account to meet any proposed expenditure, he did not trouble himself to analyse the financial progress of the business from its accounts.
w)Mr Ross was in charge of the financial side of the business (as opposed to his wife) — which task involved “paying the bills, paying the creditors, ensuring they had sufficient money in the bank to cover them and marketing the business”. He would look at the balance of the account from time to time (on the internet), but “… not in a way of looking for profit or loss …” He had no recollection of ever being unable to pay a creditor from the trading account.
x)According to Mr Ross:
All I would have realised (from handling the financial affairs of the business) was that there were monies in the account to cover the accounts. I mean, I wasn’t making a judgment of the business making money or not making money, as long as the money was there.
y)When pressed by Mr Cuerden as to why he left blank the response to the question “Is the vendor aware of any circumstances which are likely to adversely affect the profitability of the business?” in Exhibit A5, Mr Ross said that he genuinely wasn’t aware of any such circumstances. When pressed further by Mr Cuerden, Mr Ross denied that he deliberately did not endeavour to ascertain the true profitability of the business at the time that he decided to place it in Mr Featherston’s hands for sale.
z)Mr Ross denied knowing that Mr Featherson intended to market the business on the basis of its current earnings. He said that what was asked of him was to provide a full year’s trading results. According to Mr Ross, that is what he did.
aa)Mr Ross maintained throughout that it was his belief that the financial position of the business had not altered since the time that he and his wife had taken it over.
bb)Mr Ross conceded that, had he spent time analysing the lunch bar’s figures, and had he and his wife not had their plan of operating the business for twelve months whilst at the same time using other funds to meet their day to day expenses (which I shall call their “12 month plan”), then he would have realised that the figures did not support the representations included in Exhibit A5. But he did not do the necessary analysis and “… it certainly didn’t appear that there was any drop off in sales or custom or deliveries”.
cc)In relation to the BAS statements, Mr Ross said that they were submitted by his accountant, who then posted him details of the amount owing (or a copy of a payment form from the ATO). Mr Ross did not give thought to the fact that the amount of tax payable was relatively small. Nor did he ask his accountant to provide him with copies of the BAS statements. He did not think that such a request was necessary for any relevant purpose.
dd)Mr Ross conceded that he could have ascertained from his BAS statements (or from other documents) what the income of the business had been for the first six months of the 2003 calendar year. He maintained, however, that he was only asked to provide trading figures for a full financial year, and that is what he did.
ee)Mr Ross agreed that when Mr Featherston suggested an appropriate sale price for the business as being in the range of $50,000.00 to $80,000.00, it was on the basis that annual turnover was approximately $200,000.00. He reiterated, however, that at no stage prior to Mr and Mrs Hinds requesting the relevant figures was he aware that the annual turnover was less than that sum.
ff)Mr Ross said that the mortgage payments in respect of the house in which he and his wife lived “… were actually taken out of the trading account”. Mr and Mrs Ross had refinanced an existing mortgage over their house in order to enable them to facilitate the purchase of the lunch bar in late 2002. As a result, and in effect, Mr and Mrs Ross were obliged to pay one payment to the mortgagee in respect of both the house mortgage and the loan for the implementation of the 12 month plan. Indeed, the second loan was not for the purchase of the lunch bar, but for the Ross’s anticipated expenses for the twelve month period. The payment in respect of both components of the mortgage came from the shop’s trading account — and hence from its income. Clearly, therefore, the lunch bar was generating sufficient takings to cover mortgage expenses as well as the day to day expenses associated with the running of the lunch bar as a business.
gg)In summarising the 12 month plan (which he described as a “business plan”), Mr Ross said:
The point of the initial business plan that my wife and I went into: that being, our full concentration initially for the first twelve months was to put everything we had into the business. At the end of that period of time, twelve months, we would then put in our yearly returns and have discussion with the accountant as to how the business went in that initial twelve months and also be open for his professional advice as to where we were heading, or what we should plan for the ongoing period. We had made provisions right from the outset that we could survive the first twelve months on the monies we had borrowed, and without going into the details of that plan, we implemented that plan to the fullest and best of our ability …
hh)Mr Ross said that a further reason why he did not pay a great deal of attention to the trading figures of the business during the first six months of its operation was because he anticipated that it would take some time (after a change of ownership) for sales to reach their potential.
The Meeting (8 January 2004) — Evidence of Mr Ross
Mr Ross’s evidence in relation to the Meeting is as follows:
a)It was agreed that Mr Ross would provide three months’ figures “at random”. The months chosen by Mr Ross were September, October and November 2003.
b)When he prepared the figures, Mr Ross was surprised to discover that the lunch bar’s gross sales were far less than the amount referred to in Exhibit A5.
c)Although the period envisaged in the 12 month plan ended in November 2003, other events had overtaken it. Relevantly, and according to Mr Ross, a “medical situation” had arisen, Mrs Ross had to travel to Melbourne in relation to one of their children and Christmas was approaching.
d)Notwithstanding forceful cross examination by Mr Cuerden, Mr Ross adhered to his description of the events that took place at the Meeting. He said that the trade figures were collated the evening before the Meeting, and that the documents comprising pages 9 to 12 of his affidavit were presented to Mr and Mrs Hinds for their inspection. He strenuously denied that he produced a set of figures “as alleged by Mr and Mrs Hinds” showing a daily turnover of $750.00 to $800.00. He also denied telling Mr Hinds that:
(i)he could not take the figures that he (Mr Ross) had prepared; and
(ii)all of the original books and records had been lost.
e)Only Mr Ross and Mr Hinds were sitting at the table in the lunch bar when he gave the daily figures to Mr Hinds. Mr Featherston was sitting elsewhere in the shop. Mrs Hinds was in the kitchen with Mrs Ross.
f)According to Mr Ross’s statement appearing on page 8 of his affidavit, Mr Hinds examined the current turnover figures, made notes and “… stated he was interested in making an offer to purchase, but his offer would only reflect his opinion of the value of the business based on the current declared turnover”.
g)Mr Ross did not show the daily takings figures to Mr Featherston at the Meeting. He agreed with Mr Grayden (for Mr Inglis) that Mr Featherston effectively distanced himself from the discussion that took place with Mr Hinds.
h)Mr Ross did not provide Mr Featherston with copies of the daily takings figures, and did not inform him that the gross income of the business was significantly less than the amount of $4,000.00 per week that had previously been represented.
Mr Featherston’s evidence regarding the Meeting
Mr Featherston’s evidence was as follows:
a)In paragraph 12 of his affidavit, Mr Featherston said that, at the Meeting, Mr Ross sat down with Mr and Mrs Hinds and discussed the turnover figures of the business. During cross examination by Mr Cuerden, however, Mr Featherston said that Mr Ross sat down with Mr Hinds to discuss the figures, and that Mrs Hinds did not sit down with them at that time. According to Mr Featherston, Mrs Hinds “was there in the background”.
b)He confirmed that he was not part of the discussion between Mr Ross and Mr Hinds as it related to the gross takings of the lunch bar. He said that it was not his concern.
c)He said that the $4,000.00 turnover figure was not mentioned at any time during the negotiations that took place after the Meeting. In other words, neither Mr Ross nor Mrs Ross informed Mr Featherston that the actual gross sales figure was significantly less than $4,000.00 per week. Similarly, neither Mr Hinds nor Mrs Hinds said that he/she was aware that the $4,000.00 per week figure was incorrect. At the same time, the $4,000.00 per week figure was not mentioned by anyone else (including Mr Featherston) during the negotiations leading to the decision on the part of Mr and Mrs Hinds to make an offer to purchase the business, and to amend that offer in such a way as to make it acceptable to both vendor and purchaser.
Mr Hinds’ Evidence regarding the Meeting
Mr Hinds’ evidence in relation to the Meeting was as follows:
a)Mr Hinds said that Mr Featherston gave him the booklet (being Exhibit A2) at the time of the Meeting. He did not read the booklet — although he glanced through it. He was aware that it contained a profit and loss statement from June 2002. He did not regard the profit and loss statement as being relevant as it was out of date. He confirmed that he did not base any part of his decision to buy the business on the 2002 figures.
b)In his first affidavit, he said that Mr Ross showed him (and Mrs Hinds) three or four pages of A4 paper, upon which were written certain figures. According to Mr Hinds:
Mr Ross told us they were the daily takings figures for the previous three months. Those figures showed takings of approximately $750.00 - $800.00 per day. Mr Ross retained those pieces of paper …
At that meeting, Mr Ross also told us that all of the original books of the business had been lost. My wife and I were not given any books or records relating to the business.
c)Mr Featherston was not sitting at the table with Mr Hinds and Mr Ross (and Mrs Hinds). Mr Featherston did not take part in the discussion regarding the figures appearing on the pages produced by Mr Ross. Similarly, he offered no advice or opinion in relation to the figures.
d)Mrs Ross was not present at the time.
e)The figures were presented to Mr and Mrs Hinds together. After they were discussed, Mrs Hinds moved away from the table to look after Mr and Mrs Hinds’ child. At the time, their child was approximately twelve or thirteen months old.
f)According to Mr Hinds, “no actual purchase price” was discussed at the Meeting.
g)Mr Hinds denied asking Mr Ross to produce the daily turnover figures. His evidence was unclear as to whether he asked Mr Featherston to have Mr Ross produce them at the meeting. Suffice it to say, however, that he knew that the figures would be produced at the Meeting. He said (in re-examination) that one of the reasons for the Meeting was for Mr Ross to show him the trading figures for the lunch bar for a three month period. He then said that he had not conveyed to anybody that he had wanted to see the figures on that day — he simply assumed that they would be present. He later added that, if no figures at all had been presented, then he would have requested to see such figures before proceeding with the purchase.
Mrs Hinds’ Evidence regarding the Meeting
Mrs Hinds’ evidence regarding the Meeting was as follows:
a)Her description of the meeting in her affidavit supported the description given by Mr Hinds in his affidavit.
b)Mrs Hinds’ recollection was that Mr and Mrs Hinds, having decided that they were interested in the business, decided to meet with Mr and Mrs Ross. They told Mr Featherston and he organised the meeting.
c)The booklet (Exhibit A2) was handed to her husband at the Meeting. She did not know what it contained at the time, and only looked at it later.
d)She said that she sat with her husband and Mr Ross at one table, and that Mr Featherston sat at another table adjacent to them. He did not take any part in the discussion regarding the figures.
e)She remembers the figures being between $750.00 to $800.00 per day. The conversation, however, was between her husband and Mr Ross. She was “… sort of just there, looking on, as well”.
f)She did not personally read the papers presented by Mr Ross. Mr Hinds read them, and she sat beside him as he did so.
g)After initially saying that she “… didn’t actually personally take (the figures) and read them”, she then said that she did read them.
h)Mrs Hinds could not recall the months to which the figures related. Nor was she certain about the layout of the figures.
i)She then said that she “… can’t be 100% with figures because (she is) not a great figures person”.
j)When she read the figures, she “… understood what Mr Ross was saying in regards to how they got $750.00 a day to $800.00 a day”.
k)She was present for the whole of the meeting, apart from one occasion when she left the table to go to the toilet.
l)Mrs Hinds said that her one year old son was also present throughout the meeting, and that he was sitting on her knee at all times. She then said that her son did not remain sitting on her knee during the whole period, and that he played next to her seat for part of the time.
Discussion: the Meeting
Mr Cuerden did not flinch from submitting that Mr Ross presented false figures at the Meeting. Further, he submitted that Mr Ross was “outrightly dishonest”. There can be no doubt that Mr and Mrs Hinds allege that Mr and Mrs Ross (or, perhaps more accurately, Mr Ross) acted in a fraudulent manner[6].
[6] See, for example, paragraph 17 of the Applicant’s Outline of Submissions filed 1 September 2004.
The onus rests on Mr and Mrs Hinds to prove not only that the various representations were made and that they were misleading, but also that they relied on those representations.
In Neat HoldingsPty Ltd v Karajan Holdings Pty Ltd (1992) 110 ALR 449, the High Court (Mason CJ, Brennan, Deane and Gaudron JJ) said[7]:
The ordinary standard of proof required of a party who bears the onus in civil litigation in this country is proof on the balance of probabilities. That remains so even where the matter to be proved involves criminal conduct or fraud. On the other hand, the strength of the evidence necessary to establish a fact or facts on the balance of probabilities may vary according to the nature of what it is sought to prove. Thus, authoritative statements have often been made to the effect that clear or cogent or strict proof is necessary “where so serious a matter as fraud is to be found”. Statements to that effect should not, however, be understood as directed to the standard of proof. Rather, they should be understood as merely reflecting a conventional perception that members of our society do not ordinarily engage in fraudulent or criminal conduct and a judicial approach that a court should not lightly make a finding that, on the balance of probabilities, a party to civil litigation has been guilty of such conduct. As Dixon J commented in Briginshaw v Briginshaw (1938) 60 CLR 336 at 362:
The seriousness of an allegation made, the inherent unlikelihood of an occurrence of a given description, or the gravity of the consequences flowing from a particular finding are considerations which must affect the answer to the question whether the issue has been proved …
[7] At pages 449 – 450.
Their Honours continued,
There are, however, circumstances in which generalisations about the need for clear and cogent evidence to prove matters of the gravity of fraud or crime are, even when understood as not directed to the standard of proof, unlikely to be unhelpful and even misleading.
Their Honours found that Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (which I shall call Neat v Karajan) was such a case.
Not unlike the present case, the central issue in Neat v Karajan was whether the projected takings of a business which Karajan had sold to Neat had been knowingly misrepresented by Karajan or its agents. Unlike the present case, however, each of the parties in Neat & Karajan produced weekly takings books in which they alleged that they had contemporaneously and accurately recorded appropriate figures. It ultimately became common ground that Karajan’s claimed weekly takings of the business (before Neat took over) as recorded in its weekly takings book differed from Neat’s claimed weekly takings (after it took over) as disclosed in its weekly takings book to such an extent that they could not both be genuine. Each side claimed that the other had falsified the figures recorded in the relevant takings book.
Faced with such a scenario, their Honours said[8]:
… the real issue in the case was not whether there had been deliberate falsification of the takings of the business. It was whether the deliberate falsification of takings figures had been on the part of (Karajan) or on the part of (Neat). When an issue falls for determination on the balance of probabilities and the determination depends on a choice between competing and mutually inconsistent allegations of fraudulent conduct, generalisations about the need for clear and cogent proof are likely to be at best unhelpful and at worse misleading. If such generalisations were to affect the proof required of the party bearing the onus of proving, the issue would be determined not on the balance of probabilities but by an unbalanced standard.
[8] See page 451.
The issue in the case now before me is not the same as “the real issue” in Neat v Karajan. Nobody disputes that the representations of the gross takings of the business contained in the internet advertisement and the booklet comprising Exhibit A2 were inaccurate, and probably misleading. Nor is there any dispute that the actual gross takings of the business were something in the order of $2,500.00 per week. The core issue is (as formulated by Mr Cuerden): Did Mr Ross correct the misrepresentation at the Meeting, or did he present (false) figures consistent with the represented gross takings?
In other words, the determination of the key issue in the present proceedings does not “depend on a choice between competing and mutually inconsistent allegations of fraudulent conduct”. Mr and Mrs Hinds allege fraudulent conduct on the part of Mr Ross (and perhaps Mrs Ross). They allege that Mr Ross (or, perhaps, both Mr and Mrs Ross) falsified the figures that were shown to them at the Meeting. Mr and Mrs Ross, for their part, make no equivalent allegation against Mr and Mrs Hinds. They allege that Mr and Mrs Hinds have not told the truth (or, perhaps, that they are mistaken) about the events at the Meeting (and, perhaps, about other matters as well), but they do not allege fraud.
I am certainly conscious of the gravity of the allegations made on both sides in these proceedings and I recognise that I must determine the issues in the case by reference to the balance of probabilities.
I accept that statements to the effect that clear or cogent or strict proof is necessary where fraud is alleged should be understood in the manner explained by the High Court in Neat v Karajan. The approach that I adopt, therefore, is that I should not lightly make a finding that, on the balance of probabilities, a party to civil litigation has been guilty of fraudulent or criminal conduct. But, however I describe the approach that should be adopted or the judicial state of mind that should adhere (as it were), the fact of the matter is that I am not satisfied, on a balance of probabilities, that Mr Ross engaged in the fraudulent conduct attributed to him by Mr and Mrs Hinds. In other words, I find, on the balance of probabilities, that Mr Ross did not show Mr Hinds (or Mr and Mrs Hinds jointly) falsified figures at the Meeting. Indeed, I find — again on the balance of probabilities — that Mr Ross showed Mr Hinds the documents appearing on pages 9 to 12 of his affidavit. Further, I find that Mr Ross did correct the earlier errors or misrepresentations in relation to the gross weekly takings of the business at the Meeting.
Discussion - General
Whilst bearing in mind the dicta in Neat v Karajan, I would record that I preferred the evidence of Mr Ross to the evidence of Mr and Mrs Hinds. I shall deal with certain aspects of Mr and Mrs Hinds’ evidence later in these Reasons. At this stage, however, it should be said that I accept that litigants can appear to be confident (or overly confident), or calm, or anxious in the witness box and that such aspects of the witness’s demeanour are not, of themselves, bases for disbelieving the witness. Nevertheless, I had ample opportunity to observe the sorts of factors described by Isaac J in Dearman (1908) 7 CLR 459 at 561:
A look, a gesture, a tone or emphasis, a hesitation or an undue or unusual alacrity when giving evidence, will often lead a judge to find a signification in words actually used by a witness that cannot be attributed to them as they appear in the mere reproduction in type.
I was (of course) present throughout the trial. I saw and heard all the witnesses. I also saw and heard Mr Ross as a self-represented litigant.
I make no finding to the effect that Mr and Mrs Hinds are generally dishonest witnesses. I find, however, that I prefer Mr Ross’s evidence where it is conflict with that of Mr and Mrs Hinds (or either of them).
My Cuerden’s Submissions
Mr Cuerden’s closing submissions incorporated a lengthy list of criticisms of the case as presented by Mr and Mrs Ross. It is appropriate that I deal with some of the more significant submissions made by Mr Cuerden.
I do not accept that the information provided by Mr Ross to Mr Featherston on 7 August 2003 was “knowingly false”. I accept Mr Ross’s evidence as to the 12 month plan, and accept his description of his relative inattention to the financial health of the business during the period leading up to its sale. Mr and Mrs Ross suffered from the health problems described by Mr Ross, and their decision to sell the business was reasonable in the circumstances. There is nothing illogical or unreasonable about their 12 month plan, and the evidence was to the effect that they borrowed sufficient funds (secured against their house) for the very purpose of tiding themselves over for that period. In such circumstances, and having regard to the findings that I have made, it is understandable that Mr Ross would not have paid careful attention to the financial health of the business. I note, as well, that various expenses were met from the gross takings of the business (including the mortgage payments) — which would have made a systematic, detailed analysis of the financial health of the business more difficult than might otherwise have been the case.
I accept that the BAS statements reveal that the gross takings of the business were significantly less than $4,000.00 per week. The fact that Mr Ross did not call his accountant, however, is of little significance. After all, Mr Ross was self-represented. As well, the solicitors for Mr and Mrs Hinds had been aware of the existence of the BAS statements for months before the trial commenced. If they felt that the accountant’s evidence might have assisted their case, then they could have taken steps to have him appear.
Clearly, Mrs Ross did not give evidence. In my opinion, however, the rule in Jones v Dunkel[9] does not assist Mr and Mrs Hinds. In that regard, I refer to the discussion of the rule in Cross on Evidence (loose leaf edition) at [1215] – where it is summarised as follows:
An unexplained failure by a party to give evidence, to call witnesses, or to tender documents or other evidence or produce particular material to an expert witness may, not must, in appropriate circumstances lead to an inference that the uncalled evidence or missing material would not have assisted that party’s case. The rule can operate against parties not bearing the burden of proof and parties which do bear it as well. The appropriate circumstances exist where it was within the power of the party to tender the evidence which was not tendered…
[9] (1959) 101 CLR 298.
Mrs Ross was present throughout the trial. She did not give evidence because of the state of her health (she is in remission from cancer), and because Mr Ross was available to give evidence for both of them.
In any event, she could not have given any direct evidence pertaining to what Mr Cuerden described as the issue of fact (namely, whether Mr Ross corrected the earlier misrepresentations at the Meeting).
It follows, in my opinion, that there was a reasonable explanation for not calling Mrs Ross.
In any event, and according to Cross on Evidence:[10]
While the rule in Jones v Dunkel permits an inference that the untendered evidence would not have helped the party who failed to tender it, and entitles the trier of fact to take that into account in deciding to accept any particular evidence which relates to a matter on which the absent witness could have spoken, and the more readily to draw any inference fairly to be drawn from the other evidence by reason of the opponent being able to prove the contrary had the party chosen to give or call evidence, the rule does not permit an inference that the untendered evidence would in fact have been damaging to the party not tendering it. The rule cannot be employed to fill gaps in the evidence, or to convert conjecture and suspicion into inference. Nor does the rule prevent any inference favourable to the party who has failed to call the witness from being drawn: other evidence may justify the drawing of the inference..
[10] At [1215], page 1088.
It follows from the above that, in any event, it would be inappropriate for me to draw an inference to the effect that Mrs Ross’s evidence would have been damaging to her and to her husband’s case.
I accept that Mr Featherston may well have asked Mr and Mrs Ross for more recent figures than the June 2002 figures which were provided.
I also accept that Mr Ross might have told Mr Featherston than more recent figures were not available. Further, I accept that Mr Ross could have analysed his daily banking records or obtained or calculated accurate records relating to the lunch bar’s gross daily or weekly takings from other sources.
I accept that Mr and Mrs Ross should have been aware that the daily takings were substantially less than $800.00 and that they should have carefully analysed the figures at a much earlier stage than they did.
I find that Mr Ross is indeed likely to have suspected that the daily takings were substantially less than $800.00, but I find that he did not satisfy himself that that was the case until he prepared the figures presented to Mr Hinds at the Meeting. Having extracted those figures, I find that he disclosed them to Mr Hinds.
The internet advertisement (Exhibit A1) and the booklet handed to Mr Hinds on 8 January 2004 (Exhibit A2) speak for themselves. They clearly include representations to the effect that the current gross weekly takings of the business were approximately $4,000.00. As
Mr Cuerden has submitted, however, the real issue in the proceedings was whether those misstatements were corrected at the Meeting. I have already found that they were.
Whether Mr Ross did or did not tell Mr Featherston that the lunch bar had two employees, and that they were paid something in the order of $225.00 per week, is irrelevant. The evidence does not reveal that this piece of information was relied upon by anyone in any relevant sense.
Whether or not Mr Featherston asked Mr Ross to have the current gross takings figures ready for inspection by potential purchasers is of little relevance. I have found that Mr Ross did not prepare the necessary figures until immediately before the Meeting. There is little dispute that it would probably have been better for all concerned if he had prepared the figures much earlier than he did.
The existence of the “other potential purchasers” referred to by Mr Featherston, and to whom Mr Ross allegedly showed figures, was not put to Mr Ross. The fact of the matter is that Mr Featherston and Mr and Mrs Hinds were represented during the course of the trial. Mr Ross acted for himself. In any event, I prefer Mr Ross’s evidence in relation to this subject to that of Mr Featherston (who would appear not to have been present when the figures were allegedly shown to the potential purchaser).
As far as the Meeting is concerned, and bearing in mind Mr Cuerden’s principal submissions, I find as follows:
a)I accept the oral evidence of Mr Ross and Mr Featherston to the effect that Mr Ross sat and discussed the figures with Mr Hinds only.
b)I accept that Mrs Hinds might have sat at the table with her husband and Mr Ross at some stage, but I find that she was distracted by her son and the need to care for him. Her recollection of the discussion surrounding the figures presented by Mr Ross on that day was vague and, at times, inconsistent. She could not clearly describe the format of the figures on the pages allegedly shown to her, and she did not understand the calculations.
c)I accept Mr Ross’s evidence that he did not prevent Mr Hinds from taking the figures with him. I am satisfied that Mr Hinds left the figures behind because, for whatever reason, they were of little interest to him.
d)Mr Hind’s lack of interest in the sheets of paper upon which the figures appeared is consistent with his and his wife’s overall attitude to the purchase of the business. They were determined to do things “their way”, and were disinterested in doing any form “home work” (for want of a better term) prior to taking over the lunch bar. I shall return to Mr and Mrs Hinds’ overall attitude later in these Reasons.
e)Mr Hinds presented as direct and strong willed. I am satisfied that he would have challenged Mr Ross if Mr Ross had endeavoured to prevent him from taking the figures produced at the Meeting. There is no evidence that he did so.
f)I do not exclude the possibility that Mr Hinds failed to tell his wife about the true effect of the figures shown to him by Mr Ross at the Meeting. At the end of the day, however, little turns on that issue. I have found that Mr Ross dealt with Mr Hinds, and that he accurately disclosed the relevant figures to him.
g)I accept Mr Cuerden’s comment to the effect that Mr Featherston “… seems to have strangely distanced himself from any discussions re turnover on 8 January 2004”. Nevertheless, I find that Mr Featherston was not aware that the $4,000.00 per week figure was inaccurate until after the business had changed hands. I note, however, that the evidence reveals that no direct reference to the gross takings of the business (whether those gross takings amounted to $2,500.00 per week or $4,000.00 per week) appears to have been made – by any of Mr Hinds, Mrs Hinds, Mr Ross, Mrs Ross or Mr Featherston — at any time during the negotiations which took place after the Meeting and which led to Mr and Mrs Hinds and Mr and Mrs Ross entering into the Contract. It is difficult to imagine how negotiations could have proceeded in relation to the striking of an appropriate purchase price for the business in the absence of any direct reference to gross takings (particularly when regard is had to the significance allegedly placed upon the item by Mr and Mrs Hinds). In all the circumstances, however, I find that Mr Ross’s description of events is the more probable – namely, that Mr Hinds said that he would be offering a lower price for the business than would otherwise be the case due to the fact that the gross takings were less than he had understood them to be prior to the Meeting. The negotiation process after that point in time appears to have been little more than “horse trading” (to use a colloquialism).
h)I do not accept that it is inherently unbelievable that Mr Ross would not have told Mr Featherston of the revised gross takings figures. Mr Ross’s evidence (which I accept) is that Mr Hinds had reacted to the disclosure of the revised gross takings figures by indicating that he would take that fact into account in making an offer to purchase the business.
i)It is not the case that Mr Ross “did not respond” to Mr Featherston’s letter of 4 February 2004. Mr Ross’s evidence was that he went to the shop the following day to, in effect, sort things out. The evidence does not reveal that Mr Ross took any steps – at that meeting – to “correct” the statement in Mr Featherston’s letter to the effect that the represented gross takings of the business were $4,000.00 per week. Of equal significance, however, is the fact that Mrs Hinds does not appear to have pressed the subject with Mr Ross either. It does not appear from her evidence that the alleged representation was mentioned at all. In my opinion, Mrs Hinds’ failure to directly challenge Mr Ross on the alleged misrepresentation when he attended at the shop is almost inexplicable. It was certainly unexplained.
Further Observations
Mr Cuerden referred to a number of alleged inconsistencies or inadequacies in Mr Ross’s evidence. The fact of the matter is that aspects of his clients’ case were also of concern. In the following paragraphs, I have dealt with some only of the many evidentiary matters that were explored during the course of the trial.
Although Mr Cuerden, and (to a lesser extent) Mr and Mrs Hinds, emphasised that reliance had been placed upon all three representations allegedly made by Mr and Mrs Ross (or Mr Featherston) regarding the gross takings of the business — being the representations contained in the internet advertisement, in Exhibit A2 and at the Meeting — the overall effect of Mr and Mrs Hinds’ evidence was that they disregarded the financial information contained in Exhibit A2. I find that the booklet had no impact whatsoever upon their decision to purchase the business.
The chronology of this matter reveals that Mr and Mrs Hinds’ solicitors wrote to Mr and Mrs Ross purporting to rescind the Contract on
10 March 2004, and they vacated the premises on or about 6 April 2004. I have already commented that, in my opinion, they were inept in their attempts to effectively conduct the business. It is probable that they regretted purchasing the business at a very early stage (after they found that they lacked the capacity to run it effectively), and that they thereafter sought some means to avoid having to take over the lease of the premises occupied by the lunch bar.
I have already noted that the first letter from Mr and Mrs Hinds’ solicitors (being the letter from Rattigan & Associates to Mr and Mrs Ross dated 19 February 2004) asserts that “… gross misrepresentations were made to our client in relation to the profitability of the business, stock and the working order of plant”. The evidence reveals, however, that Mr and Mrs Hinds had their own idiosyncratic view of the likely profitability of the business[11], and the entire case was run on the premise that the alleged misrepresentations made by Mr and Mrs Ross or their agents related to the turnover or gross takings of the business.
[11] Their evidence was that they believed that profit should amount to approximately 25% of gross takings.
Mr and Mrs Hinds lived in Doubleview at the time that they took over the business. Mr Hinds recalled Mr Featherston raising the issue of the significant travelling distance between the lunch bar and Mr and Mrs Hinds’ place of residence. Mr Hinds said that he told Mr Featherston that “it wouldn’t be a problem”. Mr Hinds continued:
We’d probably eventually move over once the business was profitable and purchase a house on that side of the river.
Mr Hinds later said that, notwithstanding that he had never run a lunch bar before, it was never in his mind that he and his wife might encounter teething problems (as it were) in the early stages after taking over the business. Notwithstanding his previous evidence, when I asked Mr Hinds whether he was suggesting that it never entered his mind that the business might not be profitable from the outset, he replied:
It may have entered initially … but not at the purchasing of the business, no.
I do not accept Mr Hinds’ evidence that he did not realistically anticipate that there would be teething problems associated with the running of the business. But even if he is telling the truth in that regard, it simply reveals (in my opinion) a degree of immaturity and irresponsibility.
Mr Hinds conceded that he did not actually know whether the assessment of the value of the stock contained in the Contract was accurate or not.
As I have commented above, Mr and Mrs Hinds saw fit to increase the prices of the food sold in the lunch bar, to make significant changes to the menu (to the extent that Mrs Hinds described the new menu as being “totally different” to the previous menu), and to alter the opening hours from the outset. They also saw fit to dispense with the services of the women who had assisted in the shop whilst it was being run by Mr and Mrs Ross. There was always a risk that such significant changes might operate to the detriment of the business — but Mr and Mrs Hinds, through naivety or misplaced self confidence, were unwilling or unable to recognise that risk.
Mr Hinds conceded that the gross takings of the lunch bar dropped from the time that he and his wife took it over onwards (until the business was closed in early April 2004). When he was asked why that may have been the case, he replied:
I have got no reason for that.
He was unwilling or unable to accept that the significant changes that had been made to the functioning of the lunch bar may have had had a detrimental effect upon its operations (and, ultimately, its viability).
The evidence revealed that Mr and Mrs Hinds initially adopted a more than relaxed approach to the running of the business. For example, Mr Hinds only attended the lunch bar on two or three days per week for the first four week period, and Mr and Mrs Hinds and Mrs Hinds’ mother spent minimal time in the lunch bar between the formal handover from Mr and Mrs Ross and opening for business on
2 February 2004. They made no real effort to familiarise themselves with the “mechanics” of running the business and gave little or no thought to ensuring that adequate quantities of stock would be available for the first week or so of trading.
Mr and Mrs Hinds’ complaints regarding the condition of the stock and the state of items such as ham, cheese and vegetables were clearly exaggerated[12].
[12] See, for example, paragraphs 23 and 24 of Mr Hinds’ affidavit sworn 16 April 2004, paragraphs 25, 28 and 29 of Mrs Hinds’ affidavit sworn 27 August 2004, pages 69 to 71 and 96 to 102 of the 8 September 2004 transcript and pages 11 to 16 of the 9 September 2004 transcript.
Mrs Hinds confirmed that she and her husband decided to “… just simply shut the shop and leave” on 6 April 2004. She said that they gave no thought to trying to on-sell the business or otherwise endeavouring to “cut their losses”.
Conclusion
The jurisdiction of this Court to determine the entire ambit of the dispute between the parties was not in issue in the proceedings. Similarly, the legal principles applying to the various claims made by Mr and Mrs Hinds were also not in dispute. At the end of the day, the case falls to be determined on its facts.
I have found that I preferred the evidence of Mr Ross to that of Mr and Mrs Hinds (and to that of Mr Featherston, for that matter). That is not to say that I was entirely comfortable with all aspects of Mr Ross’s evidence. I was not, but overall — and, relevantly, in the areas that I have discussed in these Reasons — I had less discomfort with his evidence than I did with that of Mr and Mrs Hinds.
To the extent that Mr Cuerden has argued that the manner in which Mr and Mrs Hinds conducted the business after they took it over is irrelevant to the claims that they made in the proceedings, it is sufficient that I record that I regard Mr and Mrs Hinds’ conduct — from the time that they first saw the initial internet advertisement to the time that they shut the doors of the business on 6 April 2004 — as being a form of continuum. They wanted to do things “their way”, and they did. When their evidence is looked at as a whole, I find that, in reality, they did not rely upon any representations — whether made by Mr Ross, Mr Featherston, or anyone else. They believed that they could make a success of the business, and they believed that they could do so without the input or assistance of anyone outside their family.
At the same time, they made no real efforts to investigate the true financial position of the business, or to ensure that it could run efficiently and successfully after they took it over. It is in that context that my finding to the effect that Mr Ross made a full disclosure of the actual gross takings for the business for the relevant three month period at the Meeting is to be situated. It is entirely consistent with the overall attitude of Mr and Mrs Hinds that they simply did not care what the true figures were. For whatever reason, they decided that they wanted to acquire the business and that they were going to conduct it in whatever manner they saw fit.
Mr and Mrs Hinds’ disenchantment with the business arose almost immediately after they took it over. It is likely that, faced with their obligation to accept an assignment of the lease, they panicked. They then sought to avoid the Contract in any way that they could.
I accept that, in the circumstances of the case before me, Mr Inglis is liable for Mr Featherston’s conduct. I find that they were not simply passing on information supplied to them by Mr Ross and that they were not “mere conduits”. Similarly, I find that they did not merely pass on the information as to the gross takings of the business “for what it is worth” and that the disclaimer which would have ordinarily been part of sales booklets prepared by them was missing from the booklet handed to Mr Hinds at the meeting (being Exhibit A2). Clearly, there was no disclaimer in the internet advertisement. Further, I accept Mr Cuerden’s submission that Mr Featherston took no (or virtually no) interest in confirming the current gross takings figure[13].
[13] See, in relation to the findings contained in this paragraph, Yorke v Lucas (1985) 158 CLR 166 at 666, Gardam v George Wills & Co Limited (1988) 82 ALR 415 and John G Glass Real Estate Pty Ltd v Karawi Constructions Pty Ltd (1993) ATPR 41–249.
Notwithstanding the findings contained in the previous paragraph of these Reasons, I have found that, at the end of the day, Mr and Mrs Hinds did not rely on any of the representations made by
Mr Featherston (including any representations made by him regarding the value of the stock). I also find that neither Mr Inglis nor
Mr Featherston intended to mislead or deceive Mr and Mrs Hinds. They acted in good faith at all times — but I recognise that the result of these proceedings could have been different (from their point of view) if I had concluded that Mr and Mrs Hinds did rely (even to some extent) on Mr Featherston’s representations.
It has been held that s.52 of the Trade Practices Act is not intended to benefit those who fail to take reasonable care of their own interests[14]. But even if that were not the case, Mr and Mrs Hinds have not demonstrated that they were induced (by anyone, or by any representations — true or false) to do anything giving rise to loss or damage on their part.
[14] See Elders Trustee and Executor Co Limited v EG Reeves Pty Ltd (1987) 78 ALR 193.
In Argy v Blunts & Lane Cove Real Estate Pty Ltd (1990) 26 FCR 112, it was held that:
A case may perhaps be imagined where an applicant is so negligent in protecting his own interests that there will be a finding of fact that the representation complained of was not in the circumstances a real inducement to his entering into a contract. In such a case the element of causation between misrepresentation and damage will have been severed by the intervention of the negligence of the applicant.
Whether or not the attitude and conduct of Mr and Mrs Hinds can fairly or appropriately be described as “negligence”, I find that the principles set out in the previous paragraph of these Reasons adhere in the circumstances of the case now before me. The purchase was on a “walk-in walk-out” basis, but Mr and Mrs Hinds took no (or no effective) steps whatsoever to properly inspect the plant and equipment or carry out a realistic stock take. I have already commented upon their attitude in relation to the sale generally.
It follows from the findings that I have made that Mr and Mrs Hinds’ application for orders declaring the Contract void ab initio, or for rescission ab initio, should be dismissed. Similarly, their application for damages and for consequential loss pursuant to the provisions of the Trade Practices Act 1974 and the Fair Trading Act 1987 (WA) must also be dismissed.
The plant formerly located in the lunch bar has been sold. Mr and Mrs Hinds are entitled to retain the proceeds of that sale.
Mr and Mrs Hinds also sought damages of $1,000.00 in respect of the cost of repairs to the oven in the lunch bar, and further damages of $2,000.00 in respect of an alleged shortfall in the stock available to them at the time that they took over the lunch bar. Both of those claims will also be dismissed. I am not persuaded, on the evidence before me, that Mr and Mrs Ross were responsible for the damage to the oven, or for otherwise causing it to be in need of repair.
In relation to the alleged shortfall in stock, I was not presented with credible evidence that there was any significant shortfall in the value of the stock. I was provided with little more than estimates from each of the various parties.
It also follows from the findings that I have made that Mr and Mrs Hinds’ claims against Mr Featherston and Mr Inglis must fail.
Orders
Mr and Mrs Hinds’ application will be dismissed.
I, Barbara Mendleson, certify that the preceding one hundred and twenty-two (122) paragraphs are a true copy of the reasons for judgment of Walters FM
Deputy Associate:
Date: 20 May 2005
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