Honeychurch Management Pty Ltd v Deloitte Touche Tohmatsu
[2005] TASSC 13
•17 March 2005
[2005] TASSC 13
CITATION:Honeychurch Management Pty Ltd v Deloitte Touche Tohmatsu [2005] TASSC 13
PARTIES: HONEYCHURCH MANAGEMENT PTY LTD
v
DELOITTE TOUCHE TOHMATSU (a firm)
DELOITTE PBS (a firm)
VERONESE, Sylvia
BLACKWOOD, Stephen
TITLE OF COURT: SUPREME COURT OF TASMANIA
JURISDICTION: ORIGINAL
FILE NO/S: 717/1997
DELIVERED ON: 17 March 2005
DELIVERED AT: Hobart
HEARING DATES: 16 – 19, 22 – 24 November 2004
JUDGMENT OF: Blow J
CATCHWORDS:
Trade and Commerce – Trade practices and related matters – Consumer protection – Misleading, deceptive or unconscionable conduct – Character and attributes of conduct – Silence and concealment – Accountants advising re proposed purchase of business – Silence as to inappropriateness of purchase.
Fair Trading Act 1990 (Tas), s14(1).
Winterton Constructions Pty Ltd v Hambros Australia Ltd (1992) 11 ALR 649; Rhone-Poulenc Agrochimie SA v UIM Chemical Services Pty Ltd (1986) 12 FCR 477; Hejio Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 79 ALR 83; McMahon v Pomeray Pty Ltd (1991) ATPR ¶41-125, referred to.
Aust Dig Trade and Commerce [84]
REPRESENTATION:
Counsel:
Plaintiff: D J Porter QC
Defendants: S P Estcourt QC and D J Geason
Solicitors:
Plaintiff: Murdoch Clarke
Defendants: Butler McIntyre & Butler
Judgment Number: [2005] TASSC 13
Number of Paragraphs: 80
Serial No 3/2005
File No 717/1997
HONEYCHURCH MANAGEMENT PTY LTD
v DELOITTE TOUCHE TOHMATSU (a firm),
DELOITTE PBS (a firm),
SYLVIA VERONESE, STEPHEN BLACKWOOD
REASONS FOR JUDGMENT BLOW J
17 March 2005
In early 1994 the plaintiff company purchased all the issued shares in a company named Jetset Travel (Tasmania) Pty Ltd ("Jetset"). Jetset conducted a travel agency and advisory business based in Launceston, with branches in other parts of Tasmania. The defendants provided the plaintiff with professional services as accountants in connection with its acquisition of the shares in Jetset. Subsequently, the business of Jetset failed. The plaintiff suffered a substantial loss as a result of its acquisition of Jetset and the failure of the business. It contends that it suffered that loss as a result of negligence, breaches of contract, contraventions of the Fair Trading Act 1990, and breaches of fiduciary duty on the part of the defendants. On that basis, the plaintiff is claiming damages or, in the alternative, equitable compensation. Quantum has been agreed in the sum of $398,519.59 plus interest thereon at the rate of 6.25 per cent per annum from 27 October 2004.
The parties
The plaintiff company is the trustee of a family trust. Its directors are a Mr and Mrs Honeychurch. The evidence establishes beyond doubt that at all material times Mr Honeychurch acted as the agent of the plaintiff. Mr Honeychurch operated a successful insurance broking business in Launceston from 1977 until October 1989, when he sold that business. From the time of its incorporation in about 1978, the plaintiff functioned as a service company, managing the office operations of that business. After the sale of the business, Mr Honeychurch worked for another company in the insurance industry until about April 1993, when he resigned from that position and retired. In early 1994 he was wishing to return to full-time work, and had begun making arrangements to resume his career as an insurance broker.
The first defendant is a firm of chartered accountants with an office in Launceston. The second defendant is another firm of accountants, apparently related to the first, with an office at the same address in Launceston. Its role is to provide private business services to clients. No issue arises in this action requiring any differentiation between the first and second defendants. I will refer to them collectively as "Deloittes". At all material times the third and fourth defendants were accountants working in the Launceston office of Deloittes as the agents of the two defendant firms. The third defendant, Ms Veronese, was a senior accountant working in the business services division of Deloittes. In the course of her work she prepared annual financial statements for Mr Honeychurch's companies and income tax returns for him and his family. She resigned with effect from late May 1994. The fourth defendant, Mr Blackwood, was the manager of the business services division in the Launceston office. He resigned with effect from about 3 June 1994.
The evidence as to the events of 1994
Prior to the plaintiff's acquisition of Jetset, 75 per cent of the issued shares in that company were owned by Consade Pty Ltd, a wholly owned subsidiary of ENT Ltd, and the remaining shares were owned by a company named HMA Ltd. ENT Ltd, a company based in Launceston, was a client of Deloittes. In early 1994, it wanted to arrange the sale of Jetset, which had not been making a profit. Deloittes held a staff training seminar at Freycinet on a weekend in late March 1994. Mr Blackwood and Ms Veronese attended. The audit manager from the Launceston office announced that ENT had Jetset for sale. As a result, there was an approach by Deloittes to Mr Honeychurch to enquire whether he might be interested in acquiring Jetset. That much is common ground. Mr Honeychurch gave evidence that the initial approach was made by Ms Veronese, but she and Mr Blackwood gave evidence that it was made by Mr Blackwood. The parties have quite different versions of the events that occurred over the following weeks in relation to the acquisition of Jetset by the plaintiff.
29 – 31 March 1994
It is common ground that Mr Honeychurch attended two meetings at Deloittes' office on different days within the period 29 – 31 March 1994. His evidence as to those meetings was as follows. Ms Veronese phoned him, spoke to him about the Jetset business, and said that it was a good business, and that it was worth looking at if he was interested. He subsequently attended the first meeting. Initially only Ms Veronese was present, but she invited Mr Blackwood to join the meeting. Mr Blackwood provided some information about Jetset. He said that Mr Honeychurch should not have much trouble in transferring his expertise to Jetset, particularly in view of the fact that the business was already operating and the sales staff were in place. Ms Veronese told him that Jetset would be a good alternative to insurance, and that he should at least look at it. She rang him to arrange the second meeting. At the second meeting Mr Blackwood provided further information that he had obtained about Jetset. Mr Honeychurch said he would need to have somebody to give him professional advice as to whether Jetset was worth acquiring. After conferring briefly with Ms Veronese, Mr Blackwood suggested that Deloittes could act for him. Mr Honeychurch was vaguely aware that Deloittes acted for ENT. He queried whether there would be a conflict of interests issue. Mr Blackwood said he did not think there would be, since he and Ms Veronese acted independently from the individuals in Deloittes that did work for ENT, but that he would check with Deloittes' legal people and give Mr Honeychurch a call. Mr Blackwood subsequently phoned Mr Honeychurch and said that there was no conflict of interests problem.
Mr Blackwood's evidence as to the first two meetings was significantly different from that of Mr Honeychurch. It was essentially as follows. He initiated contact with Mr Honeychurch by leaving a message on his answering machine on 29 March. Mr Honeychurch returned that call that day, and left a message for Mr Blackwood to ring back. (The telephone message note was tendered as part of an exhibit.) Mr Blackwood and Mr Honeychurch subsequently spoke by telephone on 29 March. Mr Blackwood said that ENT had a travel business for sale. Mr Honeychurch said that that sounded very interesting. Mr Honeychurch raised the question of a possible conflict of interests during that first telephone conversation. After that conversation, Mr Blackwood spoke to Mrs Merridew, a Deloittes partner based in Launceston, and as a result phoned Mr Honeychurch back and told him that there was no conflict. The first meeting was on 30 March. It was attended by Mr Blackwood and Mr Honeychurch only. Ms Veronese was not present. Mr Honeychurch raised the question of the costs of Deloittes' work. There was a discussion about costs. It was agreed that Mr Blackwood would not prepare a formal valuation, since Mr Honeychurch considered that one would be too expensive. It was agreed that Deloittes would provide advice and assistance to Mr Honeychurch, and that Mr Blackwood would speak to him if the costs looked like getting over $7,500. It was agreed that Mr Blackwood would establish what information was needed in relation to the proposed purchase. The second meeting was on 31 March, not at Deloittes' office, but at the office of ENT. Mr Honeychurch collected Mr Blackwood and drove him there. They met ENT's finance manager, Mr Germano, who also gave evidence at the trial. Mr Germano told them about Jetset's business. They did not have any relevant documentation at that stage. Mr Germano told them that the asking price was $200,000.
Mr Honeychurch gave evidence that Deloittes' charges were discussed not during the first meeting but in a telephone conversation with Mr Blackwood the day after the second meeting. He said Mr Blackwood told him that the cost to give him complete professional advice on the viability of buying Jetset would not exceed $7,500; that Mr Blackwood went on to say that he would obtain all documentation and information, and provide all advice necessary to make a decision up to a final purchase date, if that occurred; and that Mr Blackwood went on to say that he would need to do a risk assessment of the company when he got further information, and that he would come back to him. Mr Honeychurch produced a note which began "1 Sale of Company – risk assessment of purchase". He said it was a note he made of that phone conversation, but it is undated and does not say what it is a note of. It was tendered as an exhibit.
Deloittes in fact sent the plaintiff company a bill for $7,500 dated 30 June 1994, expressed to be for "Attending to various matters for the period to 30 June 1994 in relation to the purchase of shares in Jetset Travel (Tasmania) Pty Ltd".
1 – 7 April 1994
Mr Honeychurch said that he collected some documents from Ms Veronese a few days after the second meeting. The second meeting must have been on either 30 March or 31 March. Good Friday fell on 1 April. If Mr Honeychurch is correct, he must have collected those documents during the week after Easter. He said he subsequently received a call from Mr Blackwood telling him that there were more documents to collect.
It is common ground that there was a third meeting on Thursday 7 April at Deloittes' office. Mr Honeychurch said it was attended by him, Mr Blackwood and Ms Veronese. Mr Blackwood said that it was attended only by Mr Honeychurch and himself. The evidence of Mr Honeychurch was that the asking price of $200,000 was revealed to him by Mr Blackwood at that meeting, not by Mr Germano at an earlier meeting. According to Mr Honeychurch, he did not meet Mr Germano at all until after 27 April. Mr Honeychurch said that Mr Blackwood explained that the price of $200,000 was asked for by ENT on the basis that ENT would guarantee that the working capital of Jetset was zero. Balance sheets tendered on the trial indicate that there was a deficiency of working capital. Mr Honeychurch went on to say that he and Mr Blackwood discussed a typed list of information requirements, a copy of which was tendered as an exhibit. He said Mr Blackwood provided him with certain documentation, and told him that Deloittes would prepare some graphs showing trends in relation to sales and so forth, to make the situation easier to understand. He said Mr Blackwood told him that he would work out what the value of the business was likely to be, and how it stacked up against ENT's price, and that they could then have another meeting.
Mr Blackwood's evidence as to the meeting of 7 April was to the following effect. A quantity of documentation had been provided by ENT. He and Mr Honeychurch discussed matters relating to the profitability of Jetset including its losses, its service culture, the number of employees, and payroll costs. Mr Honeychurch asked him about how the value of the business would be assessed. Mr Blackwood discussed the method of calculating future earnings. He explained that the valuation of a business as a going concern involved looking at the net tangible assets of the business, looking at what the profits of the business were, and applying a capitalisation rate that was appropriate depending on the earnings return expected from the business. He said that he would have to wait for more information from ENT's Mr Gordon.
8 – 18 April 1994
It is common ground that the next meeting attended by Mr Honeychurch and Mr Blackwood was on 19 April. Mr Blackwood gave evidence that he was away from his office after Monday 11 April for the rest of that week. He said that, before going away, he arranged for junior staff of Deloittes to collate information provided by ENT and to prepare graphs in relation to that information. He also said that he had a long phone conversation with Mr Germano on 11 April. Mr Honeychurch gave evidence that Ms Veronese phoned him three or four days after the meeting of 7 April; that as a result he went to Deloittes and collected graphs from her; that Mr Blackwood rang to arrange the meeting of 19 April; and that he picked up further documents from Mr Blackwood prior to that meeting.
19 April 1994
There is a certain amount of common ground as to the meeting of 19 April. Mr Honeychurch and Mr Blackwood both gave evidence that the meeting was attended by them and Ms Veronese. She gave evidence that she had only attended one meeting with Mr Honeychurch and Mr Blackwood in relation to Jetset; that she did not remember when it was; and that she did not remember what was discussed at it.
It is common ground that, during the meeting of 19 April, Mr Blackwood produced and discussed two pages of printed calculations – one in relation to the future maintainable earnings of Jetset, and one as to the value of its business. The first page of calculations reads as follows:
"Jetset Tasmania
Calculation of Future Maintainable Earnings and Goodwill
30.06.93 $ '000 Trading Profit (25) Add Eastlands loss/profit 17 Add Payroll tax (25 – 1) 24 16 Add Depreciation 12 28 Add Salaries
KD 28
TW 29
57
Future Maintainable Earnings 85 Less Tax @ 33% (28) FME After Tax 57 X 4
228
*FME incorporates remuneration to GH equivalent to the remuneration of the current general manager.
P/E 4 = 25% - Return on Investment (ROI)
· high because of economic risk in Tasmania;
· much business from former associates of ENT;
· Comalco closure?
· Effect of Uni branch is uncertain"
Some comments need to be made to explain this calculation. According to Jetset's annual profit and loss account for the year to 30 June 1993, it had a trading loss of $25,569. However some $17,000 of that loss was attributed to its Eastlands branch, which had since been closed. It paid payroll tax of $24,596 in the year to 30 June 1993, but would not be liable to payroll tax if its shares were acquired by the plaintiff. Its accounts showed a figure of $11,602 for the depreciation of plant and equipment in the year to 30 June 1993. Mr Honeychurch and Mr Blackwood contemplated that expenditure would be saved by retrenching staff with the initials KD and TW, and that Mr Honeychurch would replace the general manager and draw a salary similar to hers. This calculation suggested that, according to the scenario contemplated by Mr Honeychurch, Jetset would make an after tax profit of the order of $57,000 per annum, over and above Mr Honeychurch's salary, ignoring the depreciation of plant and equipment. This calculation also suggested that, subject to 4 being an appropriate multiplier, the value of the goodwill of Jetset was therefore something in the order of $228,000.
The second page of calculations reads as follows;
"Jetset Tasmania
Value of Business
31.12.93 $'000 Current Assets – per accounts 328 Less Current Liabilities – per accounts 401 (73) Add Related party payable 12 (61) P P & E – at wdv 47 FITB – tax losses 35 Non-current liabilities (18) Net assets based on accounts 3 Provision for redundancy (53) (50) Add Goodwill 228 Total value of investment 178 If the purchaser is to fund redundancy: Shares (178 – 83) 95 Loan to company to fund redundancy 83 178 Value of investment will reduce by trading losses from 31.12.93 to changeover."
Prior to the meeting of 19 April, ENT had provided Mr Blackwood with financial statements for Jetset for the six months to 31 December 1993. It had not at that stage provided him with figures for the nine months to 31 March 1994. The figures for current assets and current liabilities were apparently derived from the December 1993 accounts. No-one gave oral evidence as to the adjustments of $12,000 described by the words "Add Related party payable". I do not understand why that adjustment was made. The figure of $47,000 represents the written down value of property, plant and equipment as at 31 December 1993. The figure of $35,000 represents the value of future income tax benefits. As a result of past losses, Jetset had the right, in the event of it making a profit, to carry forward those losses and claim them as income tax deductions. All going well, the tax saved by doing that would be in the vicinity of $35,000. The figure for non-current liabilities was apparently derived from the December 1993 accounts. The figure of $53,000 for redundancies related not to just to KD and TW, but also to the general manager. It is apparent from documents tendered as exhibits that provision for annual leave and long service leave payable to these three employees had been made in the accounts of Jetset. The total amount payable to them by way of redundancy payments was apparently about $83,000, a figure that appears towards the end of the page of calculations, but, after making allowance for the provisions that had been made for annual leave and long service leave, the additional amount required to fund their redundancy payments was about $53,000. The goodwill figure of $228,000 is derived from the calculation of future maintainable earnings. The final calculation shows that, if the total value of the business was $178,000 as calculated, and if it was necessary for the purchaser to expend $83,000 to achieve the redundancies that made that figure appropriate, a reasonable price for the shares of the company would be $95,000.
There was conflicting evidence as to what was said by Mr Blackwood to Mr Honeychurch during the meeting of 19 April. According to Mr Honeychurch, Mr Blackwood said not to worry about the losses that Jetset was making; advised him that savings could be made by a hands-on operator; told him that he should be able to get a profit in the first year because of those savings; explained that Jetset would not have to pay payroll tax; and explained that fringe benefits tax was being paid in respect of the provision of a car to the general manager, and that that could be avoided because Mr Honeychurch had his own car. More significantly, Mr Honeychurch said that he understood that the bottom line figure in the calculation as to the value of the business was fairly close to the value of the business. He said he asked Mr Blackwood whether he would clarify whether it was worthwhile making an offer on Jetset, telling him that he was worried about committing all his cash reserves to a business he really knew nothing about, when the employees would know more than he did, whereas he knew more than the employees in his previous business as a broker. He said he directly asked Mr Blackwood whether he thought going back to insurance broking was better or whether buying Jetset was better. He said Mr Blackwood was pretty positive about the whole thing, and said that he felt that Jetset was better because the clientele was already established and the business was running, that there was some $600,000 in gross income; and that because the sales people and staff were already in place he would not have to be dealing with the public and could just run the company. One of the employees whose retrenchment was contemplated was the accounts clerk. Mr Honeychurch said he asked Mr Blackwood if Deloittes could handle the accounting work for at least six months until he got the hang of the whole thing. He said Mr Blackwood spoke with Ms Veronese for a minute or two, and then said that they could do it. He gave evidence that he thought he said that it may be worthwhile making an offer, but that he wanted to talk to his wife about it. He said that he was not given any advice to the effect that he should not consider the purchase.
Mr Blackwood had a very different version of the meeting of 19 April. He said that, after first seeing the typed versions of the two pages of calculations, he sent Ms Veronese to locate a rubber stamp that said "Draft" and "For Discussion Purposes Only", so that she could stamp the documents before they were given to Mr Honeychurch. Initially he said he believed they were stamped with that stamp, but under cross-examination he said that he did not know one way or the other that that was correct. He said that the documents were not intended to be his assessment of the valuation of the business, but that he had had them prepared so that he could explain to Mr Honeychurch the methodology involved in estimating the future maintainable earnings of the business and in using such an assessment to assess the value of the business. He said he had explained the methodology on 7 April, but was not sure that Mr Honeychurch had grasped the explanation that he had then given. He said there was discussion at the 19 April meeting as to the profit figure being very dependent on the level of turnover of the business, and as to there not being a great deal that could be done about the overheads of the business apart from avoiding payroll tax and taking some actions in relation to the personnel. He said there were discussions as to things that could affect the level of the turnover, such as the possible closure of the Comalco factory at Bell Bay, the general state of the local economy, and the risk of a downturn in the local economy having an adverse impact on a retail travel business whose product was essentially a discretionary leisure product. He said he explained to Mr Honeychurch that the business did not have much in the way of stock, plant and equipment, or other tangible assets; that a payment of $200,000 would just get him goodwill; that if the business was not successful he would lose everything; and that he would not then be able to recoup any major sums from the working capital of the business. He said he told Mr Honeychurch that he could not tell him what the appropriate capitalisation multiplier was. Clearly this was a reference to the multiplier used to convert the future maintainable earnings figure ($57,000 in the printed calculations) to a goodwill figure ($228,000 in the calculations). He said he told Mr Honeychurch, "You haven't told me what sort of return you expect from your investment." He also said that he told him that the documents were an illustration of how he could arrive at the value of the business, and that he said to Mr Honeychurch, "You can go away and apply whatever multiplier rate you choose to work out what you think is an appropriate value for the business." He said that he did not offer Mr Honeychurch an opinion as to the value of the business at that meeting, for a number of reasons. One reason was that Mr Honeychurch had previously chosen not to have Deloittes prepare a written valuation report because such a report would cost too much. Another reason was that Mr Blackwood had recently encountered a situation in which a bank manager had been embarrassed as a result of having given a customer advice as to the value of a business. Another reason was that he considered the asking price of $200,000 to be in excess of what a reasonable price might be and that, as a result, he wanted Mr Honeychurch to work out how much he was prepared to pay for the business if he was going to make an offer for it. He did not claim to have advised Mr Honeychurch that he considered the asking price to be excessive. On his version of events, the meeting simply ended on the basis that Mr Honeychurch, in due course, was to go forth and multiply.
According to Mr Blackwood's evidence, there was a second meeting on 19 April, at the office of ENT. According to Mr Honeychurch's evidence, there was no such meeting, and he did not attend the offices of ENT until after 27 April, by which time he had made an offer for the business and ENT had accepted that offer. Mr Blackwood's evidence as to the second meeting of 19 April was as follows. It was attended by Mr Honeychurch, himself, Mr Germano, and other ENT employees named Gordon and Farrell. Mr Honeychurch took over the talking from their side of the table, and basically led the entire meeting, so that Mr Blackwood became superfluous. A lot of information was provided by the ENT people. When redundancies were discussed, they said that they were not prepared to make any employees redundant. That was to be left to the purchaser.
20 – 27 April 2004
It is common ground that on 27 April Mr Honeychurch faxed a letter to Mr Germano making an offer for the business, and that Mr Germano accepted that offer by a fax that he sent to Mr Honeychurch later that day. However Mr Honeychurch and Mr Blackwood gave substantially different accounts of the events between 19 April and the making of the offer by Mr Honeychurch by fax on 27 April.
The evidence of Mr Honeychurch as to the sequence of events was essentially as follows. He decided that he would make an offer for the business. On or about 22 April he phoned Mr Blackwood and told him that he was prepared to make an offer. He had a meeting with Mr Blackwood, and no-one else, later that day. He prepared some handwritten notes in advance of that meeting. He discussed with Mr Blackwood a proposed offer of $200,000, with conditions that $120,000 thereof would be paid "up front", $80,000 thereof would be paid after nine months, and ENT would make redundancy payments to the general manager and the employee TW. Mr Blackwood suggested that the offer should be for $235,000, with ENT paying for the redundancies. (If the redundancy payments were to total $85,000 as previously calculated, that would have been the equivalent of offering ENT $150,000 instead of $200,000.) Mr Honeychurch ultimately instructed Mr Blackwood to offer $225,000, with ENT paying for the redundancies. After that meeting, Mr Blackwood phoned Mr Honeychurch and told him that ENT would not pay for the redundancies, and that he would need to structure another offer. He then instructed Mr Blackwood to offer $150,000 on the basis that the plaintiff company would make the redundancy payments. Mr Blackwood phoned him again on or about 26 April and reported that Mr Germano said that that offer was reasonable, but that ENT's Mr McQuestin had a friend who had offered $200,000 for Jetset, and that Mr Honeychurch would therefore have to increase his offer. He phoned Mr Blackwood on 27 April and asked him what he thought about the price. Mr Blackwood said, "If you want it, it's worth paying a premium to get it." He said, "I don't want it that much because I've already got insurance to go back to." Mr Blackwood said, "Well if you want it, it's worth paying a premium to get it." That annoyed Mr Honeychurch because he felt Mr Blackwood had not given him a decent answer. He asked him about the value of the business as against the future maintainable earnings. He thinks Mr Blackwood said, "It's a bit on the high side but it's still acceptable." There followed some discussion as to whether the other buyer really existed. Mr Honeychurch decided to talk to Mr Germano directly. He phoned Mr Germano, who told him that the other buyer was genuine, but that he did not think that that other buyer had the money. Mr Honeychurch told Mr Germano that he was prepared to offer $200,000 provided ENT dealt only with him. He said that he would guarantee paying a certain amount for promotions or advertising through ENT if ENT continued to use Jetset for corporate travel. He also proposed delayed payment in relation to part of the purchase price. Mr Germano proposed some sort of guarantee or security for the delayed payment. It was following that conversation that he faxed his letter of offer to Mr Germano.
Mr Blackwood gave a substantially different account of what happened from 20 April to 27 April. He said that he had a telephone conversation with Mr Honeychurch a day or so after the meetings of 19 April. He said that in that conversation he said that the price being asked for the business was too high; that Mr Honeychurch asked whether he could tell him what the business was worth; that he would not do so; that Mr Honeychurch suggested a value of $150,000; that he said that he would not specify a figure; that Mr Honeychurch pressured him; that he ultimately said, "Well, at the very best something in the low hundreds, but that might be something that you just think about"; and that Mr Honeychurch responded by saying that that was not going to be acceptable, and that that was too far away from what "they" were asking. Mr Blackwood also said that at some stage, possibly during one of the meetings or conversations prior to 27 April, he told Mr Honeychurch that they should not be rushed into making an offer before the figures for the March quarter became available. He said that on 27 April Mr Honeychurch phoned him and said that he had spoken to Mr Germano and made an offer to him; that he had also faxed that offer to him; and that Mr Germano had accepted the offer verbally. He said that he was not at any time authorised to make an offer to ENT on behalf of Mr Honeychurch in respect of the purchase of Jetset. He said he could not remember making any offer to ENT on Mr Honeychurch's behalf.
Mr Honeychurch sent Mr Germano two faxes on 27 April. The first fax confirmed an offer made during a telephone conversation that day of $200,000 for the shares in Jetset, with conditions that Mr Honeychurch would guarantee a minimum of $25,000 per year in television advertising with a network operated by ENT for two years; that $100,000 of the purchase money would be paid upon the transfer of the shares and the balance nine months thereafter; and that any staff changes would be at the discretion and cost of Mr Honeychurch. The first fax gave Mr Germano until 5pm that day to respond. The second fax extended the life of the offer until 5pm on 29 April. Mr Germano responded on 27 April by, orally at first and later by fax, accepting the offer, subject to Mr Honeychurch "providing collateral to the satisfaction of ENT in respect of the deferred component of the purchase price". After a great deal of work by accountants and solicitors, the agreement constituted by the faxes of 27 April was superseded by a much more formal agreement for the sale of the shares in Jetset dated 30 May 1994. The shares changed hands the following day.
Mr Honeychurch gave evidence that he sent his second fax of 27 April after discussing the first with Mr Blackwood, who pointed out that the first fax was so worded that ENT had only until 5pm that day to accept the offer. He said that, after sending the second fax, he received a phone call from Mr Germano accepting his offer, followed by the fax from Mr Germano. He said he then phoned Mr Blackwood and discussed what needed to be done. He described meetings with Mr Blackwood and Mr Germano on 28 April and on or about 4 May.
Mr Germano gave evidence that he had face to face discussions with Mr Honeychurch before the offer and acceptance; that he did not remember seeing Mr Honeychurch again thereafter; and that any discussions in May probably took place with employees of ENT other than himself.
As I have said, Mr Blackwood gave evidence that he received a phone call from Mr Honeychurch on 27 April informing him of the making of an offer and of Mr Germano having verbally accepted that offer. Mr Blackwood gave evidence that during that conversation he said he did not know whether it was too late to withdraw the offer, and that Mr Honeychurch should speak to his lawyer if he was not happy about what he had done. He said he told Mr Honeychurch that he was not happy with the price that ENT was asking. He said he told Mr Honeychurch, "I don't think the price they're asking is economic, not on the profitability of the business", and that he said, "Why are you doing this? It's not an economic decision to purchase this business for that price." He said Mr Honeychurch told him that he was looking for something that would provide him with a sort of regular salaried income; that he was looking for something that one of his daughters might be able to be employed in; that he was attracted by the prospects of cheap travel for himself and his wife; that he had been a successful businessman; that he had sales and marketing skills; and that he believed that he could turn the business around. He said that in earlier meetings Mr Honeychurch had told him that he knew that a cultural change was required in the business; that he believed that he could pump the business up; that he would get on the phone and speak to all his former contacts from his insurance broking days; that he had a lot of contacts around Launceston; and that he believed that he could get the business going again.
Credibility
Ms Veronese
Ms Veronese gave her evidence in a credible manner. She said that the original approach to Mr Honeychurch about Jetset had been made by Mr Blackwood, not her. She expressed disappointment about not even having been given the chance to "introduce the two gentlemen". That part of her evidence had the ring of truth about it. She gave no indication of having deliberately understated the extent of her recollections.
Mr Germano
Mr Germano was a very confident witness. It became apparent that much of his evidence was the product of reconstruction rather than recollection. In particular, he confidently asserted that it was unlikely that there had been any discussion as to the purchase price for the shares in Jetset being paid by instalments. He appeared to base that conclusion on the proposition that $200,000 was such a trifling sum that payment in two instalments would never have been discussed. His evidence was contradicted by the production of his fax of 27 April 1994 agreeing to the payment of that sum in two instalments. The result is that I must approach his evidence with caution. He asserted that he would not have dealt with Mr Honeychurch directly after the offer and acceptance of 27 April, but would have left such dealings to subordinates. It seems inherently likely that that might have been the case.
In my view the evidence of Mr Germano, generally speaking, is not sufficiently reliable for it to be of much use in resolving the conflicts between the evidence of the two principal witnesses, Mr Honeychurch and Mr Blackwood.
Mr Honeychurch
I am not satisfied that Mr Honeychurch was dishonest in any part of his evidence. However there are a number of pieces of evidence that suggest that his memory as to significant events was, to a large degree, inaccurate and unreliable.
Mr Blackwood's evidence that he made the initial contact with Mr Honeychurch about Jetset was corroborated by Ms Veronese, and by notes from Deloittes' files showing that Mr Honeychurch left a message for Mr Blackwood to call him on 29 March 1994 at 12.15pm, and that they had a conversation that day. There is no reason for the evidence of Ms Veronese as to this point to have been inaccurate or fabricated. She had every reason to feel aggrieved that Mr Blackwood had contacted a client whose work she had been attending to without having the courtesy to involve her.
Mr Honeychurch could well be wrong as to Ms Veronese having attended more than one of the relevant meetings. Her evidence generally is unshaken. Her evidence as to that point was corroborated by Mr Blackwood.
Deloittes' files contain notes in Mr Blackwood's handwriting showing that there were meetings attended by him, Mr Honeychurch and Mr Germano on 31 March 1994 and 19 April 1994. I have no reason to think that Mr Blackwood had any opportunity to alter those notes after leaving Deloittes in early June 1994. I have no reason to think that he had any reason to alter them before he left. They contradict Mr Honeychurch's evidence that he did not meet Mr Germano until after 27 April 1994. That evidence is also contradicted by Mr Germano who, despite his shortcomings, is an independent witness.
Mr Honeychurch's evidence that he authorised Mr Blackwood to make the first offer, and that Mr Blackwood reported to him as to the making of the first offer and Mr Germano's response, is inconsistent with the evidence of both Mr Blackwood and Mr Germano.
The events that occurred in and around April 1994 occurred more than ten years ago. The notes made by Mr Honeychurch were far less comprehensive than those of Mr Blackwood, which themselves were patchy and haphazard. There was no doubt some delay between the occurrence of the relevant events and the need arising for Mr Honeychurch to recall them in detail. The assets of the business were finally disposed of in November 1995. The writ was issued in April 1997. There may not have been a need for him to recollect some details until well after the issue of the writ. Mr Honeychurch gave his evidence in a credible manner, and seemed honest to me. But the objective evidence that I have referred to shows that some of his recollections were wrong, and that others might be wrong. His evidence as to disputed factual questions must therefore be approached with caution.
Mr Blackwood
In my view Mr Blackwood was a less reliable witness than Mr Honeychurch.
Parts of his evidence-in-chief from his first day in the witness box, 18 November, were contradicted by him when he resumed giving his evidence-in-chief the following morning. On the first day he said that Mr Honeychurch had first raised the question of a possible conflict of interests at their first meeting, but the next morning he said that Mr Honeychurch had first raised that question during their initial telephone conversation. On that occasion he went on to say that he discussed the possible conflict with Mrs Merridew, then discussed the Jetset business with Mr Germano, and then resolved the question of a potential conflict of interests in a further telephone conversation with Mr Honeychurch. He went on to outline a number of matters concerning the acquisition of Jetset that he said were discussed in this second telephone conversation with Mr Honeychurch, a conversation that he had not mentioned the previous afternoon.
On his first day in the witness box, Mr Blackwood said that he thought he might have prefaced his first telephone conversation with Mr Honeychurch by saying something along the lines that he understood from Ms Veronese that Mr Honeychurch had expressed an interest in a travel business operated by another of Deloittes' clients, referring to Harvey World Travel, which was operated by one Margaret Finney. Under cross-examination, he said he believed that that was said in a later conversation, later on the same day. However this was not something that he mentioned when he gave evidence of a second telephone conversation in the course of his evidence-in-chief on the second day.
Mr Blackwood gave evidence that he had never seen the Jetset financial statements for 31 March 1994. Deloittes' files reveal that they were received on 3 May 1994, about a month before he left the firm. He conceded in cross-examination that they had come to him about 3 May. When asked why he had said that he had not seen them before leaving Deloittes, he answered, "Because I couldn't remember seeing them …".
In his evidence-in-chief, Mr Blackwood first mentioned the information about the possibility of a friend of Mr McQuestin buying the business as something that Mr Honeychurch had told him when he reported on 27 April 1994 that he had faxed a letter of offer to Mr Germano. Under cross-examination, he said he did not know of another buyer having a connection with Mr McQuestin until that telephone conversation. However Deloittes' files contain a note in Mr Blackwood's handwriting of a telephone conversation between him and ENT's Mr Gordon on 18 April 1994 which records, "David McQuestin ¾has offered the business to someone else as well".
Mr Blackwood's account of the conversation on 27 April 1994, when Mr Honeychurch advised him that he had faxed a letter of offer to Mr Germano, ended with Mr Blackwood telling Mr Honeychurch that, if he believed that the business was worth paying a premium for, then that was up to him. He was cross-examined about that conversation. He said that he had no understanding of what Mr Honeychurch was going to do next. However Deloittes' files contain a note dated 27 April 1994 in Mr Blackwood's handwriting that ends with the following:
"Action ¾ Gray [Mr Honeychurch] to call John Germano & say that he is prepared to make a higher offer if they only deal with him."
That note is inconsistent with Mr Blackwood's evidence, but is consistent with Mr Honeychurch's evidence that Mr Blackwood had offered $150,000, that the making of a higher offer was discussed in the telephone conversation, that Mr Honeychurch decided to talk to Mr Germano directly, and that he offered a higher price when he did so.
I am particularly concerned by Mr Blackwood's evidence as to the telephone conversation with Mr Honeychurch on 27 April at the stage when Mr Honeychurch had made an offer of $200,000 by fax, and Mr Germano had accepted that offer orally. Mr Blackwood's evidence was that at that point he volunteered the comment, "It's not an economic decision to purchase this business for that price." I am equally concerned by Mr Blackwood's evidence that, at the time of the meeting with Mr Honeychurch on 19 April, he considered the asking price of $200,000 to be in excess of what a reasonable price might be. In the light of the evidence relating to the value of the business, particularly the expert evidence that I will refer to later in these reasons, I have every reason to accept that Mr Blackwood considered $200,000 to be too high a price, and that he had formed that view by 19 April. However, if that was his view, the only sensible course was for him to tell Mr Honeychurch of his view that day. He said he did give that advice, but not until a phone conversation a day or two later. If he considered the price too high, there is no sensible reason for him not to have given that advice earlier. His evidence to the effect that he kept silent because he wanted Mr Honeychurch to give thought to the return he expected from the business, and to form a view as to an appropriate multiplier, is simply not credible in my view.
I am left with the impression that the evidence of Mr Blackwood not only included the sort of inaccuracies one would expect in evidence concerning events that occurred ten years previously, but included exculpatory assertions that were simply not credible. I cannot rule out the possibility that Mr Blackwood sincerely believed in the truth of each piece of his evidence as he gave it, even when it was contradicted by later evidence, and even when it was not credible. People often believe what suits them.
Whose evidence should be believed?
Obviously the evidence of Mr Honeychurch and that of Mr Blackwood conflict in many respects. As to a great many of the conflicts, it is neither possible nor necessary for me to make findings as to the true facts. To some extent, what happened in 1994 is common ground. Some pieces of evidence should be accepted because they are inherently credible. As to some points, the evidence of a witness should be accepted because the evidence does not support the case of that witness, and is therefore unlikely to be incorrect. Some pieces of evidence can be rejected because they are simply not credible. Those situations apart, I am not in a position to prefer the evidence of either of the two major witnesses to that of the other.
The expert evidence
According to Jetset's accounts, it became unprofitable during the year ended 30 June 1991. The evidence establishes that the figures appearing in its accounts for its operating profit were as set out in the following table. The figures in brackets indicate losses:
Period $ Year to 30 June 1989 41,021 Year to 30 June 1990 2,035 Year to 30 June 1991 (65,532) Year to 30 June 1992 (68,114) Year to 30 June 1993 (25,569) 6 months to 31 December 1993 (15,843) 9 months to 31 March 1994 (52,178) 11 months to 31 May 1994
(66,208)
Expert evidence was given for the plaintiff by an experienced chartered accountant, Mr Dixon. In his opinion the business was seriously in trouble in April 1994, and would then have been a major risk for somebody with no specific skills in the travel industry. He said that on the basis of the accounts for the nine months to 31 March 1994, allowing for payroll tax not being payable by a purchaser, and allowing for the saving of half the salaries of two (not three) staff members whose retrenchment was contemplated, the business would still have been likely to incur an ongoing loss, even if Mr Honeychurch had worked for nothing. He believed the business was worthless.
Mr Dixon was asked to comment on the calculations that were provided by Mr Blackwood to Mr Honeychurch at the meeting of 19 April 1994 ¾the calculations that I set out in full when recounting the evidence as to that meeting. He suggested that the trading loss of $25,000 for the 1993 year was not an appropriate starting point since the business was heading for a loss of about $68,000 for the 1994 year. He said that an excessive allowance was made in relation to payroll tax since part of the payroll tax of $25,000 was included in the losses of the Eastlands branch, which had been added back in. He suggested that the depreciation of $12,000 should not have been added back in. He said he believed it was fairly well accepted across the board in industry that depreciation should not be added back in such a calculation. He suggested that, with the changes he had referred to, the chances were that there would have been no future maintainable earnings in relation to the business. His opinion was that the goodwill figure should have been zero. He said that, on the figures available, the business would have been worthless. He said the reasonable advice to someone looking to buy the business would have been, "Don't buy it."
The business was part of a national chain of franchised businesses under the Jetset name. When the business failed, the head franchisor, a mainland company, bought the assets of the business for $37,500. Shortly before that, a purchaser wishing to operate under the Jetset name in the Devonport area purchased the franchise for that area from the plaintiff for $17,500. The plaintiff was thus able to recoup a total of $55,000 by selling off the assets of the business, principally goodwill, under "fire sale" conditions in late 1995. Mr Dixon acknowledged these points to be correct when under cross-examination.
There were no other expert witnesses. I found Mr Dixon an impressive witness. His evidence was substantially unshaken and certainly uncontradicted. The fact that he allowed only for the saving of half the salaries of two retrenched employees, when retrenchments might have made greater savings possible, is not really significant in my view. Although there was a goodwill value attaching to the Jetset name, I think the unprofitability of the business as at April 1994, or even 31 December 1993, made it a company that was not worth buying. The situation might have been different if the purchaser had had skills and experience in relation to the travel industry, and a reliable plan to restore the company to profitability. However the plaintiff was in no such position. From the plaintiff's position the investment was a highly speculative one, and a most unwise and dangerous one. Those things should have been clear to any accountant with the expertise and information that Mr Blackwood had in April 1994. They would have been even clearer if the March 1994 accounts, which reached his office on 3 May 1994, had been available.
The retainer issue
There is a dispute between the parties as to the scope of Deloittes' retainer. The plaintiff pleaded that it retained Deliottes for accounting and business advice in relation to the possible purchase of Jetset. The defendants denied that, but admitted that Mr Honeychurch discussed the purchase of Jetset with Mr Blackwood and/or Ms Veronese from time to time. The plaintiff's case is that Mr Honeychurch, on behalf of the plaintiff, told Mr Blackwood and Ms Veronese that he would need to have somebody to give him professional advice as to whether Jetset was worth acquiring, and that Mr Blackwood orally agreed with him that Deloittes would provide such advice. The defendants' case is that Deloittes were not retained to provide advice as to the value or viability of the business, but only to obtain and provide information with a view to Mr Honeychurch exercising his own business judgment as to the possible acquisition of the business.
Mr Blackwood answered some interrogatories relating to the scope of the retainer in 1998. In his answers, he made assertions as to the effect that Deloittes were retained to deal with specific queries raised by Mr Honeychurch from time to time, and that those were the full terms of the retainer. In answer to interrogatories as to the scope of the services provided by Deloittes, he said that he provided Mr Honeychurch with business advice as to the purchase of the issued shares in Jetset, in that he provided advice regarding the proposed purchase in relation to issues raised by Mr Honeychurch from time to time. Mr Estcourt QC put to Mr Honeychurch in cross-examination that the arrangement settled upon was that Mr Blackwood would obtain financial and general information on Jetset and provide it to him, and that he would seek such advice from Mr Blackwood as he saw fit about Jetset. Mr Honeychurch said that that was not correct. In opening the defendants' case, Mr Estcourt QC said, "We say … that Mr Honeychurch was a skilled and successful businessman who retained Deliottes to obtain information about the financial and general position of Jetset, and to provide him with that information and such commentary, or advice, as he requested from time to time."
Mr Blackwood's oral evidence did not correspond with his answers to interrogatories, nor with the assertions put by Mr Estcourt QC in cross-examination and in his opening. I have already summarised Mr Blackwood's evidence as to a meeting on 30 March 1994. He did not say that Deloittes were retained only to provide information and to provide such specific advice as was requested by Mr Honeychurch. According to his evidence, the work that was discussed involved Deloittes "looking at" the business. Mr Porter QC put to Mr Blackwood in cross-examination that there was a discussion between him and Mr Honeychurch along the lines that Deloittes' work could cost a bit less "if we have a look at it and decide that it's just not a goer, and we just walk away from it at an early stage". Mr Blackwood agreed with that proposition. Mr Blackwood also agreed that Mr Honeychurch had told him that he needed professional advice as to whether the acquisition of Jetset was something worth doing. That answer was given during cross-examination as to one of the initial meetings of March 1994.
Both Mr Honeychurch and Mr Blackwood gave evidence that a figure of $7,500 was discussed by them in relation to the cost of Deloittes' work. As I have said, a bill for that amount was sent to the plaintiff company – not to Mr Honeychurch personally – at the end of June 1994. The second defendant charged that sum for "Attending to various matters for the period to 30 June 1994 in relation to the purchase of shares in Jetset Travel (Tasmania) Pty Ltd." Mr Estcourt QC submitted that the wording of that bill supported the defendant's case as to the scope of the retainer. I reject that submission. The bill was so vaguely worded that it is equally consistent with the plaintiff's case.
In the light of the evidence I have referred to, my findings as to the scope of the retainer are as follows. Mr Honeychurch, on behalf of the plaintiff company, retained Deloittes to provide information and advice as to the proposed purchase of Jetset. Deloittes were not required to prepare a formal valuation, nor to prepare a formal report as to the viability of the business or the proposed purchase. Deloittes were required not just to provide such advice as Mr Honeychurch specifically requested, but to advise generally in relation to the proposed purchase. In the event that Deloittes formed the view that the only reasonable course was for the plaintiff not to proceed with the proposed purchase, the giving of advice to that effect was within the scope of the retainer. One reason for Deloittes being retained was for them to give Mr Honeychurch, who lacked their expertise, such expert advice as they reasonably could, having regard to the extent of their investigations and the result of their investigations, as to whether the purchase should proceed and, if so, at what price, and upon what terms.
Fair Trading Act 1990
It is pleaded in the amended statement of claim that the plaintiff suffered loss and damage which was caused by misleading and deceptive conduct of the defendants that was contrary to the Fair Trading Act, s14, in that the defendants made certain false and misleading representations and failed to advise the plaintiff of certain things. I will deal first with the allegations as to positive representations.
The allegations relied on were particularised in the statement of claim as follows:
"The Defendants advised and represented that:
(a)the purchase of Jetset represented a good investment opportunity for the Plaintiff;
(b)despite Jetset making a loss, significant savings could be made through staff redundancies, and with a 'hands on' operator such as the Plaintiff acting through LGH;
(c)… ;
(d)there would be immediate income to the Plaintiff if the Plaintiff purchased Jetset;
(e)Jetset had an established client base;
(f)University Student Travel Association affiliation would ensure a competitive edge for the business;
(g)in a document entitled 'Jetset Tasmania ‑ Value of Business', the Jetset business was worth $178,000, comprised of goodwill of $228,000 with net liabilities of $50,000;
(h)in a document entitled 'Jetset Tasmania ‑ Calculation of Future Maintainable Earnings and Goodwill', the net future maintainable earnings after tax were $57,000pa;
(i)Jetset was worth $150,000, with $200,000 still an acceptable figure;
(j)Jetset was worth paying a premium for."
There is no evidence that any representations to the effect alleged in subpar(a) were made. There is evidence that representations to the effect alleged in (b), (d) and (e) were made, but all those representations were true, and therefore neither misleading nor deceptive. As to (f), Mr Honeychurch gave evidence that Mr Blackwood made a representation to the effect alleged at their first meeting, but Mr Blackwood denied that, and I do not think Mr Honeychurch's recollections are sufficiently reliable for me to find that allegation proved. As to (g) and (h), I am not satisfied that Mr Blackwood went so far as to adopt the figures in the documents produced by him at the meeting of 19 April 1994 as firm, correct and accurate figures. As to (i) and (j), there is again a conflict between Mr Honeychurch and Mr Blackwood as to what was said. As to each alleged representation, I am not satisfied on the balance of probabilities that the evidence of Mr Honeychurch is correct. I do not have sufficient confidence in the reliability of his evidence to make findings in his favour as to those points.
However I think the plaintiff's claim under the Fair Trading Act in respect of omissions on the part of the defendants must succeed. It has been pleaded that the conduct of the defendants was misleading and deceptive in that they failed to advise the plaintiff that "(a) Jetset was an unwise investment; (b) it should not purchase Jetset; (c) the purchase price sought was in excess of a reasonable price." It is clear that the defendants did not ever give the plaintiff advice in the terms of (a) or (b). As to (c), I am unable to make a finding as to the correctness of Mr Blackwood's evidence that he told Mr Honeychurch a day or two after 19 April 1994 that the price being asked for the business was too high. I am therefore not satisfied on the balance of probabilities that the defendants failed to advise the plaintiff that the purchase price sought was in excess of a reasonable price. However I am satisfied on the balance of probabilities that no advice to the effect of (a) or (b) was given.
Silence as to a particular point can amount to misleading or deceptive conduct in certain circumstances. Hill J explained how this can be so in Winterton Constructions Pty Ltd v Hambros Australia Ltd (1992) 11 ALR 649 at 666 as follows:
"… if the circumstances are such that a person is entitled to believe that a relevant matter affecting him or her adversely would, if it existed, be communicated, then the failure to so communicate it may constitute conduct which is misleading or deceptive because the person who ultimately may act to his or her detriment is entitled to infer from the silence that no danger of detriment existed. Thus, where a duty to speak is imposed, silence may constitute misleading and deceptive conduct."
See also Rhone-Poulenc Agrochimie SA v UIM Chemical Services Pty Ltd (1986) 12 FCR 477 at 489 – 490; Hejio Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 79 ALR 83; McMahon v Pomeray Pty Ltd (1991) ATPR ¶41-125 at 52,857 – 52,858.
The calculations produced by Mr Blackwood at the meeting of 19 April suggested that Jetset had goodwill that might well have been worth something like $228,000, depending on what multiplier was appropriate. Mr Blackwood had not ruled out the possibility that a larger multiplier than 4 might have been appropriate. That would have resulted in an appropriate purchase price being greater than $178,000, or greater than $95,000 if the purchaser were to fund the proposed redundancies. The vendor was asking $200,000 on the basis that the purchaser was to fund any redundancies. On 27 April 1994 Mr Honeychurch made an offer of $200,000 on that basis, with certain strings attached, during his telephone conversation with Mr Germano. Before making that offer, he was considering whether to make an offer for the purchase of the business and, if so, at what price, and upon what terms. Mr Blackwood knew that he was considering those matters. It was within the scope of Deloittes' retainer to provide advice, at least if Deloittes was in a position to do so, as to whether the plaintiff should attempt to acquire the business and, if so, at what price, and upon what terms. The business was a very risky investment. It was one that the plaintiff was unwise to contemplate. The most appropriate advice would have been advice not to purchase Jetset. I accept Mr Blackwood's evidence that, as at 19 April 1994, he considered the asking price of $200,000 to be in excess of a reasonable price. By that time, it is clear that Deloittes had investigated the profitability of Jetset's business to a significant degree, and were in a position to offer some advice as to the degree of risk involved in acquiring the business, and as to whether the plaintiff should not proceed.
In my view, the circumstances that existed in the days leading up to Mr Honeychurch making an offer during the telephone conversation with Mr Germano were such that Mr Honeychurch was entitled to believe that, if the business of Jetset was so risky that his company would be unwise to contemplate acquiring it, Mr Blackwood or someone from Deloittes would have told him so. Whilst I am not in a position to make detailed findings as to what was said in the conversations between Mr Honeychurch and Mr Blackwood in the days leading up to the oral and faxed offers of 27 April, I am satisfied that the business of Jetset was then so risky that it would have been unwise for any purchaser to offer thousands of dollars to acquire its issued shares; that the information available to Deloittes and Mr Blackwood about the viability or profitability of Jetset compelled that conclusion; that neither Mr Blackwood nor anyone else from Deloittes gave Mr Honeychurch advice to that effect; that the plaintiff would not have proceeded with the purchase if such advice had been given to Mr Honeychurch; and that, because of the arrangement that he would be advised by Deloittes if the proposed transaction was "not a goer", Mr Honeychurch must have assumed that the risks associated with the purchase of the business were not so strong as to warrant Deloittes advising him not to proceed. In those circumstances, the silence of Deloittes and Mr Blackwood as to the unadvisability of proceeding with the purchase amounted to misleading and deceptive conduct that was relied on by the plaintiff in making an offer to purchase the business. The offer was accepted, and the purchase was ultimately completed as a result. As a result of the plaintiff entering into a contract to purchase Jetset's shares, which it would not have entered into if Deloittes had given the appropriate advice, it suffered damage. The claim based on the contravention of the Fair Trading Act must therefore succeed against Deloittes and Mr Blackwood.
Contributory negligence is not a defence or partial defence to such a claim. The High Court held in I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (2002) 210 CLR 109 that such a defence is not available to a claim for damages based on a contravention of the Trade Practices Act 1974 (Cth), s52(1), and made pursuant to s82(1) of that Act. Since the relevant provisions of the Fair Trading Act, ss14(1) and 37(1), are in identical terms, the position is the same. It follows that the plaintiff's claims against the first, second and fourth defendants, ie Deloittes and Mr Blackwood, must succeed in full.
All of the evidence as to the advice and information sought by Mr Honeychurch from Deloittes, and provided to him by Deloittes, suggests that Mr Blackwood was primarily responsible within Deloittes for the provision to him of information and advice, and that the role of Ms Veronese was very much a subsidiary one. I am not satisfied that she attended more than one meeting with Mr Honeychurch, nor am I satisfied that her role extended beyond attending to particular tasks delegated by Mr Blackwood, nor that Mr Honeychurch had any reason to think otherwise. I think it follows that her silence as to the unadvisability of the plaintiff purchasing Jetset has not been shown to amount to misleading or deceptive conduct. The evidence simply does not establish the existence of circumstances such that Mr Honeychurch was entitled to believe that any relevant matter likely to affect the plaintiff company adversely would, if it existed, have been communicated by her. As against her, the plaintiff's claim under the Fair Trading Act must fail.
Negligence and breach of contract
The amended statement of claim contains particulars of the allegations of negligence relied upon by the plaintiff. The alleged acts and omissions set out in those particulars are also alleged to constitute breaches of an implied term of the contract between the plaintiff and Deloittes to the effect that Deloittes would exercise reasonable care, competence and diligence in giving advice to the plaintiff, as would be expected of competent accountants and/or business advisers. The particulars of the allegations of negligence and breaches of contract relied on by the plaintiff read as follows:
"The Defendants:
(a)advised the Plaintiff that the purchase of Jetset was a good investment opportunity when it knew or ought to have known that it was not;
(b)failed to advise the Plaintiff that the purchase of Jetset was an unwise investment;
(ba)failed to advise the plaintiff not to purchase Jetset;
(bb)failed to advise the plaintiff that the purchase price sought was in excess of a reasonable price;
(c)gave advice and made representations as to the future earnings and profitability of Jetset when it knew or ought to have known of the unlikelihood or impossibility of those events;
(d)… ;
(e)gave specific advice as to the value of the business, including goodwill and future maintainable earnings when it knew or ought to have known that the figures were incorrect and could not be justified;
(f)failed to give, as far as reasonably practicable, reasonable and accurate advice as to the financial position of Jetset;
(g)… ;
(h)advised the Plaintiff that Jetset was worth $150,000 to $200,000 when it was effectively worth nothing;
(i)advised the plaintiff that Jetset was worth paying a premium for when it was not."
There is no evidence as to the giving of advice as alleged in subpar(a). As to (bb), (h) and (i), there is conflicting evidence, I am unable to make findings, and the allegations have therefore not been established on the balance of probabilities. However I am satisfied on the balance of probabilities of the matters alleged in the other particulars.
As to (b), it is common ground that the plaintiff was not advised that the purchase of Jetset was an unwise investment. As to (ba), it is common ground that the plaintiff was not advised not to purchase Jetset. As to pars(c) and (e), the two pages of calculations provided by Mr Blackwood at the meeting of 19 April 1994 were provided in such circumstances as to suggest that the future maintainable earnings of Jetset, after tax, might be in the vicinity of $57,000 per annum; that the value of Jetset's goodwill might be in the vicinity of $228,000; and that a reasonable price to pay for its shares might be in the vicinity of $178,000 if it were to fund any redundancies. I am satisfied that Mr Blackwood and Deloittes ought to have known that any such figures were highly inaccurate, and that the provision of them therefore amounted to negligence. As to par(f), I am satisfied that the financial position of Jetset was that it was highly unprofitable and likely to remain so, and that the failure to give advice to that effect amounted to negligence. Having regard to my earlier conclusions as to the roles of Mr Blackwood and Ms Veronese, it follows that the claim in negligence should succeed against Deloittes and Mr Blackwood, but not Ms Veronese.
In my view, the implied term asserted by the plaintiffs meets all the criteria for the implication of a term listed in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 at 283, and that term was breached by Deloittes in the respect alleged in subpars(b), (ba), (c), (e) and (f).
If Deloittes and Mr Blackwood had advised Mr Honeychurch that Jetset was an unwise investment, advised him that his company should not purchase Jetset, and not furnished Mr Honeychurch with the pages of calculations that were presented on 19 April 1994, and if they had given appropriate advice as to the financial position of Jetset, I have no doubt that the plaintiff would not have proceeded with the purchase. It follows that the negligence and breaches of contract referred to in subpars(b), (ba), (c), (e) and (f) resulted in the plaintiff acquiring the shares in Jetset, and suffering damage.
The defendants pleaded volenti non fit injuria. The amended defence contains particulars of the allegations relied upon as a basis for that plea. Those particulars read as follows:
"(i)The plaintiff and LGH [Mr Honeychurch] were aware at the time of purchasing Jetset Travel that it had been operated at a loss for some two or three years.
(ii)The plaintiff and LGH were aware that at the time of purchasing Jetset Travel, the defendants were acting for the plaintiff, ENT Limited.
(iii)The plaintiff and LGH were aware that the plaintiff was taking over Jetset Travel in the middle of winter, a period that is traditionally slower and therefore less profitable or unprofitable.
(iv)The plaintiff and LGH conducted their own independent investigations into Jetset Travel.
(v)The plaintiff purchased Jetset Travel, without commissioning a report into the company."
As to subpar(ii), it is true that Mr Honeychurch was aware that Deloittes did some accountancy work for ENT Ltd, but it does not logically follow that, by retaining Deloittes, the plaintiff voluntarily assumed the risk that Deloittes would be negligent, or took any risk at all. As to (iv), there is no evidence that the plaintiff or Mr Honeychurch conducted any independent investigation into Jetset. As to (i), (iii) and (v), the basic facts as alleged are established. The plaintiff no doubt undertook some risk in purchasing the business in the circumstances alleged. But in order for the plea of volenti non fit injuria to succeed, I would need to be satisfied on the balance of probabilities that the plaintiff voluntarily and freely accepted the risk that, if it purchased the business, it would suffer financially as a result of negligence on the part of the defendants. In my view, the degree of risk taken by the plaintiff in proceeding without a written report on Jetset, taking over in mid-winter, and knowing that there had been losses for some two or three years does not warrant a conclusion that it voluntarily and freely accepted the risk of financial loss. The plea of volenti non fit injuria must fail.
The defendants pleaded contributory negligence. By way of particulars, they pleaded that the plaintiff was negligent in that it and Mr Honeychurch:
"(a)Declined the offer by the defendants to prepare a report into Jetset Travel;
(b)Conducted their own independent investigation into Jetset Travel;
(c)Conducted their own negotiations with ENT Limited and HMA Limited regarding the purchase of Jetset Travel;
(d)Proceeded to purchase Jetset Travel even though they were independently aware that it was not in a good financial position;
(e)Proceeded to purchase Jetset Travel despite advice from the defendants that the purchase price was too high;
(f)Obtained finance in order to purchase Jetset Travel from the ANZ Bank, without any consultation with the defendants;
(g)Continued to engage the services of the defendant even though they were aware from the outset that the defendants were also acting for ENT Limited;
(h)Implemented ideas into Jetset Travel that were considered unusual and unreasonable;
(i)Proceeded to purchase Jetset Travel even though they were advised that LGH's expressed reasons for purchasing were inappropriate.
As to subpar(a), I take the view that no loss or damage resulted from the absence of a report. As to (b), there was no evidence of an independent investigation as alleged. As to (c), it is true that Mr Honeychurch dealt directly with Mr Germano on 27 April 1994, but the plaintiff's damage resulted from the decision to proceed with the purchase, and not from the fact that the plaintiff dealt directly with Mr Germano at that time. As to (e), there is a conflict of evidence, and I am not satisfied on the balance of probabilities that advice was given that the price was too high. As to (f), there was no evidence from which it could be concluded that the obtaining of finance from the ANZ Bank was causative of any loss or damage. As to (g), there was no evidence that the defendants' relationship with ENT Ltd was causative of any loss or damage. There was no evidence to support (h). As to (i), there is no evidence that Mr Honeychurch's reasons for being interested in purchasing Jetset's business, which included the possibilities of cheap travel and of a job for his daughter, made any difference to the degree of care exercised by him in deciding whether to purchase the business or in making decisions about the price and the terms of the purchase. However I am satisfied on the balance of probabilities that the plaintiff was negligent in proceeding with the purchase knowing that Jetset was not in a good financial position. That is to say, I am satisfied that the allegation in subpar(d) is established. Mr Honeychurch committed his company to the purchase of Jetset on the basis that it would have to pay $200,000 to acquire the issued shares, meet the cost of any redundancies, and pay to have the accounts clerk's work done externally for some six months after her retrenchment. By proceeding to purchase Jetset, knowing that it was not in a good financial position, the plaintiff failed to take reasonable care to protect itself against the risk of financial loss.
In my view Deloittes and Mr Blackwood are primarily to blame for the plaintiff proceeding with the purchase of Jetset. Mr Honeychurch relied on them for professional advice. If the claim based on the Fair Trading Act had not succeeded, I would have reduced the plaintiff's damages by 30 per cent because of contributory negligence.
The claim for breaches of fiduciary duty
It is common ground that at all material times ENT Ltd was a client of Deloittes. There is no suggestion that Mr Blackwood or Ms Veronese were involved in doing any work for ENT. In fact the only evidence as to the scope of Deloittes' work for ENT was that the firm did ENT's tax work and audit work, and had provided a valuation of Jetset in 1992 that Mr Blackwood and Ms Veronese had not seen. There was certainly no evidence that Deloittes had any involvement on behalf of ENT or any related entity in relation to the sale of Jetset.
It is common ground that the scope of the relevant fiduciary obligations was as stated by Gaudron and McHugh JJ in Breen v Williams (1996) 186 CLR 71 at 113 in the following passage:
"In this country, fiduciary obligations arise because a person has come under an obligation to act in another's interests. As a result, equity imposes on the fiduciary proscriptive obligations - not to obtain any unauthorised benefit from the relationship and not to be in a position of conflict. If these obligations are breached, the fiduciary must account for any profits and make good any losses arising from the breach. But the law of this country does not otherwise impose positive legal duties on the fiduciary to act in the interests of the person to whom the duty is owed."
It also common ground that, in order for the plaintiff to establish a breach of fiduciary duty, it is necessary to identify intentional conduct amounting to such a breach, and that past dealings, or the expectation of future dealings, do not of themselves establish a conflict between two distinct duties: Pilmer v Duke Group Ltd (2001) 207 CLR 165 at 200 – 201.
In order for the claim for equitable compensation to succeed, it would be necessary to establish conduct that was engaged in with the intention of furthering the interests of another client to the prejudice of the interests of the plaintiff. Millett LJ explained the position in Bristol and West Building Society v Mothew [1996] 4 All ER 698 at 713 as follows:
"Even if a fiduciary is properly acting for two principals with potentially conflicting interests he must act in good faith in the interests of each and must not act with the intention of furthering the interests of one principal to the prejudice of those of the other … . I shall call this 'the duty of good faith'. But it goes further than this. He must not allow the performance of his obligations to one principal to be influenced by his relationship with the other. He must serve each as faithfully and loyally as if he were his only principal. Conduct which is in breach of this duty need not be dishonest but it must be intentional. An unconscious omission which happens to benefit one principal at the expense of the other does not constitute a breach of fiduciary duty, though it may constitute a breach of the duty of skill and care. This is because the principle which is in play is that the fiduciary must not be inhibited by the existence of his other employment from serving the interests of his principal as faithfully and effectively as if he were the only employer. I shall call this 'the no inhibition principle'. Unless the fiduciary is inhibited or believes (whether rightly or wrongly) that he is inhibited in the performance of his duties to one principal by reason of his employment by the other, his failure to act is not attributable to the double employment."
I have no reason to conclude that either Mr Blackwood or Ms Veronese was ever motivated by a desire to benefit ENT Ltd or any related entity in relation to anything that either of them did or said, or omitted to do or say. The facts necessary to establish an entitlement to equitable compensation for a breach of fiduciary duty have therefore not been proved.
Conclusion
For these reasons there will be judgment for the plaintiff against the first, second and fourth defendants for $398,519.59 plus simple interest thereon at the rate of 6.25 per cent per annum from 27 October 2004 until today, and judgment for the third defendant against the plaintiff.
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