Jewelsnloo Pty Ltd v Sengos (No 2)

[2016] NSWSC 61

Supreme Court

New South Wales

Medium Neutral Citation:

Jewelsnloo Pty Ltd v Sengos (No 2) [2016] NSWSC 61

Hearing dates:

4 – 8 August 2014; 18 – 19 August 2015

Date of orders:

12 February 2016

Decision date:

12 February 2016

Jurisdiction:

Equity

Before:

Robb J

Decision:

(1)     Order that the first, fourth and fifth defendants be restrained by themselves, their servants or agents from selling, promoting for sale or distributing water filtration equipment and dispensers in any manner that involves those defendants in passing off their products or business as the products or business of the plaintiff.
(2)     Order that the proceedings be otherwise dismissed.
(3)     Direct the parties to deliver submissions on the costs orders that should be made in accordance with a timetable to be determined.
(4)     Order that the exhibits and any documents produced on subpoena may be returned forthwith in accordance with the Rules.

Catchwords:

TRADE AND COMMERCE – contract to purchase business – vendors made misrepresentation to the plaintiff concerning the turnover of the business – whether plaintiff relied upon the representation in entering into the contract to purchase the business – held plaintiff did not rely upon misrepresentation

 

TRADE AND COMMERCE – vendors had benefit of restraints of trade deed with prior vendor that prevented prior vendor from competing with vendors – whether prior vendor had made misrepresentation to the plaintiff concerning intention to compete with the plaintiff – whether prior vendor and vendors had made misrepresentations to the plaintiff concerning the subsistence of the deed and the plaintiff’s entitlement to the benefit of the deed – held representations not made – whether prior vendor and vendors had made representations to the plaintiff by silence by failing to inform the plaintiff that the vendors had released the prior vendor’s obligations under the deed – held representations not made

 

INTELLECTUAL PROPERTY – passing off – whether business had necessary goodwill or commercial reputation – goodwill or commercial reputation established – whether ordinary customers would be deceived by conduct of relevant defendants – conduct of relevant defendants found to be passing off

 

RESTITUTION – plaintiff claimed order setting aside purchase of business on ground that plaintiff entered into the contract because of misleading and deceptive conduct by vendors – plaintiff claimed order for rescission under s 243 of Schedule 2 of the Competition and Consumer Act 2010 (Cth) – plaintiff delayed in claiming order – plaintiff continued to operate business – plaintiff did not elect to rescind or offer to return business to vendors – plaintiff would not have been entitled in any event to an order setting aside the purchase as restoration of the status quo had become impossible because of plaintiff’s actions

 

DAMAGES – misleading or deceptive conduct – plaintiff not entitled to damages as claims dismissed – consideration of plaintiff’s claim for damages equal to the purchase price paid by the plaintiff for the business – plaintiff chose not to tender evidence of the difference between the purchase price and the market value of the business – applicable principles considered – plaintiff would not have been entitled to damages claimed in any event because the evidence established that the business had a value at the date of purchase and the plaintiff did not establish that it lost the benefit of the entirety of the purchase price

  DAMAGES – passing off – Exemplary, punitive and aggravated damages – plaintiff claimed damages instead of an account of profits – plaintiff did not prove it suffered any loss caused by the passing off – plaintiff not entitled to compensatory damages – plaintiff claimed exemplary damages for tort of passing off – applicable principles considered – plaintiff not entitled to exemplary damages

Legislation Cited:

Fair Trading Act 1987 (NSW)
Competition and Consumer Act 2010 (Cth)

Cases Cited:

Arktos Pty Ltd v Idyllic Nominees Pty Ltd [2003] FCA 329
Awad v Twin Creeks Properties Pty Ltd [2012] NSWCA 200
Butcher v Lachlan Elder Realty Pty Ltd [2004] HCA 60; (2004) 218 CLR 592
Demagogue Pty Ltd v Ramensky (1992) 39 FCR 21
Dr Martens Australia Pty Ltd v Bata Shoe Co of Australia Pty Ltd (1997) 75 FCR 230
Facton Ltd v Rifai Fashions Pty Ltd [2011] FCA 290; (2011) 91 IPR 109
Facton Ltd v Rifai Fashions Pty Ltd [2012] FCAFC 9; (2012) 287 ALR 199
Fletcher Challenge Ltd v Fletcher Challenge Pty Ltd (1981) 1 NSWLR 196
GM Holden Ltd v Paine [2011] FCA 569; (2011) 281 ALR 406
Jewelsnloo Pty Ltd v Sengos [2015] NSWSC 80
Kimberley NZI Finance Ltd v Torero Pty Ltd (1989) ATPR (Digests) 46-054
Marks v GIO Aust Holdings Ltd [1988] HCA 69; (1998) 196 CLR 494
Munchies Management Pty Ltd v Belperio (1988) 58 FCR 274
Taleb v GM Holden Ltd [2011] FCAFC 168; (2011) 286 ALR 309
Tenji v Henneberry & Associates Pty Ltd (2000) 98 FCR 324
Troung Giang Corporation v Tung Mau Quach [2015] FCA 1097; (2015) 114 IPR 498
Watson v Foxman (1995) 49 NSWLR 315
Williams v Pisano [2015] NSWCA 177

Category:

Principal judgment

Parties:

Jewelsnloo Pty Ltd (plaintiff)
Paul Sengos (first defendant)
Stanley Kotsiopoulos (second defendant)
Kalyopy Kotsiopoulos (third defendant)
Wholesale National Pty Ltd (fourth defendant)
Associated Products Pty Ltd (fifth defendant)

Representation:

Counsel: E Chrysostomou (plaintiff)
D M Jay (second and third defendants)

  Solicitors: McGrath Dicembre & Co (plaintiff)
J Hassett (first, fourth and fifth defendants)
Adams & Partners (second and third defendants)

File Number(s):

2012/395520

Publication restriction:

None

Judgment

Introduction

1. The present dispute arises out of the sale of a business that trades under the name “Amazing Water” and involves the sale through the Internet of water coolers, filters and benchtop filters.

2. The business was founded by the first defendant, Mr Paul Sengos, who after a number of years trading sold the business to the second and third defendants, Mr Stan and Ms Kalyopy (Poppy) Kotsiopoulos, who in turn by contract dated 18 October 2012 agreed to sell the business to the plaintiff, Jewelsnloo Pty Ltd (Jewelsnloo). Mr Julian Facer is a director and the secretary of Jewelsnloo.

3. Jewelsnloo complains that it was induced to enter into and complete the contract of sale by misleading and deceptive conduct engaged in by Mr Sengos and Mr and Ms Kotsiopoulos, and seeks an order avoiding the sale, or damages in the alternative. Jewelsnloo also complains that for a period after the completion of the contract of sale Mr Sengos, through his companies the fourth and fifth defendants, engaged in passing off in selling water coolers and related products as if they were engaged in the business that had been acquired by Jewelsnloo. Jewelsnloo seeks damages for that alleged breach, including exemplary damages.

History of proceedings

4. The operative pleadings in this matter are Jewelsnloo’s second further amended statement of claim filed on 18 July 2014, and the defences respectively filed by Mr and Ms Kotsiopoulos on 25 July 2014, and Mr Sengos and his two companies on 28 July 2014.

5. A number of the interlocutory steps taken in these proceedings before the filing of these pleadings are relevant; in particular to the claim made by Jewelsnloo that it entered into the contract of sale on the basis of a misrepresentation as to the recent turnover of the business made by Mr and Ms Kotsiopoulos; Jewelsnloo’s claim that the sale should be avoided by reason of the making of that representation; and also its claim for damages against Mr Sengos and his companies for passing off.

6. The following outline of those interlocutory steps is taken from a judgment that I have given in these proceedings in which I refused an application by Jewelsnloo to be allowed to reopen its case after its case had been closed: see Jewelsnloo Pty Ltd v Sengos [2015] NSWSC 80 at [9] to [23].

7. Jewelsnloo commenced these proceedings by summons filed on 20 December 2012 by leave of the duty judge.

8. On the same date an affidavit by Mr Facer sworn on 20 December 2012 was filed.

9. The summons, confusingly, sought relief against “the defendant”, although the present five defendants were named as defendants. By orders 1 and 2 Jewelsnloo sought an injunction restraining passing off and consequential relief. That relief must have been sought against Mr Sengos and his companies. By order 3 Jewelsnloo sought damages for breach of s 42 of the Fair Trading Act 1987 (NSW) and Schedule 2, s 18 Competition and Consumer Act 2010 (Cth). Jewelsnloo sought by order 4 damages for passing off in the alternative. It sought an order for an accounting by order 5, and “restitution” by order 6.

10. Jewelsnloo did not seek any order avoiding the sale of the business. It sought relief against passing off and damages, it appears primarily for passing off. It must be accepted that the summons was probably drawn with some haste in order to support Jewelsnloo’s claim for interlocutory relief. It must be recognised that Mr and Ms Kotsiopoulos were joined as defendants, and it seems unlikely that Jewelsnloo was alleging that those defendants were parties to the passing off. It is not clear that Jewelsnloo’s claim for damages for breach of the statutory provisions was limited to the alleged passing off, and it may have extended to a claim for damages for the misleading and deceptive conduct by Mr and Ms Kotsiopoulos now made by Jewelsnloo. The basis of the claim for restitution is unclear.

11. Mr Facer’s affidavit appears primarily to support Jewelsnloo’s claim for interlocutory relief in relation to the alleged passing off. It includes the primary evidence concerning the making of the alleged representation by Mr and Ms Kotsiopoulos concerning the recent turnover of the business, although it does not appear to contain evidence that the representation was false. That may be because Jewelsnloo did not by 20 December 2012 appreciate that the turnover representation might have been false.

12. It is sufficient to note that by 20 December 2012 Jewelsnloo did not clearly claim an order avoiding the sale of the business. Mr Facer’s affidavit did not assert that any turnover representation was false. Mr Facer did not say that Jewelsnloo had acted to rescind the contract, or offer to redeliver the business to Mr and Ms Kotsiopoulos. In practical terms Jewelsnloo’s application for passing off relief against Mr Sengos and his companies was consistent with Jewelsnloo’s continuing to conduct the business, as it would not have title to the relief if it had rescinded the sale.

13. The duty judge on 20 December 2012 made an order that until 30 January 2013 Mr Sengos and his companies be restrained from selling, promoting for sale or distributing water filtration equipment and dispensers, with liberty on reasonable notice for the duty judge to vary or dissolve the order.

14. On 30 January 2013 an order was made confirming the interlocutory injunction made on 20 December 2012 until further order, subject to orders 2, 3 and 4 made on 30 January 2013. The effect of the proviso orders was that Mr Sengos and his companies were permitted to sell certain identified stock on the basis that they would keep accounts of the transactions and provide evidence to Jewelsnloo of those transactions.

15. The relevance of these orders for present purposes is that Mr Sengos and his companies have not sought to vary or dissolve the interlocutory injunction. Accordingly, Jewelsnloo’s passing off case must be limited to the products that may have been sold before the injunction granted on 20 December 2012, assuming that the products permitted to be sold by the proviso to the 30 January 2013 order were not passed off as the products of Jewelsnloo. Any pass off must have occurred over a closed period.

16. In accordance with an order that the matter proceed on pleadings, Jewelsnloo filed a statement of claim on 21 February 2013.

17. Jewelsnloo claimed damages and an order restraining Mr Sengos and his companies from passing off their business as the business of Jewelsnloo.

18. It alleged in par 5 that, during the negotiations that preceded the contract for the sale of the business, Mr Sengos represented to Jewelsnloo that he had no intention of getting back into the water cooler business, and that the trading figures of the business were true and correct. The particulars given for the making of the representations were a telephone conversation between Mr Facer and Mr Sengos on 25 September 2012, and an email sent to Mr Facer by Mr Sengos on 1 October 2012. Jewelsnloo did not identify the trading figures that were the subject of the alleged representation. Jewelsnloo continued to press its passing off claim against Mr Sengos and his companies. The claim for restitution that had been made in the summons was omitted.

19. The only claim pleaded against Mr and Ms Kotsiopoulos was the claim in par 7 that on 24 October 2014 (which was after the date on which Jewelsnloo had entered into the contract to purchase the business on 18 October 2012) they had represented to Jewelsnloo that they had obtained the benefit of a restraint of trade against Mr Sengos for a period of two years commencing on 15 February 2012.

20. No allegation was made against Mr and Ms Kotsiopoulos that they had engaged in any misleading and deceptive conduct concerning the turnover of the business. Jewelsnloo did not seek any order avoiding the sale. It alleged in par 15 that from 28 October 2012 it carried on and still carried on the business.

21. As the contract of sale was completed on 28 October 2012, it may be noted that Jewelsnloo had operated the business for some four months before the statement of claim was filed. Nothing in the statement of claim indicated that by the date of its filing Jewelsnloo had come to believe that Mr and Ms Kotsiopoulos had made any misrepresentation concerning the turnover of the business.

22. An amended statement of claim was filed in court on 24 July 2013. Relevantly, in par 5, Jewelsnloo added a claim against Mr and Ms Kotsiopoulos that they also made misrepresentations in relation to the turnover of the business. It also added a claim for exemplary damages, but did not seek any order avoiding the sale. Jewelsnloo again pleaded that it continued to carry on the business (now in par 21).

23. Jewelsnloo alleged against Mr and Ms Kotsiopoulos that they represented (a) that the business had an income from sales in the period February 2012 to June 2012 in the sum of $166,375.65; and (b) that the trading figures of the business were true and correct. The particulars given for the representations were that they were made in an attachment to an email dated 21 September 2012 from the business broker who acted for Mr and Ms Kotsiopoulos, and that they were “implied as a matter of law from the facts and circumstances”.

24. Jewelsnloo continued the allegation against Mr Sengos that he had represented that the trading figures of the business were true and correct (now par 6).

25. The only allegation of falsity of the turnover representation was the allegation in par 10(c) that the trading figures were not true and correct for the business.

26. Jewelsnloo filed a further amended statement of claim on 10 December 2013, some 13 or so months after completion of the contract for the sale of the business. For the first time it sought an order pursuant to s 243(a) of the Australian Consumer Law declaring the contract void ab initio. It also sought “an order for rescission of the contract”. Jewelsnloo did not plead that it had at any earlier time acted to rescind the contract, or that it had offered to return the business to Mr and Ms Kotsiopoulos in return for repayment of the purchase price.

27. As noted above, the current version of the statement of claim is the second further amended statement of claim that was filed on 18 July 2014. By this pleading Jewelsnloo made a number of further amendments that need not be considered for the purposes of this brief history of the proceedings.

28. In summary, Jewelsnloo did not make any allegation that Mr and Ms Kotsiopoulos had acted in any misleading and deceptive way concerning representations as to the turnover of the business until 24 July 2013. It did not seek an order avoiding the sale until 10 December 2013. Subject to the effect of Jewelsnloo making that claim, it has never asserted that it has itself rescinded the contract of sale or offered to return the business. Jewelsnloo’s passing off claim is now limited to damages for a closed period, subject to Jewelsnloo’s claim for exemplary damages. Mr Sengos and his companies have never contested the making of orders restraining them from selling products in competition with Jewelsnloo (save in respect of the orders made as a proviso to 30 January 2013 order).

Summary of current pleadings

29. I will limit references to the allegations in the current pleadings to those that are necessary to understand the issues that require decision.

Claim against Mr and Ms Kotsiopoulos

30. It will be convenient to consider Jewelsnloo’s claim against Mr and Ms Kotsiopoulos first.

31. Jewelsnloo alleges (par 5) that, during the course of the negotiations that preceded its entry into the contract for sale, Mr and Ms Kotsiopoulos represented (a) that the business had an income from sales in the period February 2012 to June 2012 in the sum of $163,375.65 (the “turnover representation”); and (b) that the trading figures of the business were true and correct.

32. In response to these allegations Mr and Ms Kotsiopoulos alleged (par 5): (a) that Jewelsnloo did not exist as a legal entity at the time of the representations as it was registered on about 27 September 2012; and (b) that Jewelsnloo had agreed to certain terms and conditions in consideration of receiving a copy of the information memorandum upon which Jewelsnloo relies to assert the making of the turnover representation.

33. As I understand the defence as prosecuted by Mr and Ms Kotsiopoulos, they have not sought to pursue or rely upon the defence pleaded in par 5(a).

34. Further, although the defence pleaded in par 5(b) has not featured prominently in the submissions made on behalf of Mr and Ms Kotsiopoulos, I have proceeded on the basis that they maintain it. In substance the defence is that on 21 September 2012 Jewelsnloo agreed that in consideration of it receiving the information memorandum, which was a necessary step in its pursuing the purchase of the business, it agreed, as pleaded:

i.   The information provided should be checked independently for accuracy and truth;

ii.   The Agent had not checked the validity of the information provided and the recipient should make his own enquiries regarding the financial and other data of the business;

iii.   The Agent advised the recipient that any indication of past performance was in no way a warranty or representation that a new owner would achieve those results in the future; and

iv.   The Agent advised the recipient to seek independent advice before proceeding with any purchase.

35. Mr and Ms Kotsiopoulos did not admit the allegation that the trading figures were not true and correct for the business. (I will proceed upon this basis although Jewelsnloo’s second further amended statement of claim is confusing in that par 10 contains two sub-pars (c)).

36. It is not unreasonable for Mr and Ms Kotsiopoulos to have declined to admit an allegation of falsity of representation pleaded as vaguely as par 10(c) of the second further amended statement of claim. As I understand the way in which they have conducted their defence, primarily as reflected in their final written submissions, their position is as follows. They accept that the information memorandum contained a statement to the effect of that alleged in par 5(a) of the second further amended statement of claim. They have not contended, or attempted to prove, that the turnover for the period February to June 2012 was in fact $166,375.65. However, for reasons that I will consider when dealing with the evidence, they contend that their conduct was not misleading and deceptive, or if it was, Jewelsnloo did not rely upon it in entering into the contract of sale; and even if they fail in that respect, Jewelsnloo is not entitled to an order avoiding the sale, and it is not entitled to the damages it claims, being the entire amount of the purchase price of $210,000. I will deal with these matters more fully below.

35. As to the second part of the turnover representation alleged by Jewelsnloo, that in par 5(b), as I understand Jewelsnloo’s case it has made no attempt to prove that the entirety of the trading figures that were provided to it before it entered into the contract of sale were not true and correct. As will be seen, the trading figures covered a number of years, including the period in which the business was operated by Mr Sengos, in addition to the period between February and June 2012. Jewelsnloo has made no attempt at all to prove that any trading figures for the period before February 2012 were false, or in any other way misleading or deceptive. Its final written submissions only assert (par 31) that the representation that the turnover in the five month period was $166,375 was incorrect because the true figure was $58,000.

36. Jewelsnloo has made further allegations against Mr and Ms Kotsiopoulos of misleading and deceptive conduct, but it must be noted that in par 7 it alleges that it entered into a contract for the purchase of the business on 18 October 2012. The other allegations of misleading and deceptive conduct are in respect of times after Jewelsnloo became bound by the contract to purchase the business. Accordingly, Jewelsnloo faces the difficulty of showing how any of the later conduct could have caused it to suffer any damage, if it was already bound by the contract to complete the purchase, and the later conduct could not have the effect of vitiating the contract.

37. Jewelsnloo alleged in par 8 that on 24 October 2012 Mr and Ms Kotsiopoulos made the following further representations to it:

a.   [They] obtained the benefit of a restraint of trade deed in Australia (the “Deed of Restraint”);

b.   The restraint of trade was against [Mr Sengos] for a period of two years commencing 15 February 2015.

c.   The deed of Restraint was binding on [Mr Sengos].

d.   [Jewelsnloo] had the benefit of the Deed of Restraint against [Mr Sengos].

e.   The rights under the Deed of Restraint would be assigned to [Jewelsnloo] on settlement.

f.   [They] would do all such things so as not to derogate from [Jewelsnloo’s] right to obtain the full benefit of the Contract of the purchase of the business.

40. The particulars given for this representation were par 16(b) of answers to requisitions on title dated 24 October 2012, and the deed of restraint dated 15 January 2012. There is also an assertion that the representations were implied as a matter of law.

41. Jewelsnloo alleged in par 9 that all of the representations were made in trade or commerce. As I understand par 9 of their defence, Mr and Ms Kotsiopoulos admit that the documents given to Jewelsnloo on which it relies were provided in trade or commerce.

42. These further representations (as they were called in the defence) were relevantly claimed to be false because on 12 October 2012 Mr and Ms Kotsiopoulos executed a deed of release in favour of Mr Sengos, and on about 9 October 2012 they agreed to waive or otherwise release the restraint of trade, and finally they did not have the benefit of the restraint of trade.

43. In substance, the response of Mr and Ms Kotsiopoulos to Jewelsnloo’s allegations in par 8 of the second further amended statement of claim was that they did not admit the allegations, and they further said that Jewelsnloo took no, or no effective, steps to obtain the benefit of an assignment of the deed of restraint.

44. Jewelsnloo pleaded in par 12 that, by reason of the matters earlier pleaded, it had a reasonable expectation of being apprised by Mr and Ms Kotsiopoulos of the deed of release and all matters in connection with the deed of release. It pleaded in par 12A a similar reasonable expectation in relation to any waiver or release of Mr Sengos from his obligations in the restraint of trade. It pleaded in par 15 that the failure by Mr and Ms Kotsiopoulos to apprise Jewelsnloo of these matters involved conduct which was misleading and deceptive.

45. Mr and Ms Kotsiopoulos did not admit these allegations.

46. Jewelsnloo pleaded a further claim in par 15A that Mr and Ms Kotsiopoulos’ conduct involved a derogation from its right to obtain the full benefit of the goodwill in breach of clause 17.3 of the contract for the sale of business.

47. Mr and Ms Kotsiopoulos do not appear to have responded expressly to this allegation in their defences. Jewelsnloo said nothing in its final submissions in support of this claim. It is not a claim capable of being made out without explanation, and in the circumstances I have proceeded upon the basis that the claim has been abandoned.

48. Jewelsnloo alleged in par 16 that it completed the settlement of the purchase of the business on 26 October 2012 in reliance upon all of the representations alleged, including the post-contract representations.

49. Jewelsnloo made its damages claim in par 17; being for the purchase price of the business of $210,000. It also foreshadowed a claim for interest payments, cash contributions to the business, and legal fees and disbursements to be advised. As I understand the evidence, Jewelsnloo has not provided evidence of these additional amounts.

50. By its second further amended statement of claim Jewelsnloo added a further claim in par 18A that “the above matters constituted unconscionable conduct within the meaning of the unwritten law in contravention of schedule 2, s 18 of the Competition and Consumer Act.

51. Neither in its pleadings nor in its submissions has Jewelsnloo grappled properly with the issues involved in making out this claim of unconscionable conduct, and its treatment has been peripheral. It appears from par 139 of Jewelsnloo’s final written submissions that it claims that the signing of the deed of release by Mr and Mrs Kotsiopoulos was the only conduct claimed to have been unconscionable.

52. I should note for completeness that Jewelsnloo applied for leave to file a third further amended statement of claim. It initially made an application to file such a pleading on the first day of the hearing, 4 August 2014. I gave leave in respect of one amendment sought, and deferred ruling on the other. Later, on 18 August 2015, Jewelsnloo sought leave to file a revised version of its draft third further amended statement of claim, by which it sought to amend par 5 to add sub-par (c), to allege an additional representation by Mr and Mrs Kotsiopoulos before the contract of sale was entered into, that Jewelsnloo would have the benefit of the deed of restraint against Mr Sengos after it purchased the business. I rejected that application on 18 August 2015 on the basis of reasons given in a separate ex tempore judgment on that date. .

53. Mr and Ms Kotsiopoulos raised an apportionment defence in par 19 of their defences on the basis that Mr Sengos and his companies would be concurrent wrongdoers for the purposes of s 87CD of the Competition and Consumer Act. In view of the conclusions that I have reached as expressed below, this issue will not require consideration.

54. In further answer to the whole of the second further amended statement of claim Mr and Ms Kotsiopoulos pleaded in par 20 that in entering into the contract for the sale of the business Jewelsnloo warranted that it had made its own enquiries in accordance with clause 5.2.2; it had obtained independent advice in accordance with clause 5.2.4; and that it did not rely on any statement or representation other than those expressly contained in the contract in accordance with clause 5.2.5.

Claims against Mr Sengos and his companies

55. I will now turn to the claim that Jewelsnloo has pleaded against Mr Sengos and his two companies.

56. Jewelsnloo alleged against Mr Sengos in par 6 that, during the course of negotiations before the contract of sale was entered into, he made the following representations to Jewelsnloo:

a.   [Mr Sengos] had no intention of getting back into the water cooler and filtration business, being the business; and

b.   Despite there being no agreement between [Jewelsnloo] and [Mr Sengos], [Mr Sengos] had no intention of getting back into the business at all or at least until after two (2) years from the date of the Contract; and

b1.   [Mr Sengos] would not sell water coolers and or not compete in the business;

b2.   Not competing was material to the business and went to the root of the Contract and business;

c.   The trading figures of the business were true and correct.

57. Mr Sengos admitted that he made the representation in sub-par (c) but denied or did not admit making the other representations.

58. It is appropriate at this point to consider the significance of the admission that Mr Sengos made the representation in sub-par (c). As will be seen, the information memorandum provided to Jewelsnloo contained trading figures for the business for both the period it was conducted by Mr Sengos and the later period during which it was conducted by Mr and Ms Kotsiopoulos. There was no evidence that Mr Sengos was responsible for the inclusion in the information memorandum of the trading figures concerning the later period. Nor was there any evidence that Mr Sengos was aware of those figures, or of what was said about them in the information memorandum. Mr Facer’s own evidence as to what Mr Sengos said to him concerning the trading figures (par 17 of his 20 December 2012 affidavit) was that, in response to a statement by Mr Facer to Mr Sengos that the broker had sent to him “the trading figures for when you had the company”, and a question whether those figures were right, Mr Sengos replied: “My figures are right Julian, I don’t know what Stan or [the broker] sent to you but I banked all of the money that I made in that business because I did not want to have any troubles with the tax man”. Thus, on Jewelsnloo’s own evidence, the only representation made by Mr Sengos was that the figures for the period in which he had operated the business were right.

59. As I have observed above, Jewelsnloo made no attempt to prove that any of the trading figures for the business contained in any representations made to it for the period when Mr Sengos was managing the business were false, or misleading or deceptive in any way. There are no grounds for such a finding to be made. Jewelsnloo did not submit that such a finding should be made in its final submissions.

60. Mr Sengos’ admission that he made the representation in sub-par (c), when properly understood, is of no significance. It is not necessary to give further consideration to any claim that Mr Sengos engaged in misleading and deceptive conduct by making any misrepresentation to Jewelsnloo concerning the trading figures of the business.

61. The truth of this proposition appears to be recognised by Jewelsnloo in par 6(c) of its draft third further amended statement of claim. While it is true that Jewelsnloo was not given leave to file that draft, it must be noted that it had deleted the allegation now found in par 6(c) of the second further amended statement of claim.

62. Mr Sengos pleaded in par 6 of his defence a positive response to the allegations in par 6 of the second further amended statement of claim. In summary, Mr Sengos referred to the 1 October 2012 email he sent to Mr Facer upon which Jewelsnloo relies. He said that prior to that date he had a business relationship with Mr and Ms Kotsiopoulos in relation to the sale of the business’ products. He wished to continue that arrangement with Jewelsnloo after its purchase of the business. The statement in the email was true at the time it was sent. Mr Facer lead Mr Sengos to believe his arrangements with Mr and Ms Kotsiopoulos were likely to continue into the future. Mr Sengos was not bound to comply in perpetuity or at all with the content of his email, as that would be an unreasonable restraint of trade. As appeared during the course of the hearing, in substance Mr Sengos’ position is that he made relevant statements in the 1 October 2012 email in the belief, induced by statements made by Mr Facer, that his relationship with the business would continue, and only after Mr Facer disabused him of that expectation did he make a decision to continue to participate in a limited way on his own behalf in the same market as the business.

63. Jewelsnloo claimed in par 12 that it had the same reasonable expectation of being apprised by Mr Sengos of the deed of release of the restraint deed and the waving and release of his obligations under that restraint, as it pleaded against Mr and Ms Kotsiopoulos.

64. In pars 20 to 27 of its second further amended statement of claim Jewelsnloo pleaded a claim of passing off against Mr Sengos and his companies. It is not necessary to analyse the pleadings concerning the passing off claim at this point.

65. It is sufficient to note in practical terms that Mr Sengos and his companies otherwise denied or did not admit the allegations made against them.

66. As an analysis of the pleadings shows, there are in substance three separate claims in this matter. The first is the claim against Mr and Ms Kotsiopoulos that they induced Jewelsnloo to enter into the contract for the purchase of the business by making a misleading or deceptive representation concerning the turnover of the business in the period from February to June 2012. The second is the claim made by Jewelsnloo against Mr Sengos as well as Mr and Ms Kotsiopoulos that they mislead and deceived Jewelsnloo by making misrepresentations concerning Mr Sengos’ intention to remain in the water cooler and filtration business, and as to the existence and continuing validity of the deed of restraint, and Jewelsnloo’s entitlement to the benefit of it. The third claim is the passing off claim. It will be convenient to deal with each of these claims separately.

Turnover misrepresentation claim

67. The court is required to address the following questions. First, has Jewelsnloo established that Mr and Ms Kotsiopoulos engaged in the conduct, in this case the making of the turnover representation, which is said to have constituted the misleading or deceptive conduct? Secondly, if so, was the representation misleading or deceptive, or likely to mislead or deceive? Thirdly, if so, did the representation cause Jewelsnloo to suffer loss or damage because it had been made? Fourthly, if so, what is the appropriate relief, and in particular should the court make an order avoiding the sale and grant consequential relief, or make an order for the payment of damages? Fifthly, if an order for the payment of damages should be made, what should the amount of the damages be?

68. It will be convenient to address these questions after a consideration of the relevant facts has been undertaken.

Facts relevant to turnover representation claim

69. Mr Sengos established the Amazing Water business in 2008, primarily for the purpose of it being operated by his children. The children lost interest and Mr Sengos commenced to operate the business himself on a part-time basis through the fourth defendant, which was then known as Amazing Water Australasia Pty Ltd.

70. The fourth defendant sold the business to Mr and Ms Kotsiopoulos on 1 February 2012. Thereafter the fourth defendant’s name was changed to its present name.

71. Neither Mr nor Ms Kotsiopoulos had had experience operating businesses such as the Amazing Water business. They had primarily operated or worked in cafes, and Mr Kotsiopoulos had worked for Bunnings. They had some difficulties in operating the business.

72. Mr Sengos formed a friendship with Mr Kotsiopoulos that led him to assist the couple in managing various aspects of the business, and in due course an arrangement was formed whereby Mr Sengos would procure sales of the products sold by the business on the basis of a commission of 10% on net sales plus 40% of the profit made. A short written agreement was entered into between Mr Sengos, the fourth defendant, Mr Kotsiopoulos and his company, then called Amazing Water Australasia Pty Ltd, on 15 March 2012 to record this arrangement. It was to stay in force until 27 January 2014. The explanation for Mr Kotsiopoulos being the party to the agreement is apparently that Ms Kotsiopoulos acted as a silent partner. At a later point in time, in late August or early September 2012, according to Mr Sengos, the arrangement was simplified, and it was agreed orally that products would be sold to Mr Sengos or his company for on-sale at a price that would yield him about the same return as the earlier agreement.

73. The business had a website that advertised its products. Products were also sold to independent distributors who purchased stock from the business. A significant aspect of the business was that product was sold through intermediaries who operated websites which offered ‘daily deals’ to potential purchasers. According to Mr Kotsiopoulos, the ‘daily deals’ concept allows a product supplier to offer a product for sale on the website at a discount to the recommended retail price. The idea is to achieve bulk sales of product at a discount. The two principal websites involved appear to have been operated by businesses called Scoopon and Groupon. Mr Kotsiopoulos gave evidence that, during the course of 2012, he experienced difficulties in maintaining satisfactory arrangements with these group buying businesses. In August 2012 he approached Mr Sengos to give him assistance on the basis of Mr Sengos’ longer experience in managing this aspect of the business. On about 17 September 2012 Mr Sengos agreed to help Mr Kotsiopoulos, and he achieved some success with Groupon in October 2013. There could be a delay of several months between a proposal being made for a daily deal arrangement and the deal actually being featured on the website.

74. By July 2012, Mr and Ms Kotsiopoulos had decided that they would sell the business. Mr Kotsiopoulos had reached the conclusion that his experience did not provide him with the skills necessary to succeed in the Internet sales industry. He felt out of his depth.

75. In July 2012 Mr Phil Lyons of BCI Business Brokers was appointed to sell the business.

76. Mr and Ms Kotsiopoulos hoped to sell the business for the same price for which they had bought it, which was $300,000.

77. Mr Lyons asked Mr Kotsiopoulos for BAS and tax returns. He also asked for trading figures. Mr Kotsiopoulos said that, as they had only been trading for four months, they had not done an income tax return or any BAS.

78. Mr Facer and his wife were looking to buy an Internet style business for their future. They wanted to acquire a business that they could run from a storage warehouse and from home. They wanted a low-cost business and wanted most of the transactions to be done over the Internet through PayPal and other merchant facilities.

79. Mr Facer discovered that the business was available for purchase in September 2012. He telephoned Mr Lyons, and was told that he could not be provided with details of the business for sale until he had accepted a confidentiality agreement. He received a confidentiality agreement from Mr Lyons on 21 September 2012. On 21 September 2012 he accepted the terms of the confidentiality agreement by email.

80. Clause 2.1 of the confidentiality agreement, which was expressed to be for the benefit of both the agent and the vendor, provided:

I/We hereby acknowledge that… the Agent has pointed out that the Confidential Information provided to me/us has been provided by the vendor or the VENDOR’S representatives or advisers or compiled by the AGENT from material obtained from the VENDOR or the VENDOR’S representatives or advisers, and should be checked independently for accuracy and truth. The AGENT informed me/us that it is not possible for the AGENT to check the validity of such information and invited me/us to make my/our own enquiries in relation to the financial and other data concerning the above business/es. The AGENT also warned me/us that any indication of past performance was in no way a warranty or representation that the new owner would be able to achieve such results in the future and advised me/us to seek independent advice as appropriate before proceeding with any purchase.

81. Following Mr Facer’s agreement to the terms of the confidentiality agreement, Mr Lyons sent an information memorandum to Mr Facer on 21 September 2012. The information memorandum is a 21 page document, and contained considerable background information concerning the business, its products, and the market. The price sought was $350,000.

82. The information memorandum contained the following primary statements concerning the financial performance of the business and the justification for the price:

Financial Performance – Amazing Water has performed consistently well and been profitable since its inception in 2008. Sales for 2011 were $367,117 and owner’s return was $170,280 a margin of 46.4%. In 2012 sales were $349,562 and owner’s return reached $198,636 a margin of 56.8% (page 4).

83. This information was in substance repeated in a bullet point in the executive summary (page 5) together with a statement that the sale price of $350,000 for the business represented a multiple of owner’s return of 1.76 times based upon 2012 profits. Page 6 added that the return was 1.90 times on the average of 2011 and 2012 profits.

84. Page 6 also contained a table which set out the owner’s return in dollars for the years 2009 to 2012.

85. The following statement is made on page 17 concerning “Financials – Detailed Profit and Loss”:

The following tables detail the profit and loss accounts for the financial years 2009 through to 2012.

Sales decreased from 2009 ($269,797) when Amazing Water was managed by the original owner’s children into 2010 ($125,156) when the original owner operated from home paying minimal attention to the business. At the start of the 2011 financial year the original owner relocated the business to the Storage King site and sourced Internet sales portals such as Daily Bonanza, Deal Whiz and similar sites which resulted in a sales increase to $367,117 in 2011. Sales in 2012 reached $349,562 indicating a seamless transition of ownership. Sales in 2011 were higher due to an introductory offer provided to Harvey Norman at a low margin in order to gain brand recognition.

Owner’s return for 2009 – 2011 has increased year on year to reach $170,280 in 2011 and $198,636 in 2012. The higher Owner’s return for 2012 on lower sales reflects the above-mentioned Harvey Norman sales drive. Current sales and margins reflect the ongoing business more accurately in terms of the expectation of profit margins on the product range.

The vendor’s sales and owner’s return have tracked above the year average on an annualised basis since it commenced operations in February 2012 with sales for the five months reaching $166,376 and owner’s return of $97,348. If these five months are annualised (divided by 5 multiplied by 12) sales are $399,300 and owner’s return is $233,635 [emphasis in original].

86. A detailed profit and loss table is set out on page 19 for the years 2009 to 2012.

87. Page 20 is a profit and loss statement for the business for the period 1 February 2012 to 30 June 2012. Total sales are given as $166,375.65. Total cost of sales is $48,792.59, giving a gross profit of $117,583.06. Expenses are listed individually with a total of $42,054.14. The net profit is $75,528.92.

88. Although most of the financial information provided in the information memorandum relates to the period before 1 February 2012, there is the profit and loss statement for the period in which the business was operated by Mr and Ms Kotsiopoulos referred to immediately above. Additionally, the statements made on page 17, particularly those that have been emphasised, claim that there had been a seamless transition in ownership, that the current sales and margins were the more accurate reflection of expected profit margins, and that the stated sales of $166,376 in the five month period could be extrapolated to 12 months sales of $399,300, which would give an owner’s return of $233,635.

89. After he received the information memorandum Mr Facer entered into a series of email communications with Mr Lyons over the period up to 28 September 2012. Mr Facer included those email communications as exhibits to his affidavit, with virtually no elaboration concerning the meaning and effect of, or his understanding of, those emails.

90. Mr Facer then said that on about 25 September 2012 he had a telephone conversation with Mr Lyons in which he said that he was not prepared to pay $350,000 for the business, but he might be prepared to pay $220,000 including stock. Mr Facer said that he said to Mr Lyons: “The banking records are not conclusive”.

91. It is significant that Mr Facer has not given any consideration to the detail of the email communications that he had with Mr Lyons in his affidavit. It is also significant that Mr Facer omitted to deal with important aspects of the circumstances that led Mr Facer to offer to purchase the business for $220,000 including stock.

92. The evidence of the email communications that was exhibited to Mr Facer’s 20 December 2012 affidavit as Exhibits JF-4 and JF-5 amount to 137 pages. The pages are to some extent jumbled and difficult to follow. The court does not have the benefit of any submissions from the parties as to the significance of this evidence. That may be understandable so far as the defendants are concerned, because Mr Facer has put the evidence forward without any elaboration, and the defendants have made it clear that they have conducted their defences tactically in response to the way that Jewelsnloo has put its case, and given the relatively small amounts of money at issue in this case, it is reasonable that the defendants have conducted their defences conservatively. It is much less understandable why Jewelsnloo has not addressed the significance of this evidence.

93. In the circumstances it will only be safe for the court to have regard to the aspects of this evidence whose significance is relatively clear. Given the way that the evidence is ordered, it is a difficult matter to ensure that the following commentary is undertaken in chronological order. It appears that Mr Facer had discussions with Mr Lyons in the period before he made an offer to purchase the business. Mr Facer has generally not given evidence of the discussions. The significance of the documentary exchanges must be assessed having regard to the absence of that evidence. It will be convenient to refer to the source of relevant findings by giving the page number in the exhibits to Mr Facer’s affidavit. I have read all of the evidence and done my best to give it due weight, but will not attempt to set out all relevant parts of the evidence.

94. Mr Facer asked Mr Lyons to answer a number of questions set out in an email dated 21 September 2012. Mr Lyons did so by interlining his responses in that email (page 32).

95. On 21 September 2012 Mr Facer asked Mr Lyons concerning the $350,000 asking price what the “bottom price” was (page 32). Mr Lyons replied: “There’s probably only room for a small amount of negotiation in the price”.

96. Also on 21 September 2012, Mr Facer asked Mr Lyons for more “granular” figures (page 31). If “GL” stands for general ledger, Mr Facer asked for an historical general ledger for the 2011 and 2012 years, and appears to have requested MYOB records. Mr Lyons replied on the same day saying: “Stan does not run MYOB – he does not run the business in a sophisticated manner”.

97. Mr Lyons’ reply email (page 31) also stated that he had attached the monthly sales figures plus some FAQ. The monthly sales figures (page 40) are a breakdown of the $166,375.65 income into separate amounts for each month for the five month period into floor, bench and filters showing the total number sold plus the total receipts for each type of product.

98. The FAQ takes the form of a series of questions in black print and responses in red print. They contain a relatively detailed description of the way the business operated. For example, the FAQ explained (page 37) that Harvey Norman was the largest customer who bought by the container load, but was not expected to purchase again until 2013. There was a discussion of the way in which the business made sales through organisations such as Groupon and Scoopon (page 37).

99. It will be convenient to note at this stage (although it relates only to the issue of the restraint of trade against Mr Sengos), that the FAQ included the following:

Do you have a non-compete agreement with the original vendor? If we proceed, we would require the vendor to sign a non-compete agreement.

Non-compete with the original vendor is in place but that is with the vendor. Yes vendor would sign a non-compete.

100. While this answer informed Mr Facer that a non-competition agreement existed that bound Mr Sengos (or the relevant company), it made it clear that only Mr and Mrs Kotsiopoulos had the benefit of that agreement.

101. On 25 September 2012 Mr Facer by email asked Mr Lyons for monthly sales figures going back further than the five months (page 47). He said that another 19 months would be ideal if possible. Mr Lyons replied on the same day, saying: “I have attached some additional information for your reference. I don’t have any monthly figures for prior periods”. It is difficult to tell with confidence from the way that the email chains are organised in the evidence what the additional information was.

102. Doing the best I can from the structure of the exhibit, it appears that the additional information included financial reports by the companies who operated the business while it was controlled by Mr Sengos for the years ended 30 June 2010 to 30 June 2012. In some cases taxation returns were also included. At least one of the financial reports was signed by Mr Sengos. The parts of the financial reports at pages 65, 89 and 98 contain profit and loss reports for the years 2009 to 2012. The figures for revenue, gross profit and net profit match the figures for the profit and loss account for Amazing Water in the table on page 19 of the information memorandum.

103. The financial reports are in the conventional form; appear to have been properly prepared; and each appears to have been prepared by a named professional accountant.

104. The information (at page 97) included another copy of the profit and loss statement for Amazing Water for the period 1 February 2012 to 30 June 2012 that is included at page 20 of the information memorandum.

105. On 27 September 2012 Mr Facer sent a further email to Mr Lyons (page 115 and 116) in which he said, among other things: “I would like to have sight of the last 12 months bank statements regardless of how inaccurate they are”. This email is hard to interpret because it has responses interpolated after the text of Mr Facer’s email. The responses are in two separate colours. I do not know the meaning of colours. The response was apparently: “See attached – Stan’s and Paul’s from prior period. (This response is in blue). This response was followed by: “attached is a downloaded statement, I haven’t got it yet…” (This response is in red). The response was apparently included in an email from Mr Lyons to Mr Facer (page 115), which had an attachment part of the title of which was “3 months bank statements Amazing Water”.

106. It appears that the attachment included copies of bank statements for times when the business was operated by Mr Sengos and other times when it was operated by Mr and Mrs Kotsiopoulos. The bank statements for the latter period appear mainly at pages 144 to 165. There were two Westpac bank accounts, which had numbers 032-076 37-2050 and 732-076 63-0598. According to my calculations, the total banked to the credit of the first account between early February and the end of June 2012 was $17,107.89. The total credited to the second account over the period 25 January 2012 to 26 July 2012 was $37,044.82. The total is $54,152.71.

107. The bank statements for the second account have had withdrawals and deposits redacted. In the absence of any contrary explanation it would be reasonable to infer that, before copies of these bank accounts were provided to Mr Facer, someone had redacted the transactions referred to in the bank statements that were not related to the business of Amazing Water.

108. It is instructive to note at this point that, as I have observed above, in its final written submissions Jewelsnloo asserted that the representation that the turnover was $166,375 for the five month period was incorrect because the true figure was $58,000. That latter figure is very close to the sum of $54,152.71 disclosed by the bank statements for the two accounts of Mr and Ms Kotsiopoulos.

109. Mr Facer also asked in his 27 September 2012 email to Mr Lyons (page 115) for a breakdown of the 2012 sales number in product lines and quantity of each product line sold. The title to the attachment to Mr Lyons’ response includes the words “Monthly Sales Figures.xls”. It appears that one of the documents in the attachment (page 166) is another copy of the monthly sales figures that were provided by Mr Lyons to Mr Facer on 21 September 2012.

110. Mr Facer’s email to Mr Lyons on 28 September 2012 (page 112) includes the statement: “Please let Stan know – I am buying the business. I am just doing as much as I can before buying it. I am not trying to do anything but that”.

111. Mr Lyons gave evidence that he reviewed the bank statements provided to him by Mr Kotsiopoulos (at pages 117 and 144 to 165 of the exhibits to Mr Facer’s first affidavit) and also the consolidated monthly sales figures for the business (at page 166 of that affidavit). He noted that the deposits appeared to be less than the stated monthly income in the Excel document. Mr Lyons then gave the following evidence of conversations that he had on or around 25 and 26 September 2012:

11.   I then called Mr Kotsiopoulos and had a conversation with him in words to the following effect:

Lyons:   The Bank Statements seem to be less than the amount of the monthly trading figures. Have you got any other Bank Statements?

Kotsiopoulos:   As I said my accounting skills are hopeless. I can’t provide you with anything else.

Lyons:    We can’t sell the Business without verifying the numbers. I will have to tell the interested buyers that the Business is off the market.

Kotsiopoulos:   OK.

12.   On or around 25 September 2012 I called Mr Facer and had a conversation with him in words to the following effect:

Lyons:   I’ve just spoken with the vendor and they can’t provide any other documents verifying the income. Unfortunately we have to withdraw the Business from sale.

Facer:   I would be prepared to still go ahead but at a lesser price if the figures can’t be verified.

Lyons:   Wait a minute, I don’t want you to rely upon those figures. I will need you to sign off on a waiver confirming that you are not relying on those figures if you want to proceed.

Facer:      OK. Send it through.

Lyons:   Come back to me on the price that you are prepared to pay.

13.   On or around the 26 September 2012 Mr Facer called me and we had a conversation in words to the following effect:

Facer:      I am prepared to offer $200,000 for the Business.

Lyons:      I will take it to my vendor and will let you know.

14.   I then had a conversation with Mr Kotsiopoulos in words to the following effect:

Lyons:   We’ve got a buyer for the Business but he is only prepared to pay $200,000 as the figures for the Business aren’t conclusive and can’t be proven. With the reduced sale price the purchaser is prepared to do a quick sale as he likes the Business.

Kotsiopoulos:   Well if there is no one else genuinely interested I am OK with that accepting the offer.

112. If these conversations took place, they would establish that Mr Lyons told Mr Facer specifically that the vendors could not provide any other documents verifying the income for the period in which they had operated the business. That was such a serious situation to Mr Lyons and the vendors that they proposed to withdraw the business from sale. Had Mr Facer permitted Mr and Ms Kotsiopoulos to withdraw the business from sale, they would have avoided the risk of becoming involved in the present litigation. Mr Facer himself offered in response to go ahead but at a lesser price if the figures could not be verified. Mr Facer, therefore, in substance offered to take the risk of the turnover figures being unverifiable in order to achieve a discount on the asking price. Mr Lyons expressly stated that he did not want Mr Facer to rely upon the figures, and required as a condition of proceeding that Mr Facer sign a waiver confirming that he was not relying upon the figures. Mr Facer agreed. Mr Facer then offered a price that was a 43% discount on the asking price. Mr Kotsiopoulos then agreed to accept the offer on the basis that he could not establish that the turnover figures for the business were correct.

113. Mr Lyons then, on 26 September 2012, sent a letter to Mr Facer, which said:

Congratulations on your offer of $200,000 plus stock being accepted by the vendor of Amazing Water.

As per our telephone conversations I confirm that the vendor cannot offer verification of the sales data he has provided in the accounts included in the information memorandum provided to you on Amazing Water.

In recognition of this fact we have negotiated discounted sale/purchase price to reflect that situation.

Would you please confirm that this is your understanding by signing and returning it to me.

114. The letter included a provision for signing by Mr Facer. Mr Facer signed the letter on 26 September 2012, and added a proviso that the agreement was subject to contract.

115. In his affidavit in reply to the evidence given by Mr Lyons on this issue Mr Facer swore:

47.   In relation to paragraph 12 I deny the conversation as alleged. On or around 25 September 2012 I had a telephone conversation with Phil Lyons wherein Phil said words to the following effect: “I’ve spoken to the Vendor and they can’t provide any other documents to verify the income so it’s up to you if you buy the business you will just need to sign a waiver saying that.” I said: “okay”.

Phil said: “Julian, he’s not lying he just didn’t bank the cash that he received from sales. The figures would be right. It’s up to you Julian but if you buy the business you’ll just need to sign a waiver that the figures aren’t verified.”

I said: “okay.”

48.   In relation to paragraph 13 I deny the conversation as alleged.

49.   In relation to paragraph 15, I was never informed by either Stan, Paul or Phil that the trading figures I had been provided by Phil could not be relied upon or that they were inaccurate. I was only informed by Phil that Stan was unable to provide any further documents to verify the income other than the documents that had already been provided to me by Phil. I signed the letter [being the letter dated 26 September 2012] on the understanding that [Mr and Ms Kotsiopoulos] were unable to provide any further documentation to verify the income figures not on the basis that the figures were incorrect, inaccurate or misleading.

116. I have taken into account the fact that Mr Kotsiopoulos in his affidavit does not deal with these conversations, and does not corroborate Mr Lyons’ evidence.

117. I prefer the evidence given by Mr Lyons to that given by Mr Facer on this issue. Mr Lyons was an independent witness, who gave his evidence when cross-examined in a forthright and persuasive manner. On the other hand, I did not always find Mr Facer’s responses in cross-examination to be persuasive. I accept the submission made on behalf of Mr and Ms Kotsiopoulos that Mr Facer often appeared to be apprehensive in giving his evidence, and was sometimes unwilling to make reasonable concessions regarding seemingly uncontentious issues. For example, in respect of the reduction in the sale price of the business, the following exchange took place in cross-examination (T p 130):

Q:    Well, you did offer a discount?

A:    No. I didn’t. I offered the price.

Q:    Well, all right, so the sale price was $350,000, what did you offer?

A:    I offered 220 at first.

Q:    That was a discount on the sale price?

A:    I didn’t see it as a sale price. I saw it as an offer to treat.

118. Mr Facer was unable to make the obvious concession that he offered to pay a price for the business that involved a discount on the asking price.

119. Mr Facer’s evidence appears to be intended to achieve a number of results. One was to establish his understanding that Mr and Ms Kotsiopoulos were unable to provide any further documentation to verify the turnover figures, not that the figures were incorrect, inaccurate or misleading. This aspect of Mr Facer’s evidence may be accepted. All that Mr Lyons claimed to have informed Mr Facer was that the figures could not be verified and that was a problem that was sufficiently serious to justify taking the business off the market. Mr Lyons did not say that he positively advised Mr Facer that the figures were wrong. It does, however, follow from what he claims he said that he professionally thought the absence of verification was sufficiently serious that he would not have Mr Facer rely upon the figures. Mr Facer said that he was never informed that the figures “could not be relied on or that they were inaccurate”. It is true that he was not told they were inaccurate. It follows from the evidence given by Mr Lyons that he was informed that the figures were not reliable.

120. Secondly, Mr Facer makes the claim that Mr Lyons positively informed him that the turnover figures were correct, and the explanation for the deficiency in the documentary proof was that Mr and Ms Kotsiopoulos had not banked all of the receipts from the business. Further, Mr Facer insinuates that Mr Lyons really only required that the waiver be signed as a pretence to enable the sale to go ahead.

121. I do not accept the claim by Mr Facer that Mr Lyons so far departed from his professional obligations as to make a positive suggestion that the sales figures were correct notwithstanding the clear inadequacy of the documentary evidence in support.

122. I have taken into account the fact that the detailed monthly breakup of sales figures for the various products sold by the business appeared to verify the $166,375.69 turnover for the five months period exists, and was provided to Mr Facer (page 40 of the exhibit to Mr Facer’s first affidavit). It is difficult to conceive of how that document was prepared except from records that contained the information necessary to enable further calculations of the various subtotals to be made, unless it was a complete fabrication. The same may be said for the profit and loss statement for the business for the five month period that may be found at page 20 of the information memorandum.

123. It is arguable that, if those documents were prepared from financial records, it is probable that in some unexplained way the bank statements did not record all of the receipts of the business. If that were true then the probability that Mr Lyons informed Mr Facer that not all of the receipts had been banked might logically be increased. However, as I observe below, the business was not a cash business, and it is unclear how Mr and Ms Kotsiopoulos could have received the revenue generated by the business without banking or other records being created. Jewelsnloo’s case is inconsistent with their being more revenue than about $58,000, and Mr and Ms Kotsiopoulos did not contest that issue. Neither Mr Lyons nor Mr Kotsiopoulos was cross-examined concerning the provenance of the profit and loss account or the statement of monthly sales data. In the circumstances, the existence of the two documents is not a proper foundation for drawing any inference about the probability that Mr Lyons made a positive assertion to Mr Facer that the turnover representation was true, because not all of the receipts had been banked. Furthermore, it should be noted that Jewelsnloo did not plead that such a representation was made.

124. Mr Facer denied the conversation given by Mr Lyons in par 13 of his affidavit. That conversation involved no more than Mr Facer offering to pay $200,000 for the business, and Mr Lyons saying that he would seek instructions. It is inherently likely that that conversation took place. If it did not, there was no basis for Mr Lyons writing his 26 September 2012 letter to Mr Facer. Mr Facer did not offer any alternative evidence as to how Mr Lyons could have known what Mr Facer’s offer was.

125. In my view the terms of the 26 September 2012 letter are substantially more consistent with Mr Lyons’ version of the conversation than they are with Mr Facer’s version. The letter states that a discount in the sale price had been negotiated to reflect the situation that the vendor could not offer verification of the sales data. Mr Facer specifically confirmed that understanding. He said nothing in his hand written proviso about any qualification to that confirmation.

126. Given that Mr and Ms Kotsiopoulos had paid $300,000 when they purchased the business, and that is the price they wanted to receive on its sale, it is unlikely that they would have discounted that price by one third if their position was that the turnover figures were correct notwithstanding the deficiency in the documentary proof. It is more likely that they would have offered to warrant the validity of the turnover representation. Instead, they very readily agreed to substantially discount their asking price. That suggests that Mr Lyons had taken the stance that the business should not be sold for a price that assumed the truth of the turnover representation.

127. Mr and Ms Kotsiopoulos entered into a contract to sell the business to Jewelsnloo on 18 October 2012. The price was $200,000 plus trading stock, to a maximum of $20,000. The contract included the following terms:

5.2.2   Independent Enquiry

The Purchaser has made its own enquiries regarding the subject matter of this contract including the construction, nature, fitness or suitability for any purpose of the Business or any financial return or income which may be derived from the Business…

5.2.5   No Reliance

The Purchaser does not rely on any other document, statement, correspondence, representation, warranty, condition or arrangement whether oral or in writing made by the Vendor or any other person in respect of this subject matter of this agreement other than those expressly contained in this Agreement.

128. Completion of the contract of sale took place on 26 October 2012.

Was the turnover representation made?

129. I find that Mr and Ms Kotsiopoulos represented to Jewelsnloo before it entered into the contract of sale that the turnover of the business for the period 1 February 2012 to 30 June 2012 was $166,375.65.

130. Mr and Ms Kotsiopoulos accepted in their final written submissions that they made this representation (par 27).

131. The representation was made at page 17 of the information memorandum and in the profit and loss statement at page 20. It was repeated in the record of monthly sales figures for the business that Jewelsnloo was provided on two occasions.

Was the turnover representation false or otherwise misleading or deceptive?

132. I find that the turnover representation was on the balance of probabilities and the manner in which this issue was addressed by the parties false, and accordingly it was misleading and deceptive.

133. The evidence on this issue was not decisive, but as I understand the final written submissions of Mr and Ms Kotsiopoulos, it was not contested. The thrust of their defence on the turnover representation issue was that Jewelsnloo did not place any reliance on the turnover figures in the information memorandum (par 35).

134. Mr Facer gave evidence that he was initially told by Mr Lyons that Mr and Ms Kotsiopoulos did not maintain comprehensive financial records of the business by using a program such as MYOB. That appears to be the effect of Mr Lyons’ 21 September 2012 email to Mr Facer. Mr Facer said that shortly before settlement of the contract of sale he found out that Mr and Ms Kotsiopoulos did maintain MYOB records. Mr Kotsiopoulos told him that the records were not complete or accurate, and not all of the invoices issued by the business were in that MYOB file. Mr Facer send an email to Mr Kotsiopoulos on 25 October 2012 in which he asked to see evidence “of those 500 odd invoices you told me you had (and not just the totals) – please. You said you had them all in Excel”. Mr Lyons responded to this request by email dated 25 October 2012 in which he said on this subject: “Stan advises these are in the MYOB file which he will email after settlement, MYOB is up-to-date as at end of September”. Shortly after Mr Facer received this email he had a telephone conversation with Mr Lyons in which Mr Lyons told him that he would get all of the information he wanted after settlement, and that Mr Kotsiopoulos was not prepared to give it to him until after he had settled.

135. Mr Facer said that a few days after settlement he was given a flash drive by Mr Kotsiopoulos, who said that all of the information that Mr Facer had sought was on the flash drive.

136. Mr Facer had some difficulties in gaining access to the information on the flash drive, which he explained in his affidavit of 26 August 2013. I ultimately received into evidence printouts of information contained in the flash drive entitled “Sale Register Detail (all sales)” and the tax invoices for the business of Amazing Water for the period 1 February 2012 to 30 June 2012. I also received into evidence information of the same description for the period 1 July 2012 to 25 October 2012. This information was contained in Exhibits JF5 and JF6 to Mr Facer’s 26 August 2013 affidavit. I dealt with the manner in which these exhibits were received into evidence in pars 32 to 34 of my judgment given on 20 February 2015.

137. Exhibit JF5, which covered substantially the same period as the turnover representation, showed that sales of the business for the period from 4 February 2012 to 30 June 2012 were $58,730.03.

138. Jewelsnloo relied upon this evidence on the basis that the circumstances in which the flash drive was given to Mr Facer, and the statements made to him at the time as to the nature of its contents, as well as the apparent meaning of the titles to the files that were printed out and became Exhibit JF5 and Exhibit JF6, justified the court in relying upon the information as being evidence of all of the turnover of the business for the period the subject of the turnover representation. In my view that reliance was justified. It may be that the contents of the flash drive and the meaning and significance of the information printed out from it have not been fully and completely explained by the evidence. There is evidence of Mr Kotsiopoulos claiming that the information in the files on the flash drive was not complete. However, if that were true Mr Kotsiopoulos is the only person in a position to give evidence to substantiate that claim. He did not attempt to do so. In the circumstances the appropriate course is for the court to accept on the balance of probabilities that the turnover for the relevant period was an amount of or close to $58,730.03.

139. Accordingly, the turnover representation was false. It was misleading and deceptive notwithstanding all of the information given to Mr Facer concerning the unreliability of the turnover figures and the fact that the bank statements for the period only showed that $54,152.71 had been banked into the business’ bank accounts. Mr and Ms Kotsiopoulos did not withdraw the turnover representation. It was repeated by their agent, Mr Lyons, in the attachment to his 25 September 2012 email, which included the profit and loss statement for the period 1 February 2012 to 30 June 2012. The provision by a representor to the representee of information that casts doubt on or is inconsistent with an explicit representation, which is not formally withdrawn or qualified, will not ordinarily have the effect that the representation is not misleading or deceptive, when it is ultimately proved to be false. The maintenance of the representation in the face of the inconsistent information will create the risk that the representee will believe it and act upon it, which is the source of the representation being misleading or deceptive.

Did Jewelsnloo act in reliance on the turnover representation?

140. The combined effect of the following factors justifies the conclusion that Jewelsnloo did not rely upon the truth of the turnover representation in deciding to enter into the contract for the sale of the business.

141. To put the effect of the turnover representation into proper context, it must be remembered that the information memorandum informed Jewelsnloo that the Amazing Water business had been commenced in 2008, and that the information memorandum contained comprehensive profit and loss accounts for the business for the years 2009 to 2012 while the business was operated by Mr Sengos. The figures in the profit and loss accounts were corroborated by the financial reports and tax returns provided to Mr Facer by Mr Lyons. Jewelsnloo did not challenge the accuracy of the information memorandum in relation to those years. Mr Facer in his evidence said nothing about that period. In those circumstances the court should infer that Jewelsnloo decided to acquire the business on the basis that the financial information available for the period from its inception to about February 2012 supported the claims made about the business in respect of that period in the information memorandum.

142. I infer that Jewelsnloo regarded the business as being viable and worthwhile over the period to February 2012 in which the business was managed by Mr Sengos, and the significance of the turnover representation was its relevance to the effectiveness of the operation of the business after it was sold to Mr and Mrs Kotsiopoulos. The turnover representation was not crucial to the inherent viability of the business, as that had been established by the trading results for the first four years of its existence. The turnover representation was nonetheless important, as a purchaser in Jewelsnloo’s position would wish to be confident that the initial viability of the business was continuing. However, variations from the historical trends in turnover would more likely go to Mr and Ms Kotsiopoulos’ effectiveness as managers of the business, rather than its inherent viability, and any reductions in turnover experienced by Mr and Ms Kotsiopoulos in their short tenure could probably be turned around by competent management. That would be so provided everything else said in the information memorandum remained valid concerning the operation of the business.

143. Mr Facer was not permitted to enter into negotiations for the purchase of the business unless he first formally acknowledged, as he did on 21 September 2012, the matters set out in clause 2.1 of the confidentiality agreement. That provision, the terms of which have been set out at par 80 above, required Mr Facer to check representations made to him independently for accuracy and truth.

144. At the end of the process of negotiations Jewelsnloo signed a contract of sale in which it warranted that it had made its own enquiries regarding any financial return or income which may be derived from the business (clause 5.2.2), and that it did not rely on any representation whether oral or in writing made by the vendor in respect of the subject matter of the agreement other than those expressly contained in it (clause 5.2.5).

145. It may be that the existence of acknowledgements and warranties such as those contained in the confidentiality agreement and the contract of sale are not always absolutely effective to prevent a purchaser relying upon a false representation that has induced it to enter into the contract of sale: see for example Butcher v Lachlan Elder Realty Pty Ltd [2004] HCA 60; (2004) 218 CLR 592.

146. However, in my view it would be wrong for the court lightly to ignore the effect of such provisions in arm’s length commercial transactions in which the parties are professionally represented. Terms of this nature should not be treated as mere verbiage. If a potential purchaser does not want its rights to be governed by such terms, it may insist upon a variation to the agreement, or decline to proceed with it. Terms of this nature are important to the way that the parties have agreed to divide between them the risk of error being made by one party or the other. Vendors are likely implicitly to conduct the negotiations on the basis that the purchaser has accepted the obligation to make its own enquiries, and to judge the risks of the transaction on the basis that the provisions govern the distribution of risk between the parties; and the vendor is likely to provide information to the purchaser without taking the care to protect the vendor’s own interests that would be necessary if the vendor could not rely upon the provisions. As the present case to some extent demonstrates, not all matters relevant to the operation of the business are black and white and capable of absolute demonstration. It is a perfectly sensible commercial arrangement that the agreements apportion the obligation to make enquiries about the operation of the business and the risk of error as between the parties.

147. In the present case Jewelsnloo has ignored the significance of these provisions. Mr Facer did not give any evidence concerning the attention that he paid to these provisions, notwithstanding that they were specifically raised by the defences of Mr and Ms Kotsiopoulos. Jewelsnloo did not put forward any circumstances that would justify the court in not giving effect to the provisions in this case. In particular, Jewelsnloo has not provided a foundation for a finding that it was misled or deceived by the turnover representation notwithstanding the acknowledgement given by Mr Facer in the confidentiality agreement, and the warranty that it gave in the contract of sale. It would therefore be unfair for the court not to give effect to these provisions, as there is too great a risk that Mr and Ms Kotsiopoulos, through Mr Lyons, were themselves induced to leave the turnover representation as it stood, and not go to greater lengths to substantiate it or withdraw it, because they relied upon the positions adopted by Mr Facer and Jewelsnloo in the confidentiality agreement and the contract of sale.

148. Further, Mr Facer did pursue his own enquiries as required of him by the confidentiality agreement, and that led him to the position where he was told that Mr and Ms Kotsiopoulos did not have financial records that justified the turnover representation, and moreover when he was provided with all of the bank statements available to the vendors, they only established that over the five month period the subject of the turnover representation $54,152.71 had been banked from the turnover of the business. All Mr Facer said on this subject, in his 10 March 2014 affidavit, was that Mr Lyons had informed him that not all of the cash received by the business had been banked; that he was never informed that the trading figures could not be relied upon or that they were inaccurate; and that he signed the 26 September 2012 letter sent to him by Mr Lyons on the understanding that the vendors were unable to provide any further documentation to verify the income figures. I have not accepted Mr Facer’s evidence that Mr Lyons told him that much of the income of the business had not been banked. However, whether or not Mr Lyons made that statement, Mr Facer’s evidence goes no further than to baldly assert that he was not told that the turnover representation was wrong, and he believed it, and the only problem was that the vendors could not substantiate it.

149. Mr Facer ignored in his evidence the fact that he had been given evidence that established that apparently only $54,152.71 had been banked. That is such a large disparity from the amount of $166,376 (in fact, a disparity of $112,223) that the court could not rationally accept that Mr Facer continued to believe that the turnover representation was true without some explanation from Mr Facer that justified that acceptance. The disparity is so great that rational behaviour would cause a purchaser in the position of Mr Facer who learned of it, and who thought that the truth of the turnover representation was crucial to proceeding with the transaction, to take relatively extensive steps to require that the representation be verified. Even if such a purchaser understood that the vendors had not banked some two thirds of the cash received, the purchaser would have insisted upon other information being provided to establish the turnover. This was an Internet business. Its operation would have generated Internet records and invoices. It was not a cash business. The proposition that two thirds of the receipts of the business were not banked is inherently improbable, as the vendors would almost invariably be paid electronically, or by cheque. Alternatively, if that could not be done, the purchaser would insist upon an appropriately worded warranty as to the truth of the turnover representation. Mr Facer did none of these things.

278. Mr Sengos and his companies have not denied that they have sold products in the manner alleged in par 25 (a); that is, through the group selling agents identified in the subparagraph.

279. To put the matter in perspective, as I understand it, Jewelsnloo has not taken issue with Mr Sengos and his companies’ claim that, during the six week period in which the business existed, some $19,506 in sales were made with $9824 in profit. When taken to the evidence of Mr Sengos to this effect in par 60 of his affidavit, Mr Facer did not doubt these figures (T 109).

280. I am satisfied on the evidence that Mr Sengos and his companies (whichever of them it may have been) acquired the stock that they sold in a legitimate way from Mr and Ms Kotsiopoulos, before they sold the business to Jewelsnloo. The products were sold in the same packages and get up in which the supplier supplied the products to Mr and Mrs Kotsiopoulos.

281. Primarily, Jewelsnloo relied upon pars 70 and 72 of Mr Facer’s first affidavit, and the documents at pages 309 to 311 (and perhaps also pages 313 and 314) in the exhibit to Mr Facer’s first affidavit to establish that the second element was satisfied. Mr Facer points to the fact that the Groupon webpages depict one of the Amazing Water products and that the telephone numbers given are numbers of one of Mr Sengos’ companies.

282. The Groupon webpages appear (I have been able to detect references on pages 309, 310, 313 and 314 of the relatively unclear exhibit) to identify Amazing Water as the supplier. This appears most clearly from pages 309 and 310, which speak of “includes nationwide delivery from Amazing Wa (screenshot not complete)” and “includes nationwide delivery from Amazing Water” respectively. Pages 313 and 314 refer to “Amazing Water’s unique five-stage filtration process”. Page 314 contains another reference to “Amazing Water’s amazing [illegible]”. Although the name of the fourth defendant is set out on pages 310 and 311, that is done in a way that would suggest, when read with the text of the webpages, that the fourth defendant was the owner of the Amazing Water trade name.

283. I should note a somewhat strange aspect of the evidence. Mr Sengos was asked in cross-examination whether he was responsible for the preparation of the design of the Groupon webpages referred to above. He said that he was not. The matter was not taken further, either in cross-examination or in evidence in reply by Mr Sengos and his companies. The significance of this evidence is somewhat mysterious. It may mean that Groupon itself designed the webpages. It is also possible that, if that was the case, Groupon simply reused the designs that it had formerly used when the Amazing Water Business was owned by the fourth defendant, and then Mr and Ms Kotsiopoulos. That possibility is enhanced by the fact that Mr Sengos apparently continued to liaise with the group selling agents on behalf of Mr and Ms Kotsiopoulos. This is all a matter of speculation. Mr Sengos and his companies did not plead that, for any reason that the law might recognise and accept, they were not responsible for the designs of the webpages under which businesses such as Groupon sold products on behalf of the fourth defendant with the trade name and get up of the Amazing Water business. In these circumstances I regard Mr Sengos’ answer as immaterial. He and his companies would be responsible for the web page designs employed by the likes of Groupon to find purchasers for the products on behalf of Mr Sengos and his companies.

284. I am satisfied that Jewelsnloo has made out its claim in relation to the allegations in par (a) to the particulars to par 25 of the second further amended statement of claim.

285. So far as the allegation in par 25(b) is concerned, it is to be noticed that the allegation is that Mr Sengos and his companies “advertised for sale on their website” the relevant products, and not that they sold any.

286. The website that Mr Sengos used was designed by his daughter Bianca. Mr Sengos accepted that, when his website was compared with the Amazing Water website used by Jewelsnloo: “apart from the relatively marginal changes Bianca made, the two websites are basically the same”. That was a proper concession for Mr Sengos to make. A comparison between the two websites strongly justifies the conclusion that any potential purchaser who opened Mr Sengos’ website would probably confuse the supplier with the owner of the Amazing Water website, and believe that any product acquired would be supplied by Amazing Water; that is Jewelsnloo. Mr Sengos and his companies did not submit to the contrary.

287. Mr Sengos gave evidence, which Jewelsnloo did not challenge, that there was only one sale that was effected through the website, and that sale was reversed after the court granted the initial injunction on 20 December 2012. Accordingly, Mr Sengos and his companies did not complete any sales through the website, which is consistent with the allegation in par 25(b) that all that they did was advertise products for sale.

288. Although on the evidence I accept that it has not been shown that Mr Sengos or his companies made any sales by acting in the manner alleged in par (b) to the particulars to par 25 of the second further amended statement of claim, I am satisfied that that conduct constituted passing off, at least to the extent that the second requirement is satisfied if the conduct is likely to cause Jewelsnloo to suffer injury in its trade or business. The conduct would be sufficient to support the granting of an injunction by the court to prevent its continuance.

What relief for passing off is appropriate?

293. Jewelsnloo has established by the evidence considered above that it is entitled to an injunction to prevent Mr Sengos and his companies from continuing the conduct that I have found constituted passing off. However, Jewelsnloo effectively got that relief on the very day that it commenced these proceedings, and Mr Sengos and the companies have never suggested that the order that has been made until further order should be discharged.

294. Furthermore, Mr Sengos and his companies only acquired a limited amount of goods from Mr and Ms Kotsiopoulos, which I infer they have now sold over the period of the six weeks before 20 December 2012 and the period allowed by the proviso to the 30 January 2013 orders. The evidence does not support a finding that there was any real likelihood that Mr Sengos and his companies would have attempted to acquire additional goods bearing the trade name “Amazing Water”, and with the Amazing Water get up from the Chinese suppliers in order to continue selling the products on a long-term basis.

295. The question, therefore, is whether Jewelsnloo has established an entitlement to any additional relief.

296. The law affords plaintiffs who can establish that the defendant has engaged in passing off alternative remedies in damages or an account of the defendant’s profits. The former involves compensation for the loss suffered by the plaintiff as a result of the passing off, and make cover loss of profits from sales that the plaintiff has been prevented from making as a result of the defendant’s passing off, as well as for damage to the plaintiff’s reputation. The alternative remedy of an account of profits entitles the plaintiff to be paid the profits earned by the defendant as a result of the passing off. The plaintiff must make an election as to which remedy is pursued, and the plaintiff may be given time after the commencement of the proceedings to decide which election should be made. That time is given because it may not initially be clear whether the more advantageous remedy to the plaintiff will be damages or an account, and the plaintiff may need to use the interlocutory processes of the court to determine which remedy it should elect to pursue. The elections must be made before final judgment: see Dr Martens Australia Pty Ltd v Bata Shoe Co of Australia Pty Ltd (1997) 75 FCR 230.

297. In the present case Jewelsnloo sought an account in the initiating summons, as well as damages, but then deleted the claim for an account in the initial statement of claim and all subsequent amendments of that pleading.

298. Jewelsnloo said nothing during the course of the hearing concerning the alternative remedy of an account of the profits made by Mr Sengos and his companies. I assume that it decided to take that course because it appreciated that only a small profit had been made – as it appears, only $9,824.

299. The only remedy that has been pursued by Jewelsnloo in addition to the injunction is damages.

300. As I understand Jewelsnloo’s evidence and submissions, it has not attempted to make out a case for compensatory damages by proving that a consequence of the passing off was that Jewelsnloo was prevented from selling the goods that were sold by the fourth defendant itself.

301. Furthermore, Jewelsnloo has not made any claim for compensation for any injury to its reputation caused by the passing off. Nothing has been said by Jewelsnloo on that issue. It may be that, because the fourth defendant has sold identical products to those sold by Jewelsnloo, under the Amazing Water trade name and to get up, so that the products sold are not in any way inferior copies of Jewelsnloo’s products, no damage has been caused to Jewelsnloo’s reputation.

302. The only positive claim that Jewelsnloo has made for damages is for exemplary damages.

Is Jewelsnloo entitled to exemplary damages?

303. It will be appropriate to start with a review of the authorities that have considered the circumstances in which exemplary damages should be awarded for the tort of passing off.

304. The Full Court of the Federal Court of Australia in Taleb v GM Holden Ltd [2011] FCAFC 168; (2011) 286 ALR 309 accepted that exemplary damages could be awarded upon proof of the tort of passing off in Australia, in the following terms:

[41] It is accepted in this country that the circumstances of a passing off may be such as to make it appropriate to punish a respondent for conduct showing a conscious and contumelious disregard for the wronged party’s rights and to deter the wrongdoer from committing like conduct again: see eg Flamingo Park Pty Ltd v Dolly Dolly Creations Pty Ltd (1986) 6 IPR 431 at 456–457; Deckers Outdoor Corporation Inc v Farley (No 5) (2009) 262 ALR 53 at [98] ff. Such awards have not commonly been made, the apparent reason for this being that the passing off has occurred in conjunction with a copyright infringement for which substantial “additional damages” have been awarded under s 115(4) of the Copyright Act 1968 (Cth): eg Decker Outdoors at [115]; on the interrelationship of such “additional damages” and exemplary damages, see eg Futuretronics.com.au Pty Ltd v Graphix Labels Pty Ltd (No 2) (2008) 76 IPR 763 at [17]–[19]; and see generally Ricketson and Creswell, The Law of Intellectual Property: Copyright, Designs & Confidential Information, [13.900]–[13.940].

305. The circumstances in which the court will award exemplary damages for passing off have recently been considered by a number of judges of the Federal Court. In Facton Ltd v Rifai Fashions Pty Ltd [2011] FCA 290; (2011) 91 IPR 109 Bromberg J said:

[32] The applicants also seek exemplary damages, or alternatively additional damages under s 115(4) of the Copyright Act.

[33] The claim for exemplary damages is put on the basis that Rifai Fashions and Mr Rifai have engaged in “conduct showing a conscious and contumelious disregard for the plaintiff’s rights”: XL Petroleum (NSW) Pty Ltd v Caltex Oil (Aust) Pty Ltd (1985) 155 CLR 448 at 471 per Brennan J. The applicants rely on the evidence that Rifai Fashions continued to sell counterfeit “G-Star” branded apparel after Mr Rifai signed the Notice of Consent to Forfeit Goods and after each of the first and second undertakings were signed. That was said to be knowing conduct with an extra level of dishonesty, which raised the conduct to the level apt for an award of exemplary damages.

[34] Whilst the power of a court to award exemplary damages was severely curtailed in the United Kingdom, that position has not been followed in Australia: Uren v John Fairfax & Sons Pty Ltd (1966) 117 CLR 118; Australian Consolidated Press Ltd v Uren (1966) 117 CLR 185; and Sanders v Snell (1997) 143 ALR 426 at 450–452.

[35] However, to act in contumelious disregard of the rights of another involves more than knowing, deliberate or wilful conduct. Contumelious conduct involves an element of malice or spite or the like, often manifested in insult or humiliation: see “Contumely” Macquarie Dictionary (5th ed, 2009). In Sanders, Wilcox, O’Loughlin and Lindgren JJ at 451 expressed the position in Australia by reference to an early edition of McGregor on Damages and the passage there contained that exemplary damages:

can apply only where the conduct of the defendant merits punishment, which is only considered to be so where his conduct is wanton, as where it discloses fraud, malice, violence, cruelty, insolence or the like; or as it is sometimes put, where he acts in contumelious disregard of the plaintiff’s rights.

[36] The applicants were unable to point me to any decision where exemplary damages were awarded for passing off, other than a decision of the Federal Magistrates Court in Crimson SRL v Claudia Shoes Pty Ltd (No 4) [2007] FMCA 1728. That decision seems to equate a breach of s 115(4) of the Copyright Act involving flagrant conduct, with a conscious and contumelious disregard of an applicant’s rights. With respect to the learned Federal Magistrate, flagrant disregard and contumelious disregard of a person’s rights are not the same. Flagrancy speaks of the glaring extent of the disregard and not as to its malicious or spiteful character.

[37] I have no hesitation in finding that Mr Rifai’s conduct (and thus that of Rifai Fashions) was knowing and deliberate. It can be said that the continued selling of a small number of counterfeit goods after the giving of undertakings involved wilfulness. However, the conduct was not wanton, there was no malice or insolence or the like disclosed. Whilst there was conscious disregard for the applicants’ rights, that disregard was not both conscious and contumelious. This is not one of those rare occasions where an award of exemplary damages is appropriate.

306. On appeal in Facton Ltd v Rifai Fashions Pty Ltd [2012] FCAFC 9; (2012) 287 ALR 199, Lander and Gordon JJ did not (at [11]) find it necessary to discuss the tort of passing off or the claim for exemplary damages, because they decided that additional damages should be ordered under s 115 of the Copyright Act 1968 (Cth). Their Honours increased the amount of the additional damages that the trial judge had awarded to the applicant, and did so on a different principle than that upon which his Honour had acted.

307. Gilmour J disagreed with the judgment of the trial judge in respect of his findings concerning exemplary damage, in the following terms:

[77] The trial judge declined to award exemplary damages. The critical finding of the primary judge at [37] of his reasons was that whilst the respondents’ conduct was knowing and deliberate it was not wanton, malicious, insolent or the like and was not therefore “contumelious”. The primary judge referred to a passage from Mayne & McGregor on Damages (12th ed, 1961) as cited by the Full Court in Sanders v Snell (1997) 73 FCR 569 at 597 that exemplary damages:

… can apply only where the conduct of the defendant merits punishment, which is only considered to be so where his conduct is wanton, as where it discloses fraud, malice, violence, cruelty, insolence or the like; or as it is sometimes put, where he acts in contumelious disregard of the plaintiff's rights.

[78] The primary judge considered that before offending conduct could be contumelious, there required to be established an element of “malice or spite or the like often, manifested in insult or humiliation”. I would respectfully disagree with the primary judge for a number of reasons. First, contumelious conduct need not be malicious or spiteful. It includes, for example, contemptuous conduct: Macquarie Dictionary On-line or reproachful conduct: Oxford English Dictionary On-Line. Lamb v Cotogno (1987) 164 CLR 1, as was noted by the Full Court in Sanders v Snell at 598–599 was a case where there was an express finding by the court at first instance that the defendant had acted without malice. However, this was held not to be a barrier to the award of exemplary damages. It sufficed that the defendant’s conduct was “callous” with the defendant acting in a humiliating manner and in wanton disregard of the plaintiff’s welfare.

[79] Second, in my opinion, the conduct of the respondents, contrary to the finding of the primary judge at reasons [37] was “wanton”. I do not understand their Honours in Sanders v Snell at 597 when they cited the above passage from Mayne & McGregor on Damages (12th ed 1961) as somehow limiting the meaning of the word “wanton” in the present context. It seems to us to describe the deliberate and flagrant disregard for another’s legal rights. Whether the conduct in question in a particular case falls within that description will be a matter of degree and judgment in the context of that case.

[80] Here, the primary judge found, with substantial justification on the evidence, that the respondents conduct was not only knowing and deliberate but also “involved wilfulness” and a “conscious disregard for the (appellants’) rights”.

[81] In my opinion these findings warrant the description of a “conscious and contumelious disregard for the plaintiffs’ rights” stated by Brennan J in XL Petroleum and as discussed by the Full Court in Sanders v Snell.

[82] I agree with the submissions of the appellants that it would convey the wrong message to infringers that they will suffer nothing more than compensatory damages and party-party legal costs when they engage in conduct of the following kind which occurred here:

(a)   acquiring and selling goods known to be counterfeit;

(b)   giving false undertakings;

(c)   continuing to trade in goods knowing them to be counterfeit after giving such undertakings;

(d)   denying liability in subsequent legal proceedings, putting the plaintiffs to proof and ignoring numerous Court orders to file evidence and submissions; and

(e)   giving false sworn evidence that it was not known that the goods were counterfeit.

[83] This list is illustrative only and is not intended to confine the circumstances in other cases which may attract an award of exemplary damages.

308. In GM Holden Ltd v Paine [2011] FCA 569; (2011) 281 ALR 406 Gordon J said the following in relation to an application for an order for exemplary damages in respect of a passing off:

[94] In XL Petroleum (NSW) Pty Ltd v Caltex Oil (Aust) Pty Ltd (1985) 155 CLR 448 at 471, cited with approval by the Full Court in Lamb v Cotogno (1987) 164 CLR 1 at 9:

As an award of exemplary damages is intended to punish the defendant for conduct showing a conscious and contumelious disregard for the plaintiff’s rights and to deter him from committing like conduct again, the considerations that enter into the assessment of exemplary damages are quite different from the considerations that govern the assessment of compensatory damages. There is no necessary proportionality between the assessment of the two categories. In Merest v Harvey (1814) 5 Taunt 442 [ 128 ER 761] substantial exemplary damages were awarded for a trespass of a high-handed kind which occasioned minimal damage, Gibbs C.J. saying:

I wish to know, in a case where a man disregards every principle which actuates the conduct of gentlemen, what is to restrain him except large damages?

The social purpose to be served by an award of exemplary damages is, as Lord Diplock said in Broome v Cassell & Co. [1972] AC, at p 1130, “to teach a wrong-doer that tort does not pay.

[95] In Sanders v Snell (1997) 73 FCR 569 at 451 Wilcox, O’Loughlin and Lindgren JJ expressed the view that exemplary damages:

… can apply only where the conduct of the defendant merits punishment, which is only considered to be so where his conduct is wanton, as where it discloses fraud, malice, violence, cruelty, insolence or the like; or as it is sometimes put, where he acts in contumelious disregard of the plaintiff’s rights.

[96] The applicants submitted that the respondents’ passing off has been wanton and has disclosed fraud, malice and/or insolence in the relevant sense to found an order for exemplary damages based on the following facts:

1.   the flagrancy of the copying by the respondents given that the features of pattern and ornamentation on the respondents’ products are a close copy of the Holden wheels and wheel centre caps — this is a passing off case in the counterfeiting category;

2    the respondents did not have to incur the significant design costs that the applicants had to incur in order to create the Holden Wheels;

3.   the respondents’ products continued to be offered for sale well after the applicants’ solicitors first wrote to them;

4.   the letters of demand sent by the applicants’ solicitors were ignored completely;

5.   there is a need to deter similar infringements to protect consumers from being misled that they are purchasing authorised products when in fact they are not; and

6.   there is a public interest in deterring unauthorised copying in circumstances where design is at the heart of a business such as the applicants’.

[96] I agree. As I have noted earlier, the conduct of the respondents showed a complete and continual disregard of their legal obligations and, in particular, the rights of the applicants. This was particularly brought into focus by the deliberate destruction of documents orchestrated by Mohamed Taleb (see [64] above): Mohamed Taleb admitted during cross examination that he was “happy to destroy as many records” of Taleb Tyres “as quickly as possible” following the first meeting of the company’s creditors. It is likely that this conduct of Mr Taleb had a direct bearing on the fact that the liquidators of Taleb Tyres were unable to produce any documents in response to subpoenas served on them by the applicants. This conduct constituted a contumelious disregard of the applicants’ rights, and requires exemplary damages to be calculated accordingly.

[97] The amount of such exemplary damages is entirely in the court’s discretion and, as noted by Brennan J in XL Petroleum at 471, there is no necessary proportionality between the assessment of compensatory damages and exemplary damages, and indeed, the latter may be many times greater than the former.

[98] In the circumstances of the present case, I consider that an appropriate award of exemplary damages for passing off is $200,000.

309. On appeal in Taleb v GM Holden Ltd (above) at [45] and [55], the Full Court decided that the exercise of Gordon J’s discretion in assessing the amount of exemplary damages had miscarried, because her Honour had made a mistake of fact, and the amount of the exemplary damages was reduced to $75,000. The Full Court did not disagree with her Honour’s statement of principle.

310. I have considered the reasoning in these cases in some detail, as expressions such as “contumelious” and even “contemptuous” will not always provide an objective indication of the quality of the conduct of a defendant that is sufficient to warrant an award of exemplary damages, as a punishment for the defendant’s conduct. There was a level of disagreement in Facton Ltd v Rifai Fashions Pty Ltd between the trial judge and Gilmour J as to whether contumelious conduct was “wanton, malicious, insolent or the like”, or whether conduct falling short of being malicious or spiteful could be contumelious because it was contemptuous. It may not be a simple matter in a particular case to characterise conduct as being contemptuous while not malicious or spiteful.

311. Of perhaps more utility is the apparent acceptance by the courts that conduct involving passing off may be knowing and deliberate, and thus warrant an award of compensatory damages, without the conduct having the quality that justifies an award of exemplary damages as a punishment for that conduct. While the conduct listed by Gilmour J at [82] and by Gordon J at [96] of their judgments set out above only provide examples of conduct considered by the courts as being contumelious, those lists throw useful light on the seriousness of the conduct and the state of mind and attitude of the defendant that is required before an order for exemplary damages is warranted.

312. The question is whether the conduct of Mr Sengos and his companies in this case was such as to justify an order for exemplary damages against them.

313. Jewelsnloo made a strong submission that the conduct was contumelious, but it did not offer any reasoned explanation as to why the court should treat the conduct as having that extreme character. Jewelsnloo appeared to approach the issue on the basis that it was an obvious conclusion to reach. Although Jewelsnloo did not articulate its submission in the following way, it may be that Jewelsnloo was proceeding upon an assumption that the court would find that Mr Sengos made the misrepresentations to Jewelsnloo that are alleged against him in relation to his intentions to continue in the business, and the continuation of the restraint of trade to which he agreed, so that his later conduct in passing off the products he acquired from Mr and Mrs Kotsiopoulos should be considered as all being part of the same wrongful attack by Mr Sengos on the lawful interests of Jewelsnloo. However, if that be so, the first limb of Jewelsnloo’s case has failed, and the passing off must be considered as a separate wrong.

314. Jewelsnloo did not cross-examine Mr Sengos with the end of demonstrating that his motives were in fact contemptuous of the interests of Jewelsnloo, or looked at differently, involved a wilful or conscious disregard for Jewelsnloo’s rights, so that, however described, they would warrant the description of a “conscious and contumelious disregard for the plaintiffs’ rights” as stated by Brennan J (as his Honour then was) in the XL Petroleum case.

315. It will therefore be necessary for the court to determine itself how the conduct of Mr Sengos and his companies should be assessed. In my view that conduct should be assessed from the perspective that Mr Sengos and his companies were left with a finite and relatively small amount of stock that had legitimately been purchased from Mr and Ms Kotsiopoulos when they unexpectedly decided to sell the business. Mr Sengos initially hoped to be able to sell that stock in the course of some cooperative arrangement with Jewelsnloo, and to continue to operate as a subsidiary to Jewelsnloo’s business. When that aspiration failed, Mr Sengos decided to sell the stock using the same business model as he had always used, given that he had been released from the deed of restraint that he had executed.

316. In my view the most probable explanation of what followed was that, because of the relatively limited amount of stock, which would be expected to generate only a small amount of profit, Mr Sengos decided to make use of the marketing arrangements that he had always used after making minimal and inexpensive alterations. The amount of stock available for sale did not warrant the cost of designing a new web page or advertisements for the webpages of businesses such as Groupon from scratch. Mr Sengos arranged for his daughter to make changes to the webpage that had been used by Mr and Ms Kotsiopoulos, and then transferred to Jewelsnloo. For whatever reason, his daughter only made minimal changes, which were entirely insufficient to create the appearance that the webpage was operated by a completely different business to Jewelsnloo. The evidence concerning the design of the Groupon webpages is limited. It is not clear who designed the webpages, what Mr Sengos’ involvement was, or whether he even knew exactly what the content of the advertisements was. Nonetheless, he was responsible for the content. Whether he was insufficiently careful and simply left it to Groupon to design the advertisements (with the result that they simply adapted the existing advertisements), or whether Mr Sengos himself took an unwarranted shortcut in deciding to use those advertisements, the probability is that the inclusion in the fourth defendant’s webpage and the Groupon advertisements of features that have led to passing off being committed was caused by decisions on Mr Sengos’ part to try to sell the goods quickly and at the least expense possible.

317. That conduct on Mr Sengos’ part was deliberate and unwarranted, and justified the imposition of the conventional remedies for passing off, but in my view it was insufficient to justify a finding that it was contemptuous of Jewelsnloo’s rights, or otherwise contumelious in the sense discussed above. Accordingly, I decline to make any order for exemplary damages against Mr Sengos and his companies.

Orders

318. Given the stance taken by Mr Sengos and his companies, as described above, concerning the continuation of the interlocutory injunction granted on 20 December 2012, and continued until further order on 30 January 2013, Jewelsnloo is entitled to a final order granting injunctive relief in relation to the passing off committed by Mr Sengos and his companies. An order to that effect should be made, to ensure that an order dismissing the proceedings does not undermine the effectiveness of the existing interlocutory injunction. However, the interlocutory injunction issued by the court restrained Mr Sengos and his companies from selling, promoting for sale or distributing water filtration equipment and dispensers on a blanket basis, whether or not that conduct involved passing off by the defendants. It will be necessary to reformulate the permanent injunction so that it only restrains conduct that constitutes passing off.

319. Jewelsnloo has otherwise entirely failed in these proceedings, and an order should be made that the proceedings be dismissed.

320. As the parties have requested, I will hear them as to the costs of the proceedings.

321. I therefore make the following orders:

1. Order that the first, fourth and fifth defendants be restrained by themselves, their servants or agents from selling, promoting for sale or distributing water filtration equipment and dispensers in any manner that involves those defendants in passing off their products or business as the products or business of the plaintiff.

2. Order that the proceedings be otherwise dismissed.

3. Direct the parties to deliver submissions on the costs orders that should be made in accordance with a timetable to be determined.

4. Order that the exhibits and any documents produced on subpoena may be returned forthwith in accordance with the Rules.

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Decision last updated: 24 February 2016