J & M United Pty Ltd v Danaris Pty Ltd
[2010] FMCA 713
•20 September 2010
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| J & M UNITED PTY LTD v DANARIS PTY LTD & ANOR | [2010] FMCA 713 |
| TRADE PRACTICES – Misleading and deceptive conduct – false or misleading statements – sale of service station business where vendor was a friend of purchaser’s husband – whether vendor falsely represented that the business was profitable and that it would be even more profitable if run by an owner/operator – whether reasonable basis for representations as to future matters – reliance – where applicant had considerable opportunity to work in the business prior to settlement and expressed concerns regarding the profitability of the business – effect of failure to conduct due diligence and “no reliance” clause – damages – capital loss – appropriate measure of damages – no evidence of value at time of transaction – contributory negligence – application of s.82(1B) considered – trading losses – causation – where respondent claimed inaccuracies in record keeping and inefficiencies in running of business – duty to mitigate loss – whether unreasonable length of time between purchase and sale – director of respondent liable as a person involved in contravention. |
| Trade Practices Act 1974, ss.51A, 52, 75B, 82, 82(1B) Federal Magistrates Court Rules 2001 |
| Poulet Frais Pty Ltd v The Silver Fox Company (2005) 220 ALR 211 The Law of Misleading or Deceptive Conduct (Lockhart C, LexisNexis Butterworths, 2003, 2nd ed.) |
| Applicant: | J & M UNITED PTY LTD (ACN 124 338 512) |
| First Respondent: | DANARIS PTY LTD (ACN 083 907 028) |
| Second Respondent: | AVEDIS VARVARIAN |
| File Number: | SYG 3053 of 2009 |
| Judgment of: | Raphael FM |
| Hearing dates: | 9, 10 & 11 August 2010 |
| Date of Last Submission: | 13 August 2010 |
| Delivered at: | Sydney |
| Delivered on: | 20 September 2010 |
REPRESENTATION
| Counsel for the Applicant: | Mr A Franklin SC |
| Solicitors for the Applicant: | Williams The Law Firm |
| Counsel for the Respondents: | Ms E Peden |
| Solicitors for the Respondents: | Carneys Lawyers |
ORDERS
Respondents to pay the Applicant $50,120.00, together with interest of $9,518.07, for breach of s.52 of the Trade Practices Act 1974 (“TPA”) pursuant to s.82 TPA.
Respondents to pay the Applicant’s costs assessed, if not agreed, pursuant to Part 21 Rule 21.02 2(b) and Schedule 1 of the Federal Magistrates Court Rules 2001.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG 3053 of 2009
| J & M UNITED PTY LTD (ACN 124 338 512) |
Applicant
And
| DANARIS PTY LTD (ACN 083 907 028) |
First Respondent
| AVEDIS VARVARIAN |
Second Respondent
REASONS FOR JUDGMENT
Introduction
In April 2007 the applicant company completed the purchase of a service station in Ryde from the first respondent, a company of which the second respondent was the sole director and shareholder. The applicant is a company formed by Mrs Margaret Messina and the service station was a business investment for her and her son following a redundancy from her lengthy employment at the National Australia Bank. It was intended that Mrs Messina and her son would work in the business. The opportunity to purchase the business had come to Mrs Messina’s notice through her husband, Mr John Messina, who had negotiated the purchase of the service station with Mr Varvarian, the second respondent, commencing in about November 2006. It is the applicant’s case that Mr Varvarian made certain representations about the profitability of the business which induced the applicant company to purchase. Those representations were allegedly made to John and Margaret Messina. It is alleged that the representations were false or misleading and that the business was not profitable at the time it was sold and never became profitable whilst in the hands of the applicant. It is alleged the representations were made as to both present and future matters.
The respondents deny the representations were made in the form alleged. They argue that, even if representations were made, they were not relied upon by the applicant. But even if they were relied upon, the applicant suffered no loss compensable under s.82 Trade Practices Act 1974 (Cth) (the “TPA”).
At the hearing evidence was given by Mr and Mrs Messina, their accountant and an expert accountant for the applicant. Mr Varvarian and Mr Shafique gave evidence on behalf of the respondents who also called an expert, although this witness’ evidence was severely restricted. In these reasons I shall not rehearse all the evidence in detail but shall deal with it on the basis of the issues to be resolved. Upon making my findings of fact, I shall then turn to the law relating to representations for the purposes of determining liability and the quantum, if any, of damages.
History and Findings on the Evidence
Mr Messina had known Mr Varvarian for some years and met him regularly for lunch in a group. Mr Messina considered Mr Varvarian a friend. Mr Varvarian considered Mr Messina a close acquaintance. They had a mutual friend in a Mr Michael Cherote who did not give evidence in the case although he appears to have attended a number of critical meetings and was a regular at the luncheons. Mr Messina was aware that Mr Varvarian owned several service stations and also that he had expressed an interest in disposing of a station he owned in Ryde. Mr Varvarian had purchased this station in September 2005. It operated from premises in Lane Cove Rd. Mr Varvarian had mentioned that he wished to sell the service station in Ryde because he had had some health problems and his doctor had told him to cut down on his workload. In November 2006 Margaret Messina, who was then working as a manager in the National Australia Bank, was offered a redundancy package. She told her husband. He appeared to have thought that she might use her redundancy payment to purchase a business to work in. He approached Mr Varvarian and asked if the service station was still for sale and Mr Varvarian advised him that it was. Mr Messina told Mr Varvarian that he was thinking of buying it for his wife and asked how much Mr Varvarian wanted for the business. He was told $75,000.00. The Messinas discussed this opportunity. Mrs Messina indicated in her evidence that she had not really thought about buying a business with her redundancy payment until her husband mentioned the service station, whereas he had indicated that they had had a discussion and that she had instructed him to approach Mr Varvarian. I do not think this difference in their evidence is of any significance. Mr Messina says that he had a conversation with Mr Varvarian in which he asked Mr Varvarian how much the business made and told him that his wife would want to earn at least $1,000.00 to $1,500.00 a week. In Mr Varvarian’s affidavit he deposes to saying:
“She should be able to earn at least $1000. As you know, what you get out of a service station depends on the price of petrol. At the moment I don’t do a great deal of work in the place myself. I leave it largely to my three employees. If she’s an owner/operator then you could save quite a bit in wages.”[1]
Mr and Mrs Messina both say that after the initial inquiry they had a lunch meeting with Mr Varvarian at the Catalina restaurant in Rose Bay and at that meeting Mr Messina asked Mr Varvarian what the business was making. He claimed that Mr Varvarian said that the business made 7¢ a litre profit on fuel and that one could work on a net figure of 30% profit on shop sales:
“After expenses, I am making anywhere between $1300 to $1500 per week and you will make a lot more because I am not an owner/operator. I have never physically worked in the business and I have staff to run the business because I am not hands on.”[2]
[1] Affidavit of Avedis Varvarian dated 22 June 2010 at para.9.
[2] Affidavit of John Messina dated 22 April 2010 at para.8.
After this luncheon the Messinas and Mr Varvarian agreed to meet at the service station in Ryde. Mr Messina puts this meeting in November and he says that at the meeting Mr Varvarian produced what he describes as a computer generated sheet and pointed to the figures and said:
“You work on 7 cents per litre on fuel and 33% profit on the shop sales. And even though I don’t work at the site, I make $1300 to $1500 net every week.”[3]
The computer generated sheet is found as Exhibit A to Mr Messina’s first affidavit. There are three columns:
[3] Affidavit of John Messina dated 22 April 2010 at para.11.
Month
Fuel Sales
Shop Sales
Jul-06
283,319.21
38,970.79
Aug-06
312,316.80
42,882.47
Sep-06
251,286.82
41,290.20
Oct-06
238,007.62
43,192.89
Nov-06
221,756.85
43,958.15
Dec-06
235,474.06
44,038.91
Jan-07
207,654.97
41,290.20
Average 249,973.76 Average 42,231.94
The months run from July 2006 to January 2007. The fuel sales vary in numbers commencing with 283,319.21 and the shop sales vary in numbers commencing with 38,970.79. The average for fuel sales is said to be 249,973.76 and the average for shop sales is said to be 42,231.94. Mr Varvarian denies that he produced this document. He said that it was produced by Mr Messina from information that Mr or Mrs Messina obtained from the back room of the service station. There is no doubt that Mr Messina was wrong when he said that it was produced at a meeting in November because it refers to sales as late as January of the following year. Mr Messina says he took the document and, at a subsequent meeting with Mr Varvarian, he used the figures in it to calculate the profitability of the business based, not upon Mr Varvarian’s assertion of 7¢ per litre and 30% profit on shop sales, but 5¢ and 25% for shop sales. He says that he asked Mr Varvarian for estimates of his monthly outgoings. His calculations on this basis are found in ink (or pencil) in Exhibit A. They are not entirely clear because of the handwriting, but there is a notation of profit, $3,119.00. Perhaps the more important point for the purposes of this case is that Mr Messina thought that the figures indicated that the business was making a profit. I have considered who might have prepared this document in its original form. I am satisfied that it was not produced until February 2007, after the Messinas had returned from an overseas holiday and recommenced their negotiations with Mr Varvarian. I tend to the view that it was produced by Mr Varvarian because Mr Messina assumed that the fuel sales figures were in litres and the shop sales figures were in dollars, whereas, the fact was that the fuel sales figures were also in dollars and not in litres. This made a significant difference to the question of profitability because at all times a litre of petrol cost more than a dollar and, therefore, the fuel sales figure in litres was less than that which appeared on the document. If Mr or Mrs Messina had produced the document from information in the service station, they would be unlikely to have made this error. Also Mr and Mrs Messina decided to make the purchase on the basis of the figures produced by Mr Messina which showed a profit and did not commence their trial period when the books and records were open to them until February. Mr Varvarian says that at all times the Messinas’ had access to the premises but I am not satisfied that they utilised this to prepare the document.
Mr Varvarian claims that at no time did he tell Mr Messina that he was making $1,300.00 to $1,500.00 per week from the business. He says that he told Mr and Mrs Messina that she might make that sort of money if she and her son worked in the business, in other words, they would be replacing his wages expense with their own labour.
The Messinas told Mr Varvarian that they wished to proceed with the purchase. It was agreed that solicitors would be employed by both parties and a formal contract for sale of business would be drawn up. In the meantime, Mr Varvarian offered the Messinas a trial period of two weeks, during which time they could familiarise themselves with the operation of the business. Mrs Messina formed a company that became the applicant in these proceedings and she and her son attended the premises to learn the ropes. There is some dispute as to the frequency and extent of their attendance. There was an original suggestion that they both attended for full days. But, by the end of the hearing, it was conceded that they did not attend for full days. On the other hand, they attended for longer than was suggested by Mr Varvarian and his witness. In my assessment of the evidence, I would find that Mrs Messina and her son attended the premises for around 5 hours per day over the two week period and that they concentrated on understanding the technical operation of the service station. In Mr Varvarian’s evidence he suggests that Mr Messina was an experienced service station manager. Mr Messina denied this. The evidence which I accept is that Mr Messina worked night shifts for Mr Cherote in a service station that Mr Cherote owned, although he may not have done this for some years prior to the events in question. I am sure that Mr Messina had some knowledge of service station procedures.
Mr and Mrs Messina alleged that, in addition to the other representations, Mr Varvarian also represented that he was selling an average of 250,000 litres of petrol per month.
Mrs Messina deposes that, in about February 2007, she and her husband had a meeting with Mr Varvarian at his Killara service station when the following exchange took place:
“Me “Avedis, what I would like are your profit and loss statements, your bank statements, your BAS statements and anything that can help me do my due diligence to work out the figures you have given me are correct. Can you give me proof that the figure you give us of 7 cents per litre profit on fuel sales is correct from the computer generated sheet you gave us previously?”
JM“You don’t have to do that. Avedis is like family, I trust him and he wouldn’t sell us a dud, if he says he is making between $1,300.00 - $1,500.00 per week then he is making $1,300.00 - $1,500.00 per week”
AV“Margaret, I wouldn’t rip off a prostitute let alone a friend.””[4]
[4] Affidavit of Margaret Messina dated 22 April 2010 at para.11.
Mrs Messina also deposes that, during the trial period which commenced on 27 February, she developed some reservations about the profitability of the business and she could not see how the business was making any money. She contacted Mr Varvarian to discuss her concerns and recalls a conversation:
“Me “Avedis, I can’t see how the business is making any profit”
AV“Don’t worry the business is making money but all the profit is under the ground and in the stock.””[5]
She also discussed her concerns with her husband:
“Me “John, I’ve been working in the business for the last week and I can’t see where it is making any profit”
JM“Look Avedis is like family I trust him implicitly and if he says it is making $1,300.00 - $1,500.00 net profit per week then I believe him. Anyway profit is averaged out over the whole year not just a week or two. Avedis wouldn’t sell us a dud business.””[6]
[5] Affidavit of Margaret Messina dated 22 April 2010 at para.15.
[6] Affidavit of Margaret Messina dated 22 April 2010 at para.16.
Mr Varvarian deposes that by early March 2007 Mrs Messina seemed to understand the operation of the business and was resisting his attempts to assist her. However, she did continue to ring him with queries which mostly concerned the accounting. He says that, in or about the second week of March, Mr Messina told him that Margaret and Jamie had a pretty good idea of the business but wanted to make sure that they could run it and that everything was okay. Although exchange had not taken place, he wanted to know whether Mr Varvarian would accept payment for the stock so that Mrs Messina and Jamie could go into the business and start to operate it.
“We would keep the takings but you would have the benefit of being paid for the stock now. If for any reason we didn’t go ahead, then we would have to do another stock take and square up. Although I had reservations about doing so, I agreed to this proposal.”[7]
This trial period continued from the second week in March to 27 April, a period of approximately six weeks.
[7] Affidavit of Avedis Varvarian dated 22 June 2010 at para.18.
The contract which the parties eventually exchanged, on or around 26 April 2007, contained two relevant clauses:
“8. The Purchaser expressly acknowledges the provisions of any records, account and information by the Vendor relating to the business is not intended by the Vendor to be a warranty and/or representation or (sic) is it relied on by the Purchaser for that purpose. The Purchaser acknowledges having relied solely and wholly on his own enquiries and investigations and his own independent financial and legal advice in relation to all matters concerning the performance and profitability of the business.
18. No Reliance on Information
The Purchaser acknowledges that it does not rely on any:
(a)Letter, document, advertisement, brochure, correspondence or arrangement whether oral or in writing as adding to or amending the terms, conditions, warranties, and arrangements set out in this Contract which such terms, conditions, warranties and arrangements constitute the only agreement between the Vendor and the Purchaser; or
(b)Warranty, statement or representation made or given by the Vendor, the Vendors agent or any other person on behalf of the Vendor except as such are expressly provided herein but that it has relied entirely upon its own investigations relating to it and inspection of the Lot and the Common Property, and all improvements erected on the land.”
Both Mr and Mrs Messina were asked whether they took advice from their solicitor and agreed that they did. Mr Messina said the solicitor explained the contract to him and that he understood what the solicitor was telling him. He had no complaint about the solicitor’s advice. Mrs Messina also said that the solicitor explained the contract, that she read it and understood that she was buying a business. She understood that there were other terms in the contract, although she did not recall them and did not discuss them. The solicitor would have done what he was expected to do and she had no complaints against him.
The Messinas agreed that they had discussed the purchase with their accountant before contracts were exchanged. The accountant asked them if they had done due diligence and they said that they had not. Mr Messina said that Mr Varvarian was a friend and that he had done the figures on the basis of 5¢ a litre on fuel and shop sales at 25% and it had come out alright. He thought the business was worthwhile on that basis. But Mrs Messina put the most weight on Mr Varvarian’s representation that the business was making $1,500.00 a week. That was what she focussed upon. Mrs Messina discussed the purchase of the business with Mr Newcombe, her accountant.
“And did Mr Newcombe suggest to you that you should check the figures of the business before you purchased it?
Mr Newcombe asked me if I had done my due diligence. I said to him that I have been given no profit and loss statements, or statements to basically ascertain if this was, in fact, correct. We showed Mr Newcombe the piece of paper that had the shop sales and the amounts of fuel being sold, which was the piece of paper that John had, and Mike Newcombe – John turned around and said to Mike Newcombe, “it is not necessary for us to do due diligence. We are purchasing this from Avedis, which is a very good friend of mine, and we trust him implicitly.” And that is exactly the conversation that I remember.” [T56].
When Mrs Messina commenced the trial periods, the infrastructure of the service station had a number of problems. First, of the six bowsers, two had been chained up and locked because they did not work. It appears that the bowsers were the responsibility of the landlord. Mrs Messina told that Mr Shafique, one of Mr Varvarian’s employees who continued working with her, told her that those two bowsers had never worked. The question of the two non-operational bowsers was never taken up with Mr Varvarian. Mrs Messina assumed that he was making his weekly profit without them.[8] It would appear that there are meters which indicate the amount of fuel in the underground tanks, these meters did not work and they could not be calibrated. Estimates of the amount of fuel in the underground tanks were obtained by use of a dipstick and dipstick readings had to be taken every morning at the commencement of the shift and every night. Ordering new fuel was based upon these readings. The other bowsers were old and also broke down with increasing frequency. There were times when they were not working and customers would become frustrated at having to wait a long time to purchase fuel. Eventually, after complaints to the landlord, some second-hand bowsers were purchased and used to replace the most damaged bowsers. Another problem referred to by Mrs Messina was the till. It seems that the till draw frequently fell out after opening spilling money and dockets all over the floor.
[8] [T92]
There was a dispute in the evidence about the use of the till. The records indicated that there were a large number of “voids” or “no sales” being rung up. The respondent suggested that this may have indicated that the Messinas were taking money out of the till and thus depressing the daily takings. Mrs Messina’s evidence was that the cash from the till was being used to make payment for the goods purchased but all those invoices were tallied in a general ledger or cashbook. She agreed that there were a large number of no sales and voids rung up but she said that this was done because of problems with the till in opening it and closing it and because she would ring up a no sale or void every time she wished to open it. She would open the till quite frequently to see how much cash was in there so she could know whether to transfer cash from the till into the safe. She told the Court that she ran the business as her own and she did not think that she would one day have to come into Court and explain how many times she opened the till. Her son Jamie also appears to have used voids and no sales frequently. As the case evolved, it seemed to me that the suggestion that this indicated some form of skimming became less and less pronounced. I am of the view having heard Mrs Messina’s evidence that her explanation was truthful and the large number of voids and no sales rung up had no effect upon the figures obtained for goods (including fuel) sold i.e. there were no cash receipts that were unrecorded and any cash payments out found their way to the journal.
The Court questioned Mrs Messina about the profitability of the business during the trial period.
“What I’m asking you is that in that period, right? Yes.
In that period, did you ever try and work out how much money you were making? Yes. Of course.
And what result did you come to? I worked out that we were not making any money. Yes. And I actually took it
Well, did you tell your solicitor or your accountant or anybody about that? I spoke to John about that. I spoke to Avedis about that and
In that period? In that period absolutely.
…
Okay. No, you tell me. Just remind me. Okay?---I was so concerned- - -
Yes. This is in the period before that?---Yes.
Yes?---I was so concerned that I would go home and I would say to John, I’m doing these figures, I’m taking these outgoings, I’m taking what petrol goes in, what goes out. I’m reconciling things and I said I cannot see where there’s any money being made---
I remember that sort of statement?---Yes.- - - Then
That was during the trial period, was it?---Yes.
What I call the trial period. What you call something else?---That was through - that was before the stock take and ---
Yes. Before the stocktake?---Before the stock take. That was before the stocktake. I went to Avedis before the stocktake through my concerns because my husband got sick of listening to my whinging and he wanted to prove to me that my thoughts were not correct. We went to a meeting with Avedis and it was at the Killara Service Station and I basically said to Avedis look I can’t see where I’m making any money here. I can’t see it. Like when I’m doing reconcile - I can’t - and the response to that was well are you taking into the account that, you know, your money is under the ground that’s in the fuel---
I remember that. Yes. Yes, yes, yes. Okay?---And I said well yes. It is under the ground, it is in the fuel and I basically turned around and I said well - and he said well, you’ve got to take into consideration, you know, if you want to see money in your bank account, you know, like don’t get any fuel. And I said well, I’m just trying to understand here where I’m making money. And I said can I - and that is the occasion when I actually asked I want to see your profit and loss statements, your balance sheets. I want to see bank statements. Prove to me that what you said to me is $1500 - you give me these documents so I can have a look to satisfy myself.
Yes. Okay. And what did he say to that? And he said well, I don’t have them at the moment, they’re with my accountant or whatever the fact was at the time. And then as we were having this conversation and Avedis turned around and said- - -
And is this paragraph 16 and your husband said words to this effect- - -?- - - And my husband said - - -
- - - look, Avedis is like family. I trust him. Is that what you’ve got in your affidavit?---Absolutely. He basically told me something along the lines of Avedis- - -
… Yes?---I would trust Avedis with my life- - -
Well, you don’t have to- - -?--- No. This is basically what he said- - -
No. Listen. Because you’ve given evidence about it. I’m not trying to - I don’t want to try and make you change your evidence?---Yes. No, no, no.
Because you’ve said in your affidavit these words apparently “and look Avedis is like family”. I trust him implicitly. He says he’s making $1300 to 15 net profit and I believe him. Something like that?---Yes. Yes. Absolutely.”[9]
[9] [T95-96]
Notwithstanding her concerns, Mrs Messina persevered in the trial period and on 26 April 2007, after her redundancy monies had come through, exchanged contracts and settled the sale. The amount agreed to be paid was $75,000.00 for the goodwill of the business. The $75,000.00 was paid as to $45,000.00 on settlement and $30,000.00 later as cash. There is a dispute between the parties as to who wanted the cash payment. Mr and Mrs Messina say that it was a request to Mr Varvarian and Mr Varvarian said that it was something put forward by Mr Messina. Mrs Messina produced some bank records from her account at the NAB. These show that on 17 April 2007 there was a withdrawal of $30,000.00 and another withdrawal of $30,000.00 on 19 April as well as a payment to an unspecified account of $40,000.00 on the 19th. Later evidence in the cross-examination of Mr Varvarian revealed that the cash payment had not been declared in the company’s accounts and the company’s tax return for that year was later amended so that it was included. The excuse given by Mr Varvarian’s accountant to the Fisc was that the purchase took place over the period surrounding the end of the financial year and that was why the $30,000.00 was not initially included. Mr Varvarian gave evidence that a cash payment was made in June 2007. I do not accept Mr Varvarian’s evidence. I think it far more likely that a vendor would ask for payment in cash than a purchaser would ask to make the payment. I think that the bank statements seem to corroborate the Messinas’ story and I think it improbable that Mr Varvarian would have waited until late June to receive payment when he had already given the Messinas a generous trial period. The excuse given to the tax office was patently untrue because on Mr Varvarian’s own evidence the payment was made before the end of the tax year. Mr Varvarian’s unsatisfactory evidence in relation to this aspect of the matter made me very cautious about his other evidence on matters that were in contention.
After completion Mrs Messina continued to operate the business. She did seek help from Mr Varvarian and she maintained his casual staff. She became so concerned about the profitability of the business that she asked her husband to arrange a meeting with Mr Varvarian at his office in Killara. This meeting was held around 20 May. At this meeting Mr Varvarian again suggested to Mrs Messina that the profit in the business was in the ground in fuel and in stock. Mrs Messina asked to be provided with BAS statements, profit and loss statements and the balance sheet for the business. But these were not provided.
By about July 2007 Mr Newcombe became involved and he looked at the figures produced by Mrs Messina and those that were produced by Mr Varvarian and which had been left in the premises. He came to the view that the business was not profitable. They discussed their problems at a meeting with Mr Varvarian which also turned upon the position of the landlord. The Messinas considered that the rent being asked was far too high and Mr Varvarian appeared to concur. Mr Varvarian was a friend of the landlord’s and appears to have been used as a conduit to him by the Messinas. Mr Varvarian suggested that the Messinas ask the landlord for a reduction in rent and a number of very emotional emails were exchanged. The landlord did make an offer to reduce the rent by $10,000.00 but it is not clear whether it was ever taken up. He also eventually replaced the worst of the bowsers. It was also in May 2007 that Mr Messina gave Mr Varvarian $5,000.00 as a gift for selling the service station to his wife.
There then appears to have been a hiatus until about May 2008 when at one of their regular luncheon meetings Mr Messina accosted Mr Varvarian about the business and, in particular, about the representations that he said Mr Varvarian had made prior to the purchase. The conversation was heated. Mr Messina recorded it and a transcript is annexed to his affidavit. In the conversation, Mr Messina alleges that Mr Varvarian told him that the business was making between $1,300.00 and $1,500.00 per week and the transcript of the conversation appears to me to show that Mr Varvarian did not deny those representations. It will be recalled that Mr Varvarian had always maintained that the representations he made was that this sort of money could be made by Mrs Messina operating the business herself. In other words, he was not saying that he was making that amount of money but it would be available to her if she did not have to pay the amount he did for wages. In the recorded conversation, Mr Varvarian is heard to say:
“AV: So I took up the lease, but when I operated that site John that site was making me $1300 to $1500 a week without working in it John…
JM: So you were never there and you were making $1500 a week?
AV: I was never there John.
JM: So you were never there making $1500 per week having to employ full-time staff yet my wife and son who work 60-70 hours per week and employ part-time staff struggle to make $1200 per week. How does that work? It doesn’t add up.
AV: I was never there. I was never there John. Let me tell you, that site paid my bills. Out of it I paid Lisa’s mobile phone bills, my kids’ school fees and that sort of stuff. It didn’t make me a great income but I didn’t lose money either.”
On 28 August 2008 the applicant sold the business for $35,000.00. Prior to this sale, there had been some discussions with Mr Shafique who gave evidence. Mr Shafique had been dismissed from employment in the business and had indicated to Mrs Messina that he might be interested in purchasing it in about March 2008. There is a letter dated 6 March 2008 annexed to the affidavit of Mr John Messina sworn on 27 July 2010 addressed to Mr Shafique offering to sell him the property for $115,000.00. Mr Shafique’s evidence was that he was initially asked for $150,000.00 and pointed out that he was well aware that the Messinas had only paid $75,000.00 for the business. He offered $80,000.00. Mr Shafique said that the sale did not go through because he had some difficulty with his proposed partner and also because he could not continue to negotiate with Mr Messina because Mr Messina was rude to him. Whilst I am satisfied that Mr Shafique was a genuine purchaser, the evidence does not go so far as to allow me to make a finding that he could have completed at the purchase price of $80,000.00.
At this stage in the rehearsal of the evidence I must consider whether or not I accept that the representations that were alleged by Mr and Mrs Messina were actually made by Mr Varvarian. The applicant does not pursue the claim based upon the representation that the business could make 30% on shop sales but it does allege that he made the three other representations as to the total profit per week of $1,300.00 to $1,500.00, the profit on petrol sales of 7¢ per litre and the average monthly fuel sales of 250,000 litres. I am satisfied that the first and second representations were made. I accept Mr Messina’s recollection of his conversations with Mr Varvarian and that, however trusting he might have been of Mr Varvarian, he would not have suggested to his wife that she buy a business about which he knew absolutely nothing. The first two matters upon which the representations were made seemed to me to be the minimum that any intending purchaser would wish to know and I have little doubt that that information was provided. I am satisfied that Mr Varvarian produced the fuel and shop sale document on which Mr Messina worked prior to exchange of contracts. It has not been alleged that Mr Varvarian misrepresented the situation regarding the fuel sales by silence and it is quite clear that Mr Messina did his figures assuming that those were per litre sales rather than dollar sales. I think it unlikely that Mr Messina would have done figures on the basis of a 5¢ per litre profit if it had not been suggested to him that the true figure was 7¢ because it is clear from this document and his oral evidence that he was trying to do figures on the basis of a more conservative estimate. I believe that Mr Varvarian made the representation about the total profit per week because I prefer the evidence of the Messinas to his evidence and because Mr Messina’s evidence is corroborated by the recorded conversation. Having made these findings, it is now necessary to look at the more complex legal questions that they raise.
Were the Representations Misleading?
The applicant’s most significant representation was that the business was making a profit of between $1,300.00 and $1,500.00 per week. The short answer to the question whether or not this is true is that it was not. The applicant provided evidence from an expert, Mr Coy, an independent CPA. His CV establishes him as an expert accountant in the service station industry. He examined the books and records of Danaris and concluded that in the period between 1 September 2005 and 30 June 2006 there was a shortfall of approximately $1,192.00 per week and, in the period between 1 July 2006 to 15 March 2007, there was a shortfall of approximately $2,686.00 per week. In making these calculations, Mr Coy excluded from the profit and loss accounts with which he had been provided certain consultancy payments which appeared to have nothing to do with the business. When the accounts were examined in more detail in his cross-examination, he agreed that the figures were somewhat deflated by a very high superannuation payment of over $47,327.00. However, Mr Coy felt that it would not have affected the basis of his report which was that the business made a loss. Mr Coy agreed that, if the wages figure for the service station had been excluded, the business would have made a profit. There would have been a larger profit if the superannuation payments had not been made and the wages had not been paid.
The respondents called Mr Richards as their expert. It is fair to say that most of Mr Richards evidence was excluded because it was not responsive to the questions asked of him and he did not have a qualified accountancy background. The two areas in which his evidence was admitted related to the average fuel sales per month and there was also admitted the statement “the site prior to changeover did trade at a loss”. The only basis upon which the service station could have traded at a profit during the two years or so prior to it being purchased by the applicant was if no wages were paid and no superannuation payments were made. I have accepted that Mr Varvarian told Mr and Mrs Messina that he was making between $1,300.00 and $1,500.00 per week even though he was paying wages. He did not tell them that the business was making a loss which could be alleviated by substituting wages to outside staff for wages to the new proprietors or, more accurately, not paying the new proprietors at all so that the business appeared to be making a profit. The representation was false.
In regard to the representation by Mr Varvarian that the service station made around 7¢ a litre of fuel sold, this is contradicted by the evidence. Mr Coy’s conclusion is that the amount was between 5 and 6.2¢ per litre over the period he examined. Much was made of the fact that the price of fuel varied from day to day and so predicting such a figure would be difficult. However, Mr Varvarian did make a statement about the past figure which the applicant says also predicted the future. The most recent figures that Mr Coy examined show that the profit had slipped from 6.2¢ per litre to 5¢ per litre. At this level, the margin for error in the statement (which could well have been present if the figure was 6.2¢) must be excluded and the only conclusion to be drawn is that the statement was misleading.
The third representation allegedly relied upon was that the service station was selling 250,000 litres a month. Mr Coy’s calculations show that, between 1 September 2005 and 30 June 2006, a total of 1,501,220 litres were sold and, between 1 July 2006 and 15 March 2007 1, 721,727 litres were sold. Mr Coy calculates that the average number of litres per month in the earlier period was 150,122 and in the second period 202,556. The respondent notes that there were no direct representations on this matter. I have found that Mr Varvarian gave Mr Messina the print out but that print out did not state that the figures for fuel sales was in litres and it is now accepted that it accurately represented the sales in dollars. Mr Messina assumed that the sales were in litres, did his calculation on that basis and Mr Varvarian did not demure from them. However, this representation by silence has not been pleaded. I would have to conclude that I cannot be satisfied that the representation was made, therefore, it could not be misleading.
Were the Representations as to Future Matters?
The applicant argues that the representations were as to both present and future matters. They were made so as to indicate what profit the applicant could expect in the future if it purchased the business. The Court questioned Mr Varvarian on what exactly he meant when he made the representation about $1,500.00 per week.
“You see, there’s two possibilities, isn’t there? There’s a possibility that a site that turns you in $1500 a week without lifting a finger can, under efficient owner-occupier control, turn in two thousand or two thousand five hundred dollars a week?‑‑‑No.
There’s also the possibility that a site which makes no money to a person who is not there, because he’s paid staff, can have - to make $1500 a week, because the owner‑operator isn’t taking a wage and that’s what they’re making. And do you see what I mean, it’s two different things?‑‑‑Yes. I’ve always said to them ‑ ‑ ‑
Well, which one of the two were you talking about?‑‑‑I always stipulated as an owner/operator, without paying out wages to anyone, they would make that sort of money, because that’s what I was paying out in wages. So rather than pay someone wages it would be their income.”[10]
I have found that the actual representation which Mr Varvarian made was that he was taking between $1,300.00 to $1,500.00 per week and paying staff wages. It seems to me that the references which he made to owner/occupiers must have been references to the future. I am equally satisfied that the representation as to 7¢ per litre was also intended as a representation of the future. It was clear that Mr Messina was asking Mr Varvarian those questions so that he could work out what profit his wife would be likely to make. Mr Varvarian knew that the representation was being used for that purpose. In so far as the representations were in respect of a future matter, the provisions of s.51A of the TPA apply:
“Interpretation
(1)For the purposes of this Division, where a corporation makes a representation with respect to any future matter (including the doing of, or the refusing to do, any act) and the corporation does not have reasonable grounds for making the representation, the representation shall be taken to be misleading.
(2)For the purposes of the application of subsection (1) in relation to a proceeding concerning a representation made by a corporation with respect to any future matter, the corporation shall, unless it adduces evidence to the contrary, be deemed not to have had reasonable grounds for making the representation.
(3) Subsection (1) shall be deemed not to limit by implication the meaning of a reference in this Division to a misleading representation, a representation that is misleading in a material particular or conduct that is misleading or is likely or liable to mislead.”
An objective reading of the representations made by Mr Varvarian was that the weekly profit of between $1,300.00 and $1,500.00 that he was making was a base figure that the applicants as owner/occupiers could take into the business and improve upon. As there was no such profit in the first place, only a much more substantial loss, the representation cannot be said to have been made upon reasonable grounds. The representation concerning the 7¢ profit per litre on petrol sales, insofar as it referred to the future, could have been justified as having been made upon reasonable grounds by evidence that, for example, petrol margins were increasing, but no such evidence was brought. That representation is likewise deemed to have been misleading.
[10] [T198-199]
Reliance
Reliance is a question of fact; Poulet Frais Pty Ltd v The Silver Fox Company (2005) 220 ALR 211 at [101]-[103]. The respondent argues that there is considerable evidence in this case which would point to a lack of reliance. Firstly, it argues that Mrs Messina and her son spent several weeks at the service station during two trial periods which lasted effectively from 27 February 2007 to 27 April 2007. My reading of the evidence is that the two of them did go into the premises during the first two week trial, but it was essentially to learn how the service station operated, rather than to investigate its financials. She then spent six weeks from 16 March 2007, when the stocktake was done and she purchased the stock, until the exchange of contracts on 27 April 2007. During this period she had access to all the financial records of the business that were on the computer. She began to have concerns as to the business’ profitability. She was aware that she was not legally bound and the evidence of her husband and Mr Varvarian was that, if she had pulled out at this time, there would have been an adjustment on stock values and no other payment. It was in this period that Mrs Messina saw the accountant Mr Newcombe who advised her to do due diligence. It was during this period that she first asked Mr Varvarian for the profit and loss and BAS statements but did not press him when he said that they were not immediately available and after her husband had told her that she should trust Mr Varvarian’s word. She did not express her concern about the profitability to either her solicitor or to Mr Newcombe. She signed the contract on 26 April, notwithstanding her concerns. She was a former bank manager who had some understanding of figures.
The respondent also points out that the decision to buy the business was based not upon Mr Varvarian’s profitability estimates at 7¢ per litre and 30% on shop sales but on an estimate of 5¢ a litre and 25% on shop sales. These were the figures that Mr Messina did on the document that I have found was given to him by Mr Varvarian. In respect of the fuel calculation, this was done on the basis of those figures being litre figures and not dollar figures. I have not accepted that Mr Varvarian misled Mr Messina in this regard and so he cannot be considered a conduit. The respondent points out that Mr Varvarian was quite uninvolved in the deliberations of Mr and Mrs Messina in their decision to purchase the business. He was prepared to let them have a trial in the business. He did not provide them with complete financial records, but that was not made a condition of the purchase. The Messinas employed a solicitor who advised them upon the contract that had been submitted and they had no complaints regarding that solicitors advice. The contract for sale included special conditions 8 and 18 which have been extracted above at [11].
The applicant argues that the very conduct of the respondents establishes their reliance. Mr Messina trusted Mr Varvarian implicitly. He knew that Mr Varvarian was the proprietor of several service station businesses. He had known him for some 10 years before the conversations in which the representations were made and there is no evidence that he had any reason to disbelieve anything that Mr Varvarian told him. In the February 2007 meeting, when Mrs Messina asked for the profit and loss statements, financial statements and BAS statements and for proof that the 7¢ per litre profit on fuel sales was correct and Mr Messina dissuaded her from taking the matter further by saying:
“Avedis is like family, I trust him and he wouldn’t sell us a dud. If he says he’s making $1,300.00 to $1,500.00 per week then he is making $1,300.00 to $1,500.00 per week.”
Mr Varvarian acknowledged this corroboration of his representation by saying:
“Margaret, I wouldn’t rip off a prostitute let alone a friend”
When Mrs Messina raised the question of profitability again with her husband he repeated that he trusted Mr Varvarian and that he believed the profit that Mr Varvarian said he was making.
Mr Messina in response to a question from the Court said he is neither a shareholder or a director of the applicant. He did act as the applicant’s agent in discussions with Mr Varvarian after completion, but the company only came into the hands of Mrs Messina on 9 March 2007 and I am of the view that evidence reveals that the decision in relation to the purchase was taken by Mrs Messina. In Mrs Messina’s affidavit, she deposes to a conversation with Mr Varvarian in which, in response to her concern that she could not see how the business was making a profit, he said “don’t worry, the business is making money but all the profit is under the ground and in the stock.” Mr Varvarian’s evidence confirms that a conversation of this type occurred.
Section 82 of the TPA provides that in order to recover damages the applicant must prove that loss or damage suffered was “by” conduct in breach of the Act. The test for causation remains largely undefined. In McCarthy v McIntyre [1999] FCA 784, a Full Court, Hill, Sackville, Katz JJ said at [49]:
“Perhaps there is no simple test capable of formulation. It is necessary that the issue of causation be approached in what the High Court in Wardley called a "practical or commonsense" way. In many areas, the courts have applied a "but for" test of causation. As McHugh, Hayne and Callinan JJ pointed out in Marks v GIO Australia Holdings Ltd at 346, the idea that a "but for" test is the exclusive test of causation has been found wanting in some contexts and it may yet be found to be wanting in the context of ss.82 and 87 of the Trade Practices Act (and their State equivalents). Whether this be the case or not, the "but for" test, applied in a common sense and not a pedantic way, provides still a useful approach to the issue of causation.”
In this case, the applicant pleaded actual reliance on the representations. An inference as to reliance will arise in the event that a material representation is made which is calculated to induce the representee to enter into a contract and that person in fact enters into the contract; Gould v Vaggelas (1985) 157 CLR 215. I am satisfied that the respondents have not produced any evidence capable of rebutting this inference. The evidence relating to Mrs Messina’s access to the business in the two trial periods and the doubt which she expressed regarding the profitability of the business does not establish that she understood the true financial position of the business or that she did not rely upon the representations. The fact that a person expresses some level of distrust about a representation is an insufficient basis for a defendant to succeed in resisting a claim under the TPA; Transglobal Capital Pty Ltd & v Yolarno Pty Ltd [2005] NSWCA 68 at [13].
The applicant submits that the negotiations must be considered in the context of the friendship that existed between the parties. I accept this and note that whilst the Messinas’ failure to conduct due diligence was unwise, it is properly viewed as a direct consequence of reliance on Mr Varvarian’s representations. There are many examples of cases in which the causal chain allowing recovery of damages under s.52 is not broken even where the applicant has failed to take reasonable care of his own interests by undertaking a proper investigation of the figures presented; see for example Neilsen v Hempston Holdings Pty Ltd (supra) at 313. In Argy v Blunts & Lane Cove Real Estate Pty Ltd (supra) Hill J considered whether the failure of a solicitor, acting on his own behalf, to notice missing pages in a s.149 certificate constituted supervening conduct sufficient to sever the chain of causation between the loss suffered and the defendant’s misleading representation:
“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. However, in my view, the present cannot be said to be that case.”
More recently in Henville v Walker (2001) 206 CLR 459 McHugh J commented that:
“In exceptional cases, where an abnormal event intervenes between the breach and damage, it may be right as a matter of common sense to hold that the breach was not a cause of damage. But such cases are exceptional.”
One such case cited in “The Law of Misleading or Deceptive Conduct” (Lockhart C, LexisNexis Butterworths, 2003, 2nd ed.) at [10.16] is Beale v Meehan [2000] NSWSC 282 where the defendant solicitors attempted to cross-claim against a third party for misleading statements regarding the registered proprietor of premises on which their client’s injury had occurred. In that case the negligence of the defendant in not properly investigating all the available information concerning potential defendant/s was sufficient to sever any causal link between the alleged misrepresentation and the damage incurred. At [47] Adams J noted:
“What will amount in any particular situation to a relevant failure to take reasonable care by a person who acted in reliance on what they believed to be the representation created by the defendant's conduct is a matter of fact and degree. One of the material considerations is, of course, the circumstances in which the information is provided. There is an important distinction to be drawn between those cases where the maker of the representation is acting pursuant to a distinct commercial interest as, for example, the vendor of the hotel in Hill & Anor v Tooth & Co Ltd & Ors (1998) ATPR para 41-649 and a case where, as here, information was provided without consideration and for no discernible commercial advantage but merely in order to be helpful to a person who made an enquiry. In such cases, the possibility that the information might not be gathered with due care or only with minimum inconvenience and hence may not be completely reliable is obvious, especially when the enquirer is a professional person who has not only a capacity to assess the reliability of information given but also the means and the duty to do so.”
In the instant case, the representations were clearly made to advance Mr Varvarian’s commercial interests. The applicant was entitled to assume that those representations were carefully considered and intended to be relied upon. In this regard, it is relevant that Mr Varvarian was present when Mr Messina reassured his wife that an inspection of the financial documents would not be necessary during the February meeting at the Killara service station. As such, it would have been reasonably foreseeable that the Messinas might not carry out due diligence as a result of the representations. In these circumstances, I am satisfied that the applicant’s failure to conduct due diligence did not break the chain of causation.
I have also considered the effect of Mr Messina’s assurances to his wife regarding the trustworthiness of his friend and whether Mrs Messina, in fact, relied upon these assurances in purchasing the business rather than the original representations. I note that on two occasions Mr Varvarian personally responded to Mrs Messina’s doubts regarding the profitability of the business. To the extent that Mr Messina privately assured his wife that she could rely on Mr Varvarian’s statements, I am satisfied that this does not significantly detract from the inducement inherent in the original representations. People are often swayed by several considerations and the offending conduct need not be the only cause of the applicant’s loss or damage. The law attributes causality to a single one of those considerations, provided it had some substantial rather than negligible effect; Como Investments Pty Ltd v Yenald Nominees Pty Ltd [1997] FCA 12. In the circumstances of the instant case, the contravening conduct was a substantial reason for the purchase of the business. Had it not been for those representations, the contract for sale would have in all probability not have been executed.
One other matter which is relevant to the issue of reliance is the “no-reliance” clauses extracted above at [11]. I recently considered the effect of such clauses in Robertson v Knott Investments Pty Ltd [2010] FMCA 142 at [24]:
“There was some discussion during the hearing of the relevance of Clause 23 in the employment contract extracted in these reasons at [20]. That clause provides that the contract and letter of offer “supersede and exclude any (or any alleged) references to length of service ... by the company, its agents, contractors or employees, or any Recruitment Agency on the Company’s behalf”. Although not worded in the conventional way, Clause 23 amounts to a “no reliance” clause and, as such, it has evidentiary value to the issue of reliance. In Poulet Frais Pty Ltd v The Silver Fox Company Pty Ltd [2005] FCAFC 131; (2005) 220 ALR 211 (“Lenard’s case”), a case concerning a franchise agreement, the Full Court (Branson, Nicholson and Jacobson JJ) acknowledged that the authorities recognised that reliance is a question of fact and that the existence of an exclusion or qualification clause is relevant to a determination of whether an applicant has established reliance [101] – [103]:
“As the learned author of Trade Practices Law: Restrictive Trade Practices, Deceptive Conduct and Consumer Protection observes at [11.720], there are numerous authorities for the proposition that clauses seeking to exclude liability for contraventions of s 52 of the TPA are not effective but the authorities admit of the possibility that in some circumstances such a clause may be operative (JD Heydon, LBC, Vol 2, Sydney; see also C Lockhart, The Law of Misleading or Deceptive Conduct, 2nd edn Lexis Nexis Butterworths, Sydney, 2003 at [10.17]-[10.18]).
We do not need to resolve the divergent explanations given in the cases. It is sufficient to say that the authorities recognise that reliance is a question of fact and that the existence of an exclusion or qualification clause is relevant to a determination of the question of whether an applicant has established reliance.
In Keen Mar Corporation Pty Ltd v Labrador Park Shopping Centre Pty Ltd [1989] FCA 46; (1989) ATPR (Digest) 46-048 (`Keen Mar') Morling and Wilcox JJ were of the view that a well-drafted disclaimer, drawn to the attention of the contracting party and acknowledged in writing to have been made, was sufficient to negate reliance. Their Honours reversed a finding of reliance made by the primary judge (see at 53,147 and 53,151). As in the present case, there was evidence that the applicant had legal advice.”
Whilst the applicant in the instant case had legal advice, I am not satisfied that the disclaimers justify a finding that the representations did not induce it to purchase the service station. Unlike the facts in Keen Mar Corporation Pty Ltd v Labrador Park Shopping Centre Pty Ltd [1989] FCA 46, Mrs Messina did not acknowledge this clause in her own handwriting, nor did she initial it. Nor was there any evidence that the exclusion clause had been specifically brought to the attention of Mrs Messina before the contract had been exchanged; see Thors v Weekes (1989) 92 ALR 131 at 148-9 per Gummow J; Leda Holdings Pty Ltd v Oraka Pty Ltd [1997] FCA 1385 and Walcan v Superior Coffee & Cakes Pty Ltd [2002] FCA 1211 at [72] per Kiefel J.
Capital Loss
The applicant claims a capital loss as the difference between the price paid and the sale price ($75,000.00 - $35,000.00) plus commissions and legal costs. The total amount is $51,339.00. On the other hand, the respondent submits that the correct measure of damages is the difference between the price paid for the asset and its true value at the date of acquisition; Potts v Miller (1940) 64 CLR 282 (“Potts”) at 297; HTW Valuers v Astonland Pty Ltd (2004) 217 CLR 640 (“HTW Valuers”). Since the applicant has not produced any evidence as to the true value of the business when purchased, the respondent submits that no award of damages should be granted for capital loss.
The Full Court has recently considered the question of appropriate measure of damages in North East Equity Pty Ltd v Proud Nominees Pty Ltd [2010] FCAFC 60 (“North East Equity”). In that case, Sundberg, Siopsis and Greenwood JJ found that the primary judge had failed to consider the applicant’s contention that an alternative methodology ought to be applied in the circumstance of that case. The applicants, who had purchased a carrot processing plant, claimed that an appropriate measure of damages under s.82 was a comparison of the price paid and the value of the asset at the date of trial. However, his Honour did not accept that the difference between the price paid and a valuation at a date some four years later was an appropriate measure of damages. The primary Judge rejected the applicant’s claim, in part because his Honour was not satisfied that the representations were misleading and went on to note that there was no evidence of the true value of the asset at the date of acquisition and, therefore, no evidence that the applicant had paid more for it than it was worth.
In considering the issue on appeal, the Full Court took into account the principles discussed in HTW Valuers and that Court’s discussion of Smith New Court Securities Ltd v Citibank NA [1997] AC 254 (“Smith New Court Securities”). In HTW Valuers the Court accepted that it may be appropriate for a court to assess damages based on an entitlement to recover the difference between the purchase price of the asset and whatever value was left in the hands of the buyer. The circumstances where this method might be more appropriate to compensate an applicant than the transaction date rule were considered in Smith New Court Securities. There Lord Brown-Wilkinson at 267 summed up by saying that:
“…although the circumstances in which the general rule should not apply cannot be comprehensively stated, it will normally not apply where either (a) the misrepresentation has continued to operate after the date of the acquisition of the asset so as to induce the plaintiff to retain the asset or (b) the circumstances of the case are such that the plaintiff is, by reason of the fraud, locked into the property.”
The Court in HTW Valuers approved of these principles and suggested that this method would be appropriate to the facts in that case because the asset acquired was not a readily marketable asset. In North East Equity the Full Court, although not deciding the issue, came to a similar conclusion regarding the appropriate measure of damages. Relevantly, the applicant had to conduct its business through the use of the new processing plant and was, in that sense, dependent upon and locked into the retention of that asset.
I have considered whether the instant case is a suitable vehicle for the application of the alternative method. The applicant submits that it was “locked” into retaining the asset by virtue of the lease. But this is not a significant consideration when what is being valued is a business. The applicant bought the business and took an assignment of the lease. It sold the business and assigned the lease to the purchaser. It was not locked in or, if it was, a key was readily available and availed of. There is no evidence that it took an unusual time to sell the service station and in any event it has made a claim to revenue loss during the period up to sale.
But perhaps the better approach is to look at those cases which have been directly concerned with the sale of a business rather than a capital asset such as carrot processing plant, a shopping centre or shares. I have considered the authority of Yorke v Ross Lucas Pty Ltd (1982) 45 ALR 299. The facts in that case were very similar to the instant case. The applicants purchased a record shop on the basis of representations concerning the profitability of the business. After several months running the business the applicants discovered that the representations had been false and the business was in fact operating at a loss. They sought advice from their accountant who encouraged them to continue running the business whilst commencing proceedings for rescission. Citing Toteff v Antonas (1952) 87 CLR 647 the respondents argued that no damages should be awarded for capital loss because there was no evidence of the business’ true value at the time of purchase:
"When what he has been induced to do is to make a purchase from the defendant and part with his money to him in payment of the price, then, if the transaction stands and is not disaffirmed or rescinded, what is recoverable is `the difference between the real value of the property, and the sum which the plaintiff was induced to give for it' per Abbott LCJ Pearson v Wheeler (1825) Ry & Mood 303 at 304 (171 ER 1028 at 1029)."
Fisher J distinguished the case before him on the basis that the applicant had rescinded the contract. His Honour found the lack of evidence of the value of the business at the time of purchase was no bar to making an assessment of the capital loss suffered by the applicant. In Re Giorgio Bellperio and Maria Bellperio v Munchies Management Pty Ltd and Larry Manno [1988] FCA 189 Forster J applied the same reasoning in another case in which the applicants had rescinded the contract. I am satisfied that this reasoning does not apply to the instant case as the issue of rescission was not raised.
I am, therefore, of the opinion that the proper method of assessing the capital loss is that approved in Potts and set out in [37] above. In saying that, the respondent is correct that the applicant advanced no evidence of the value of the business at the time of sale. Neither Mr Coy nor the applicant’s accountant, Mr Newcombe, make reference to this in their statements and there was no examination upon it. Without such evidence the Court is unable to make the finding that the true capital loss is as claimed. The applicant did not seek to argue that the business had no value at the time of purchase because it was making losses, although such a suggestion has superficial attraction.
Given the facts of this case and, in particular, the emphasis placed upon the failure by the applicant through its director, Mrs Messina, to act upon her concerns about the profitability of the business, including her failure to take her accountant’s advice to undertake due diligence, it is surprising that the Court was not addressed on the subject of s.82(1B) of the TPA. Perhaps the respondent felt that the words of Sir George Jessell MR in Redgrave v Hurd [1881-5] 5 All ER 77 at 80; (1881) 20 Ch D 1 should still apply:
“If a man is induced to enter into a contract by false representation, it is not a sufficient answer to him to say:
“If you had used due diligence, you would have found out that the report was untrue. You had the means afforded you of discovering its falsity which you did not choose to avail yourself of.””
Section 82 including s.82(1B) now reads:
“(1) Subject to subsection (1AAA), a person who suffers loss or damage by conduct of another person that was done in contravention of a provision of Part IV, IVA, IVB or V or section 51AC may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention.
…
(1B) Despite subsection (1), if:
(a)a person (the claimant ) makes a claim under subsection (1) in relation to:
(i) economic loss; or
(ii) damage to property;
caused by conduct of another person (the defendant ) that was done in contravention of section 52; and
(b) the claimant suffered the loss or damage:
(i)as a result partly of the claimant's failure to take reasonable care; and
(ii)as a result partly of the conduct referred to in paragraph (a); and
(c) the defendant:
(i)did not intend to cause the loss or damage;
and
(ii) did not fraudulently cause the loss or damage;
the damages that the claimant may recover in relation to the loss or damage are to be reduced to the extent to which the court thinks just and equitable having regard to the claimant's share in the responsibility for the loss or damage.
Note: Part VIA also applies proportionate liability to a claim for damages under this section for a contravention of section 52.
(2)An action under subsection (1) may be commenced at any time within 6 years after the day on which the cause of action that relates to the conduct accrued.”
In the short series of remarks which I will make about this subsection, I am indebted to an article by Danielle Gatehouse titled “The Baffling Intruder: Section 82(1B) of the Trade Practices Act” (2007) 15 TPLJ 74 and (2007) 15 TPLJ 163. Ms Gatehouse opines that, because the various elements of the section are expressed in the negative, the onus of proof or, more accurately disproof, will fall upon the respondent to show that it did not intend to cause the loss or damage and did not fraudulently cause the loss or damage. It also had the onus of establishing that the claimant suffered the loss and damage as a result partly of its failure to take reasonable care. She points out that the failure to take reasonable care does not “require the discovery of a duty to avoid harm owed to others”. She refers to the dicta of Denning MR in Froom v Butcher [1976] QB 286 at 291:
“Negligence depends on a breach of duty whereas contributory negligence does not… Contributory negligence is a man’s carelessness in looking after his own safety. He is guilty of contributory negligence if he ought reasonably to have foreseen that if he did not act as a reasonably prudent man he might hurt himself.”
Whereas prior to the enactment of s.82(1B) in 2004 one looked at the failure to take reasonable care as a species of causation because it indicated a possible lack of reliance, the new section allows for reliance to continue but for the loss to be limited.
In her second article Ms Gatehouse analyses the conduct referred to in s.82(1B)(c) and in her consideration of intent looks at a number of cases involving s.75B of the TPA including Yorke v Ross Lucas Pty Ltd (1985) 158 CLR 661. She considers the constituents of fraud in this context relying heavily from what fell from the House of Lords in Derry v Peek (1889) 14 App Cas 337 before summarising how she believes the application of s.82(1B) may be finally applied:
“Combining all of the above conclusions, the final application of s 82(1B) may be where the defendant can prove that:
1. The claimant suffered the loss or damage as a result partly of the claimant’s failure to take reasonable care:
·Measured against the reasonably prudent professional/consumer; and
·Judged on the facts of each case.
2. The defendant did not intend to cause the loss or damage:
·Based upon knowledge, including:
a)actual knowledge
b)wilful or conscious avoidance either of the obvious or to make inquiries; or
c)category 4 knowledge, being actual knowledge of circumstances which would indicate the facts to an honest and reasonable person.
·of the essential matters/facts which make up the loss, including:
a)the facts which make up the contravention, including the fact that the conduct was misleading or deceptive; and
b)the facts which create liability, including the fact that the conduct would be relied upon.
3. The defendant did not fraudulently cause the loss or damage:
·Knowingly (actual), or without belief in its truth, or recklessly, not caring whether it be true or false; or
·Innocently in the context of a recognised equitable obligations.
If the defendant is successful, the damages that the claimant may recover in relation to the loss or damage may then be reduced to the extent to which the court thinks just and equitable having regard to the claimant’s share in the responsibility for the loss or damage.”
In considering the effect of the section in this light, it may be that the respondents did not seek to pray it in aid because they felt they might have some difficulties in surmounting the hurdles erected in subsection 82(1B)(c). If they had been unable to do this then the applicant would have been entitled to the full damages properly arising from its loss.
Before leaving the topic of capital loss I should comment upon the “no transaction” basis of compensation. There is reference to this in Lee v Mavaddat [2005] WASC 68 at [468] where the Court said:
“There is a contest between the parties about the proper measure of damages. The plaintiff concedes that her remedy in contract is for one-half of the liability for damages, acknowledging that had the loan been obtained in accordance with the partnership agreement and the defendant's representation, the plaintiff would have been liable for half the funding to support the acquisition. The defendant submits that after adjustment for whatever funds are available from the liquidator, that is the remedy for the other pleaded causes of action as well, that is, under the Fair Trading Act and in equity. The defendant relies upon Kenny & Good Pty Ltd v MGICA (1992) Ltd (1999) 199 CLR 413 for the proposition that in a situation such as the present the proper measure of damages with respect to the claim under the Fair Trading Act must be the same as for breach of contract. The defendant also submits that the plaintiff has chosen to plead that the false, misleading and deceptive representation was that the Bank documentation gave effect to the partnership agreement, rather than the initial representations that the defendant would be a joint borrower and "put his home into the Bank". It is submitted the plaintiff has not sought to set aside the agreement but to the contrary, accepts that it defines the obligations and entitlements of the parties. That being so, it is submitted, it is not open to her to be compensated on a "no transaction" basis; the pleadings can only give rise to an award on the basis she would not have entered into this transaction - she would, however, have entered into a transaction in which she would have been jointly and severally liable with the defendant and providing equal security. Thus it is contended the proper measure of damages must be one-half the extent of what the joint liability would have been under the agreement.”
This type of compensation was also considered by Rares J in North East Equity at [385]:
“In final address, counsel for North East Equity suggested that its reliance damages should be calculated on the basis set out below. It argued that it would not have entered into the contract and subsequent lease agreement with the bank, had it not acted in reliance on Proud Machinery’s and Mr Proud’s misleading representations, or if they had not been negligent.”
Both of the above cases involved banking transactions in which funds were borrowed and allegedly lost. The method of valuation was not adopted because in the first case the Court found the applicant would have entered into a similar transaction and risked her home; in the second the applicant would still have entered the transaction because the financial advantage was greater than the disadvantage.
In Barclay v English & Ors [2009] QSC 258 at [107] the Court said:
“I am satisfied that the loss should be calculated on a “no transaction” basis which means that if the relevant statements had not been made, the whole transaction would have been avoided. I consider that the entire expenditure is $3,686,200.20. I also consider that the current value of the boat which is $910,000 should be subtracted as this is the appropriate figure. This results in a figure of $2,776,200.20
Accordingly there should be judgment against the third defendants in the amount of $2,776,200.20.”
This is the closest case to the instant one. It involved a boat.
“[103] I am satisfied that the representations that were made by English were representations “with respect to” a future matter. The defendant made predictions that the vessel would be capable of handling heavy seas, would revel in 1.5-2 metre seas, would achieve 28 knots and would cost approximately $1.5 million ($1.8 with GST). I am also satisfied that those predictions did not prove to be accurate.”
There does not appear to be any consideration of the principles discussed in Yorke v Ross Lucas Pty Ltd (1982) 45 ALR 299 and none of the relevant cases were cited. This case may be one limited to its own facts. In any event the applicant in the instant case did not make the claim in its pleadings or submission, by which I mean that although the gravamen of the evidence was that it went into the transaction because of the representations (and therefore inferentially would not have otherwise) it was not submitted that this method of loss calculation was appropriate and it is not for the Court to make such a finding in those circumstances.
The result of these findings which I have made in regard to the capital loss claim is that I am unable to make an award because I have insufficient evidence of value at the appropriate time. I would also add that to value the business at the time of sale would need to take into account any depreciation arising out of the way in which the applicants ran it which also affects the continuing trading losses. No evidence about this aspect was brought by either party.
Trading Losses
Based on the report compiled by the applicant’s accountant, Mr Newcombe, the applicant claims $82,824 in revenue losses incurred between 16 March 2007 and 25 August 2008. The respondent submits that the Court cannot be satisfied what trading losses were incurred or that any trading losses were the result of the conduct of the respondents, rather than the “folly, error or misfortune” of the applicant; Gould v Vaggelas (supra).
In support of the first assertion the respondent points to potential inaccuracies in the applicant’s record keeping. No records were available to show the daily dip readings and, apart from the stocktake on 16 March 2007, no formal stocktakes were carried out. The respondent submits that without records of fuel purchased, used and delivered and evidence of stocktakes it is impossible for the Court to assess whether there were other factors involved in the losses suffered, including theft. The respondent also focussed on the substantial use of “void” and “no sale” as indicative of poor record keeping. However, for the reasons expressed above at [14], I have found that this use of the till does not indicate that the applicant was skimming from the earnings or that not all cash receipts and cash payments were recorded. I accept the respondent’s submission that the “shift reports” revealed that there was usually more or less cash in the till than ought to have been there at the end of the day and that, under cross-examination, Mrs Messina appeared to be confused as to how the ledger was compiled and how GST was calculated.
In relation to Mr Newcombe’s evidence, the respondent expressed concern that he seemed unfamiliar with his client’s material. For example, he was not able to identify what “Dial Time” was in the Expenses of the Profit and Loss statements he had prepared, even though it appeared in 3 years and was a large entry ($39,527 in 2008). Nor could Mr Newcombe explain what “Station Expenses” were, which in 2008 were calculated as $66,906. In compiling his report, Mr Newcombe conceded that he did not check the underlying receipts as he was not conducting an “audit”. Instead he relied upon monthly statements which in turn were based upon the daily tracker which was not produced. The respondents claim that there is no way of assessing the accuracy of Mr Newcombe’s report in these circumstances.
In Mr Newcombe’s assessment of the losses incurred by J & M United there is included an amount paid to Mrs Messina and Jamie as a salary. That figure was $25,527.00 in 2008 and $4,066.67 in 2009. The representation made by Mr Varvarian was that he was making $1,500.00 or so per week without “working in the business”. In order to compare like with like it is therefore necessary to deduct from the applicant’s loss that amount reflected in payments to Mrs Messina and Jamie over and above the amount Danaris paid to its employees. In the full year 2006/7 Danaris paid employees $81,412.00. In the full year 2007/8 J & M United paid “contractors” $64,917.00. I would therefore deduct from the J & M loss for that year $16,495.00. In the short 2008/9 year wages and contractors were both around $4,000.00 ($4,640.00 and $4,066.00). The shortfall between contractors and salaries in the previous year was 20%. I have deducted 20% from the salaries bill in 2008 of $4,066.00, $813.00. This brings the loss down to $65,516.00.
The discussion between Mr Newcombe and Ms Peden about “dial time”[11] revealed that Mr Newcombe did not know what it was but considered it an expense of the business that might have been part of the cost of goods sold. He recalled the charges came “directly from the bank statement”. He did not think there was any double counting or that it would change the operating result. I took up with Mr Newcombe the “station expenses”[12]. Again he was unable to say more than they were costs incurred around the operation of the service station. I think that this vagueness must be reflected in a discount because, whilst I can accept that these categories contained legitimate expenses, I am not convinced by the evidence that the figures are completely accurate. I would apply a discount of 15% bringing the figure down to $55,688.00. I would also apply a discount for the vicissitudes of J & M’s method of operating the business which did not appear to me to reflect the most efficient operating procedures including the criticism of recording referred to in [53] above. This discount should be 10% bringing the claim down to $50,120.00.
[11] [T132-3]
[12] [T134]
I have taken the approach set out above conscious of the responsibility of the Court to take a broad view of the assessment of damages “which are not always capable of precise calculation”; Bateman (supra) at 565, and acknowledging the views expressed by Gibbs CJ in Burns v MAN Automotive (Aust) Pty Ltd (1986) 69 ALR 1 at 16 also quoted by Burchett J:
“”The truth is that the evidence is such that the assessment of damages in the present case is little better than guesswork.”
In that situation the plaintiff suffered the consequences of the Court's inability to allow for some items for which allowance might have been made had the evidence been less "confused and imprecise". But except in such an extreme case, a court will do its best to estimate where it cannot precisely ascertain. "(C)ourts ... are called upon ... every day," as Woodward, Toohey and Pincus JJ. said in their joint judgment in Commonwealth of Australia v. Henderson (unreported, 30 May 1985), "to do the best they can with the material before them.””
Mitigation:
Mrs Messina was aware of unprofitability as early as May 2007. The business was not sold until August 2008. She had made it clear to Mr Shafique that she would be prepared to sell in late 2007. The business was offered to him in early 2008 for $115,000.00. He was prepared to pay $80,000.00. He says he pulled out of the purchase because of the attitude of Mr Messina. That may have been part of the reason but I have concluded that there was not enough evidence to satisfy me that he could have paid even the $80,000.00. Am I required to consider why J & M did not attempt to rescind the contract once the representations were shown to be clearly false or why the company traded on for a further 15 months and incurred the losses I have found?
Although affirmation of a contract induced by misleading conduct does not in itself disentitle a plaintiff for damages under s.82 of the TPA, the failure to rescind a contract or in some way cease incurring trading losses may break the chain of causation between the breach and the subsequent losses if it is found to be unreasonable; Bateman v Slayter (1987) 71 ALR 553 (“Bateman”) at 568. However, the onus is on the respondent to show that the applicant failed to mitigate; Monroe Schneider & Assocs (Inc) v Raberem Pty Ltd (1991) 33 FCR 1.
A company in the position of the applicant is not expected to act immediately upon discovering the falsity of the representations which induced it to purchase the business. The authorities demonstrate that an obligation to mitigate may arise at some point thereafter depending on the facts of each case. In Bateman the applicants purchased a franchise of a retail store and quickly realised that it was not profitable. Burchett J found that the respondent was liable for trading losses incurred up to 2 years after purchase. His Honour took into account the difficulty which was involved in varying the lease as well as the fact that the respondents actively encouraged them to continue trading and carried out a special promotion of the store. Burchett J found that it was reasonable for the applicants to continue trading until that advertising campaign had run its course but not afterwards. The business was still being run by the applicants at the time of trial almost two years later.
In Corbidge v Bakery Fun Factory Fun Shop Pty Ltd [1984] FCA 285 Woodward J considered whether the applicant should have done more to mitigate his damage after purchasing a retail shop in December 1982:
“The other possibility of mitigating damage was for him to have quitted the shop at an earlier stage, at some time in 1983 when it had become clear that the business was most unlikely to become profitable. But this would have involved either finding a purchaser, in spite of an honest statement of the shop's continuing losses, or breaking the terms of the lease and facing an unanswerable action by the landlord for breach of contract. It seems that the applicant was advised to stay in the business until this action could be tried or his lease expired; he followed that course and I am unable to say that he was wrong to do so.”
Paper Sales (Aust) WA Pty Ltd v PSA Pty Ltd [1991] FCA 428 was another case in which a purchaser decided to continue running the business after discovering the falsity of representations regarding profitability. Lee J allowed damages for trading losses for a period of 17 months from the date of purchase. After that point his Honour considered that the applicant had affirmed the bargain and decided to carry on the business at its own risk. See also Neilsen v Hempston Holdings Pty Ltd (supra); O'Hara & Breuer v Williams [1996] FCA 1487 and Jacques v Cut Price Deli Pty Ltd [1993] FCA 88.
These authorities would appear to indicate that the time taken by the applicants was not unreasonable. The respondent only refers to the Shafique offer, with which I have dealt, in its submissions on mitigation. There is no evidence that the applicant unreasonably turned down any offers and the difficulty of selling a non-profitable business should not be discounted. It is also relevant that Mrs Messina did not have actual knowledge of the falsity of Mr Varvarian’s representations but merely a suspicion. She knew she was not making $1,500.00 per week, she did not know that he had not. The respondent has not established to the requisite standard that the applicant has failed to mitigate. The applicant should recover the trading losses less the discounts I have applied.
The second respondent has been brought into this matter under s.75B of the TPA as a “person involved” in the impugned conduct. He was a director of the first respondent, it was he who made the representations that I have found were false and misleading. He must bear equal responsibility for those actions.
There will be judgment for the applicant against the respondents for damages under s.82 of the TPA for breach of s.52 in the sum of $50,120.00 together with interest there on from 28 August 2008 to judgment in the sum of $9,518.07, a total of $59,638.07. The respondents shall pay the applicant’s costs assessed, if not agreed, pursuant to Part 21 Rule 21.02 2(b) and Schedule 1 of the Federal Magistrates Court Rules 2001.
I certify that the preceding sixty-four (64) paragraphs are a true copy of the reasons for judgment of Raphael FM
Associate:
Date: 20 September 2010
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