Jornad Pty Ltd v Sapme Pty Ltd (No. 2)
[2020] ACTSC 201
•5 August 2020
SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY
Case Title: | Jornad Pty Ltd v Sapme Pty Ltd (No. 2) |
Citation: | [2020] ACTSC 201 |
Hearing Dates: | 12-15 June 2018; 18-22 February 2019 |
DecisionDate: | 5 August 2020 |
Before: | McWilliam AsJ |
Decision: | See [243]-[244] |
Catchwords: | CONSUMER LAW – MISLEADING OR DECEPTIVE CONDUCT – Sale of business – claim against vendor pursuant to s 18 of Sch 2 of the Competition and Consumer Act 2010 (Cth) – whether vendor made misrepresentations as to turnover, profitability and the payment of rent – whether purchaser relied on vendor’s statements – where business failed – whether purchaser contributed to the failure of the business |
Legislation Cited: | Competition and Consumer Act 2010 (Cth) – s 137B, Sch 2 (ss 18, 236, 237) Court Procedure Rules 2006 (ACT) Evidence Act 2011 (ACT) – ss 63(3)(a), 69(1) |
Cases Cited: | Ashbury v Reid [1961] WAR 49 Australian Competition and Consumer Commission v Birubi Art Pty Ltd [2018] FCA 1595 Yorke v Lucas (1985) 158 CLR 661 |
Parties: | Jornad Pty Ltd (as trustee for the Jornad Trust) (ACN 142 547 411) (First Plaintiff) Kevin John Barnes (Second Plaintiff) Sapme Pty Ltd (ACN 118 293 440) (First Defendant) Stephen John Dawn (Second Defendant) Anne Dawn (Third Defendant) |
Representation: | Counsel S Hausfeld (First and Second Plaintiff) P Walker SC and J Larkings (First, Second and Third Defendant) |
| Solicitors Charles Filgate Giles & Associates (First and Second Plaintiff) Trinity Law (First, Second and Third Defendant) | |
File Number: | SC 67 of 2017 |
McWilliam AsJ:
This proceeding concerns the sale of a business known as the Uni Pub (the business). It was purchased some time in August 2016 by the first plaintiff, Jornad Pty Ltd (as trustee for the Jornad Trust) (ACN 142 547 411) (Jornad). It was sold by the first defendant, Sapme Pty Ltd (ACN 118 293 440) (Sapme). The individual directors of each of Jornad and Sapme who negotiated the deal, Mr Kevin Barnes and Mr Stephen Dawn, are now the second plaintiff and second defendant respectively.
The third defendant is Mrs Anne Dawn, Mr Dawn’s wife. She is not a director of Sapme but provided certain financial information to the plaintiffs in her role as managing the accounts of the business.
The business itself involved the operation of a bar, bistro, pool room, lounge and nightclub located over five floors on the corner of University Avenue and London Circuit in Canberra City (the business premises). As part of the purchase of the business, Jornad entered into a sub-lease for the occupation of the business premises, purchased stock and undertook repairs before commencing trading from 12 September 2016. However, the business fell into financial difficulty within a matter of months, and by 2 March 2017 had ceased trading, vacating the business premises. A week later, the plaintiffs commenced the present proceeding in this Court.
The Claim(s)
The claim brought by the plaintiffs is for damages or compensation under ss 236 and 237 of Sch 2 to the Competition and Consumer Act 2010 (Cth) (the Australian Consumer Law). The plaintiffs allege that they have suffered loss because of contraventions of s 18 of the Australian Consumer Law, the conduct being representations made to the plaintiffs during the negotiations for the sale of the business, which the plaintiffs allege were misleading or deceptive.
The plaintiffs’ claim was ultimately limited to two categories of representations said to have occurred during the negotiations for the purchase of the business. They are as follows:
(a) A representation that Sapme was paying rent at the rate of $15,000 per week plus GST (First Representation).
(b) A representation that the business takings for the financial year ending 2016 were as set out in a handwritten document prepared by Mrs Dawn (Second Representation), which was emailed to the plaintiffs on 18 July 2016, and attached as a schedule to the Statement of Claim (Schedule). The Schedule comprised of a table of figures for each of the various components of the business over the individual months in the 2016 financial year (being the bar/bistro, pool room, lounge, and nightclub), along with some handwritten notes explaining the figures. The total sum of the figures for the 12-month period was $2,941,588.
The plaintiffs allege that the First Representation was made by Sapme through a document entitled Information Memorandum for Sale of Uni Pub provided to the plaintiffs on 11 July 2016 (Information Memorandum).
Allied to the First Representation, the plaintiffs plead that on various dates, being 26 and 30 July 2016 and 24 August 2016, and by ongoing silence following the provision of the Information Memorandum, further representations were made to Jornad that:
(a) the business was financially supporting itself, including paying rent of about $850,000 per year;
(b) the business paid all its bills; and
(c) the business had paid its rent up to date.
It has been convenient to group these representations together and I will refer to them as the Further Representations.
The true position, which is undisputed, was that Sapme was not paying any rent at all to the landlord, and that it had not paid any rent since June 2015. Unbeknown to the plaintiffs, Mr Dawn had come to the view that he wanted to focus on his business interests in China and had spoken to the landlord about vacating the premises in due course. Rather than have a vacant tenancy, the landlord had requested that the business remain until a new buyer was found, and that in the meantime, the business would only be required to pay the outgoings. This was described as an ‘outgoings only’ arrangement between Sapme and the landlord, or a ‘rent holiday’.
During the hearing (and following the receipt of further evidence as to the previous income of the business), the Second Representation was put in a more limited way. The plaintiffs’ complaint against Sapme is now limited to one that the figures in the Schedule provided to the plaintiffs were impliedly exclusive of GST, when in fact, the figures provided were inclusive of GST.
The plaintiffs allege that the said representations caused Jornad to contract to buy the business from Sapme, and to subsequently invest money in the business by signing a sub-lease, purchasing stock and undertaking repairs to the fixtures, fittings and equipment in the business premises. The date that negotiations ceased and the purchase was concluded is unclear. Jornad signed a sublease on 2 September 2016 and gained access to the premises on 12 September 2016.
Mr Barnes alleges that he quit his job in corrective services to devote his full energy to the business and therefore, that he ought to be compensated for lost wages. He was also required to personally guarantee the sub-lease.
If the plaintiffs had known the true position as to the rent holiday and the income figures, the first plaintiff would not have purchased the business, with the consequence being that the plaintiffs would not have suffered losses such as the cost of the stock and repairs, the financial consequences upon termination of the sub-lease, and lost wages and superannuation in respect of Mr Barnes.
The plaintiffs’ case with regard to the accessorial liability of Mr and Mrs Dawn was somewhat difficult to follow as a result of how the pleading was drafted, with cross-referencing that did not always match up with the allegations that followed and the lack of any detail as to how either Mr or Mrs Dawn were ‘involved’ or ‘knowingly concerned’ in any of the contraventions alleged. As far as I have been able to make out, the plaintiffs allege:
(a) That Mr Dawn was knowingly involved in the First Representation and the Further Representations, given that as a director of Sapme, he was ultimately responsible for the provision of the information about the business to the plaintiffs, including the provision of the Information Memorandum. He also personally communicated the contents of the Further Representations (including his ongoing silence as to clarifying any issue about the rent) to Mr Barnes during oral conversations they had over three occasions during July 2016, the first being at the business premises, the second being at Olive Restaurant in Mawson, and the third being at the Kingston Hotel.
(b) That Mrs Dawn was knowingly involved in the Second Representation and the Further Representations, as she failed to inform the plaintiffs that Sapme was paying no rent and it was she who prepared the figures in the Schedule.
The plaintiffs had initially included in their claim a case in misleading and deceptive conduct against the landlord company, Simtak Pty Ltd (ACN 064 537 079) and its director, Mr Michael Kouperitsis. That aspect of the claim was settled out of court, with a Notice of Discontinuance filed on 10 November 2017.
Sapme has filed a cross-claim for the payment of certain stock purchased by Jornad. This was resolved on the final day of the hearing. It appears that the agreed value of the stock was an amount of $30,066.17. Jornad then claimed $878.54 by way of a reduction of that amount, for out of date stock. The total amount owing to Sapme by Jornad thus appears to be $29,187.63. The parties indicated that they would provide short minutes of order to finalise that claim and a direction to that effect will form part of the final orders to be made.
The Issues
The following matters are not in dispute:
(a) the dealings between the parties were ‘in trade and commerce’;
(b) the Information Memorandum stated: ‘Current rent per week is $15,000 + GST’; and
(c) the Information Memorandum was provided to Jornad and Mr Barnes.
As to the First Representation, Sapme and the individual defendants dispute that it was made by Sapme. They plead that Sapme did not provide the Information Memorandum to the plaintiffs. Rather, Sapme’s agent, Mr Jason Klose of Brindabella Business Brokers (the Broker), prepared the document for the purpose of seeking a purchaser for the sale of the business.
As to the Second Representation, Sapme and the individual defendants admit that it was made as pleaded, but deny there was any representation that the figures provided in the Schedule were exclusive of GST. They further submit that this was not a matter raised by the pleading for the defendants to address, and that there is some prejudice caused by the plaintiffs belatedly casting their claim in that way, arising from forensic decisions and evidentiary rulings made throughout the hearing.
If the Court permits the recasting of the Second Representation to be in a more limited form (as to the figures provided being exclusive of GST rather than inclusive), the defendants argue that the case, at its highest, establishes that the figures left the plaintiff in a state of uncertainty. That situation does not constitute misleading and deceptive conduct.
As to the Further Representations, the defendants admit that meetings took place as alleged, but deny the conduct alleged.
If the Court finds that any or all of the pleaded representations were made and further, that the conduct is characterised as being likely to mislead or deceive the plaintiffs, the defendants deny that the conduct had any causal link, arguing that there was no reliance on the representations.
In that regard, and addressing the First Representation, the defendants argue that there were certain exclusionary statements contained in the Information Memorandum, and further that the plaintiffs either knew, or should have known, the state of the business by virtue of their own enquires.
In addition, and with regard to all the representations, the defendants argue that the plaintiffs conducted their own financial assessment and projections of the business, rather than relying on any representations by Sapme about the business.
The defendants further dispute that any of the loss or damage claimed is compensable by them. As explained in closing submissions, they contend that the real cause of the business failing was a series of decisions made by the plaintiffs about the management of the business.
Alternatively, the defendants plead that any loss or damage should reflect the proportion of the loss or damage claimed that the Court considers just, having regard to the extent of the responsibility for the loss found to be attributable to either the landlord company or its director. As the plaintiffs did not pursue any allegations against the landlord company or its director, this issue fell away.
Accordingly, the issues for the Court to determine are:
(a) whether each of the representations were made;
(b) if so, whether the conduct is characterised as misleading and deceptive;
(c) if so, whether the conduct caused the loss alleged (including whether Jornad relied on any of the misrepresentations, and whether liability ought to be apportioned);
(d) if causation is established, the quantum of the loss;
(e) if any misleading and deceptive conduct is established in respect of any or all of the representations, whether either Mr Dawn or Mrs Dawn were knowingly involved in the contravention/s; and
(f) what is the nature of any appropriate relief.
Was the First Representation made to the Plaintiffs?
The first step involves identifying the conduct and asking whether the facts establish the conduct pleaded. In Campbell v Backoffice Investments Pty Ltd [2009] HCA 25; 238 CLR 304 (Campbell) French CJ stated (at [32]) that it is important in considering whether conduct is misleading or deceptive to identify clearly the conduct to be characterised. If the conduct is a statement made orally or in writing, for example, it will be relevant to consider whether the statement is one of historic or present fact, or whether it is of an opinion, value judgment or estimate.
The conduct in question here was a representation as to an existing state of affairs of a business, made to an individual prospective purchaser during the course of private negotiations to buy the said business (as opposed to a public statement made to a class of persons).
The resolution of whether the representation was made by Sapme became relatively straightforward, as the defendants ultimately did not rely on the pleaded defence that the First Representation was made by Sapme’s agent, rather than Sapme itself.
That was a proper approach to take. It was not suggested that the Broker acted outside his authority. The Broker was not joined as a party to the proceeding by any cross‑claim or otherwise. There was no suggestion in the evidence that the Broker did anything other than communicate what the vendor was representing, without adopting or endorsing it: see Yorke v Lucas (1985) 158 CLR 661 at 666 (Yorke v Lucas). That fact was made clear by the disclaimer contained in the ‘Confidentiality Agreement and Deed’, which the plaintiffs had to acknowledge and agree to before being provided with the Information Memorandum. The relevant extract of that document states:
Intending purchasers should satisfy themselves as to the truth or accuracy of all information given by their own inspection, searches, inquiries, advices or as is otherwise necessary. The inquirer acknowledges that no representation or warranty has been made as to the accuracy or completeness of the material. No person in the employ of Brindabella Business Brokers has any authority to give or make any representations or warranty in relation to any businesses.
The Information Memorandum was sent to Jornad and its director by Sapme as the vendor, through its Broker. It was clearly the document which provided the key information for potential purchasers of the business to read. The express words communicated in the Information Memorandum to Jornad and Mr Barnes was that the business was paying $15,000 in rent per week. I accept that the evidence establishes the First Representation was made by Sapme.
Was the First Representation misleading or deceptive, or likely to mislead or deceive?
The second step involves characterising the conduct. The approach is an objective one and requires asking whether, as a question of fact, the impugned conduct viewed as a whole has a tendency to lead a person into error: see Campbell at [25] per French CJ; Australian Competition and Consumer Commission v TPG Internet Pty Ltd [2013] HCA 54; 250 CLR 640 (ACCC v TPG) at [49] per French CJ, Crennan, Bell and Keane JJ); and Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd [2010] HCA 31; 241 CLR 357 (Miller) at [15] per French CJ and Kiefel J.
Conduct is likely to mislead or deceive if there is a real or not remote chance or possibility that it will have that effect: Global Sportsman Pty Ltd v Mirror Newspapers Pty Ltd (1984) 2 FCR 82 (Global Sportsman) at 87.
The characterisation of the conduct is to be determined on the basis of the conduct of the defendant as a whole, and by reference to the context of all relevant surrounding facts and circumstances: Butcher v Lachlan Elder Realty Pty Ltd [2004] HCA 60; 218 CLR 592 (Butcher) at [39] per Gleeson CJ, Hayne and Heydon JJ; at [109] per McHugh J; and Campbell at [102] per Gummow, Hayne, Heydon and Kiefel JJ. As McHugh J stated in Butcher at [109], it invites error to look at isolated parts of the corporation’s conduct.
In commercial dealings between individuals or individual entities, the relevant circumstances include the knowledge of the person who claims to have been misled and any common assumptions or practices established between the parties or prevailing in the particular activity or business in which they are engaged: Miller at [20]. See also Butcher at [37]; and Campbell at [26]-[27] per French CJ.
That is in contrast to the situation where the conduct is directed to the public or the market, so that the assessment is by reference to a hypothetical ordinary person, as to which see Campomar Sociedad, Limitada v Nike International Ltd [2000] HCA 12; 202 CLR 45 (Campomar) at [100]-[103].
An intention to mislead or deceive is not necessary: Google Inc v Australian Competition and Consumer Commission [2013] HCA 1; 249 CLR 435 (Google Inc) at [9]; Yorke v Lucas at 666; and Parkdale Custom Built Furniture Pty Ltdv Puxu Pty Ltd (1982) 149 CLR 191.
The above principles are well-established. Some of the applicable principles were also referred to by Refshauge J in this Court in Jardine v Vaughan; Clarkson Williams Partners Pty Ltd (Third Party) (No 3) [2015] ACTSC 33 (Jardine) at [151]. His Honour was there dealing with an earlier version of the legislation, but the principles remain applicable to the Australian Consumer Law.
The conduct in question here concerns negotiations leading to the execution of a private agreement for sale. In such a case, it has been said that while full disclosure is not required in every situation and no one expects all the cards to be on the table, the bargaining process is not to be seen as a licence to deceive: Poseidon Ltd v Adelaide Petroleum NL (1991) 105 ALR 25 (Poseidon) per Burchett J at 26. The particular facts must be considered in the light of the ordinary incidents and character of commercial behaviour: General Newspapers Pty Ltd v Telstra Corp (1993) 45 FCR 164 at 178.
Burchett J’s observation in Poseidon was referred to by French CJ and Kiefel J in Miller at [21]. Their Honours went on to state at [22] that as a general proposition, the relevant section (previously s 52 of the Trade Practices Act 1974 (Cth)) does not require a party to commercial negotiations to volunteer information which will be of assistance to the decision-making of the other party.
Of particular note for the present circumstances, their Honours then stated (at [23]):
…A party to precontractual negotiationswho provides to another party a document containing a false representation which is not disclaimed will, in all probability, have engaged in misleading or deceptive conduct. …
The defendants accept that as at July 2016, the First Representation was false. The document did not disclose the ‘outgoings only’ arrangement that Sapme had negotiated with the landlord.
The defendants initially relied upon the disclaimer contained in the Information Memorandum, set out earlier in these reasons at [31], to suggest that there could not have been any reliance on the alleged representation. Reliance is part of causation, and the distinction between characterisation and causation must be maintained (Campbell at [24] per French CJ), but the same contextual factors may play a role in determining each question.
In the present case, the disclaimer was made at the time the representation was made. Accordingly, apart from any question of reliance, it also forms part of the context or surrounding circumstances relevant to the characterisation of the conduct.
Where there is a disclaimer involved, the onus is on the person who has otherwise engaged in the misleading or deceptive conduct to establish that the disclaimer it relies on creates an overall effect that is benign: see Australian Competition and Consumer Commission v GlaxoSmithKline Consumer Healthcare Australia Pty Ltd [2019] FCA 676 and the authority there-cited.
The argument based on the presence of a disclaimer appears to have been overtaken by the defendants’ concession in closing submissions, following the conclusion of the evidence, that the failure by Sapme to make a disclosure as to the true position with regard to the payment of rent was misleading and deceptive. No submissions were directed to the effect of the disclaimer on the nature of the conduct.
In the event that the argument was maintained by the defendants, I will state briefly why I consider the concession to have been properly made. In Australian Olympic Committee, Inc. v Telstra Corporation Limited [2016] FCA 857, Wigney J collected a number of the applicable principles for cases brought under s 18 of the Australian Consumer Law. Part of his Honour’s helpful summary (at [132]) addresses the principles regarding disclaimers, as follows:
…
· In assessing or characterising the relevant conduct or representation, it is necessary to have regard to any relevant disclaimer. The substance, effect and prominence of the disclaimer must be considered in the context of the conduct or representation as a whole: Australian Competition and Consumer Commission v Telstra Corporation [2007] FCA 1904; (2007) 244 ALR 470 at 494 [116] citing the judgment of the Full Court in Keen Mar Corp Pty Ltd v Labrador Park Shopping Centre Pty Ltd [1989] FCA 54.
· The question must ultimately be whether any disclaimer communicates information in such a way or in such a manner that the effect of any otherwise misleading conduct or representation is reversed or erased: Butcher at 638-639 [152] (per McHugh J). A disclaimer in a document or on a website may be more effective than one on, for example, a television advertisement as the latter is likely to be more transient, ephemeral or less noticeable: TPG Internet at 654 [47] (per French CJ, Crennan, Bell and Keane JJ).
· There may be some circumstances where an express disclaimer inconsistent with the message otherwise conveyed will not prevent the conduct or representation from being misleading or deceptive, or might even reinforce that message: Telstra at [114]. Each case must be considered having regard to its own facts and circumstances.
The disclaimer relied upon in the pleaded defence was one provided by the Broker as agent. It appears to have been directed primarily to the recipient acknowledging that the Broker was not making separate representations about the state of the business being offered for sale.
To the extent that intending purchasers were advised to satisfy themselves as to the truth or accuracy of the information provided, and that this is taken to be some sort of disclaimer by Sapme as opposed to Sapme’s agent, there are four points to be made:
(a) There was no evidence that the Broker drew the plaintiffs’ attention to the disclaimer, and in particular, to the fact that it was wide enough to apply to the substantive content contained in the Information Memorandum, as distinct from merely establishing that the Broker was not itself giving any warranty or representation.
(b) In any event, Mr Barnes did attempt to satisfy himself of the truth or accuracy of the information given to him. He asked express questions of both Mr and Mrs Dawn, each of which knew the true position in regard to the rent free arrangement, but did not disclose it.
(c) The payment of rent is a fundamental component of running a business. The disparity between the primary statement that $15,000 per week was being paid, and the true position that nothing was being paid, was so great that it was necessary for Sapme to draw the attention of Jornad to the true position in the clearest possible way: see National Exchange Pty Ltd v Australian Securities & Investments Commission [2004] FCAFC 90 at [55].
(d) The words of a general disclaimer from the Broker, disclaiming that ‘no representation or warranty has been made as to the accuracy or completeness of the material’ are not sufficiently specific to overcome the significant disparity on such a critical aspect of the outgoings for the business as the current payment of rent. The payment of rent of $14,000 per week, when the rent was actually $15,000 per week, might be described as an out of date figure, lacking in accuracy or completeness. Here, the representation made was about whether rent was being paid at all. The statement was not just inaccurate, it was grossly wrong.
The concession that the First Representation constituted misleading and deceptive conduct makes it unnecessary to make a formal finding to that effect, but had it remained an issue, I would have so found.
Was the Second Representation made?
I have put to one side the defendants’ complaint about the refinement of the plaintiffs’ pleaded case being too late in the proceeding to be permitted. Although the representation for which the plaintiffs ultimately now contend does not explicitly match the representation pleaded, in light of the reasons that follow, it has not been necessary to deal with that pleading point.
What is now alleged to have been the Second Representation, being that a schedule of ‘sales’ figures provided to the plaintiffs was exclusive of GST, arises out of email correspondence between Mr Dawn and the Broker, and then Mrs Dawn, the Broker and Mr Barnes.
On 15 July 2016, the Broker sent an email to Mr Dawn as follows:
Steve
As discussed, can you kindly provide the following info for Kevin:
1. Total sales for the 2015/2016 financial year
2. Monthly sales for the 2015/16 financial year split by per level.
Thanks
On 18 July 2016, the Broker sent Mr Barnes (and Jornad) an email, which said:
Kevin
Sales breakdown as requested.
JK
The email chain was included, so that the email from the Broker forwarded a second email to Mr Barnes and Jornad, attaching the sales figures from Mrs Dawn. The email from Mrs Dawn said:
Hi Jason,
Steve asked me to pull together a few figures for the respective areas of the pub over the last twelve months. They’re only handwritten, hope that’s okay, and they’re also upside down!! Sorry, I can’t work out how to turn them the right way. I’m afraid technology has passed me by!
I’ve put a few notes in as well. If anyone doesn’t understand them please call me.
Kind regards,
Anne Dawn
The table of handwritten figures in the attachment included in the first column a list of months from July 2015 until June 2016. Next to each month were four columns with the headings Ground/Bis, Pool, Lounge, and N/C. In each of the four columns, Mrs Dawn had written a series of figures. There was no total provided, but the parties did not dispute that the total sum of those figures was $2,941,588.
The schedule of handwritten figures did not state either way whether the figures set out in the table were inclusive or exclusive of GST.
The notes referred to by Mrs Dawn were as follows:
NOTES
(1) Ground Floor Bar and Bistro takings are hard to split as there is a lot of crossover between the tills on the 2 levels. We do extract a “food” total each day, but I’m not sure how accurate it is. On average we do $12,000 worth of food each week according to this reading and this is part of the Ground Floor/Bistro Column.
(2) In January we only operate the ground floor for the month. The bistro is not open until the 3rd week of January, and the Pool Room opens the 2nd week of January.
(3) Pool room only opens Wed, Thurs, Fri and Sat
(4) Night Club opens only Thursday + Saturday, unless booked for a function.
Upon receipt of the email from Mrs Dawn, the Broker had replied to her email and asked:
Anne
Thanks for providing this through.
Just one question – are the amounts shown including or excluding GST?
Mrs Dawn had then replied by email:
Hi Jason,
These figures are straight off the daily takings sheets so therefore they include GST.
Regards,
Anne
In oral evidence, Mr Barnes confirmed that the Broker had not sent Mrs Dawn’s additional information to Jornad or Mr Barnes, or otherwise made him aware of the fact that the figures were inclusive of GST. That was not disputed by the defendants and is made clear from the timings of the emails in evidence.
Unlike the First Representation, there was no express statement that the figures which were provided to the plaintiffs, totalling $2,941,588, were GST exclusive sales for the financial year ending June 2016. Any conduct to that effect (in this case pleaded as a representation) depends upon whether the Court finds that the representation arose by implication.
The relevant law as to whether a representation arises by implication is to be determined by reference to whether a reasonable person in the position of the plaintiff would draw the implication alleged ‘in all of the circumstances’: Dynamic Lifter Pty Ltd v Incitec Ltd (1994) 30 IPR 198 at 203 (per Whitlam J), applied in Australian Competition and Consumer Commission v Birubi Art Pty Ltd [2018] FCA 1595 at [71] per Perry J.
Here, in addition to the contents of the email itself, the circumstances included the following:
(a) The plaintiffs had been provided with a number of financial statements prepared by accountants for the preceding financial years, from 2012 up to 2015. Those statements included the ‘sales income’ or ‘total trading income’ figures, all of which were expressly exclusive of GST.
(b) The financial statements for the year ending June 2016 were not yet prepared.
(c) The plaintiffs requested a breakdown of the sales figures for 2016.
(d) The Broker’s email to the plaintiffs said that he was providing the ‘sales’ breakdown ‘as requested’.
(e) Nothing was said to indicate that the figures were anything other than the sales figures.
(f) Mr Barnes assumed the figures were exclusive of GST, as all the other figures that he had received previously were all GST free. The only figures provided were those in the financial statements.
The email from the Broker refers to a sales breakdown ‘as requested’, but the evidence given by Mr Barnes did not establish that what he asked for were figures that were exclusive of GST. Mr Barnes may well have thought that when he asked the Broker for ‘total sales for the 2015/16 financial year’ or a monthly sales breakdown, he was asking for the figures exclusive of GST. However, that belief or assumption was not made clear to anyone on behalf of Sapme.
There was also nothing to suggest that when a reference to ‘sales’ was made, either as a matter of usual practice in the industry or when these particular parties were negotiating, it was clearly a reference to income, exclusive of GST.
There was some reference in the evidence to a distinction between the words ‘sales’ and ‘takings’, either in the industry or as used by accountants, with ‘sales’ meaning income (exclusive of GST) and ‘takings’ meaning figures straight from the till receipts, which would include GST. However, that distinction fell away because of the evidence given, which did not support any clear distinction between sales and takings, as can be seen from the following:
(a) the view of the expert accountants was that these descriptions were not so common in the industry as to be terms of art;
(b) the notes accompanying the figures in the Schedule expressly referred to an inability to split the ‘takings’, which would have alerted the plaintiffs to the possibility that the figures were the takings figures, not the sales figures;
(c) the pleaded representation used the language ‘takings’ rather than sales; and
(d) in any event, Mr Barnes gave evidence that he understood the word ‘takings’ to mean the income that the business had produced, not the monies that had been taken at the till.
As a result, the fact that the Broker referred to the figures as a ‘sales breakdown’ and not the business takings is not significant in terms of any understanding communicated to the plaintiffs about the figures being inclusive or exclusive of GST.
That means that the only other surrounding circumstances relevant to whether the representation alleged was made were that sales figures had previously been provided to the plaintiffs in a form that was GST exclusive.
It is significant that the only ‘figures previously provided’ were those set out in the full financial statements of Sapme (including detailed balance sheet, profit and loss statement and trading account statement), prepared by a qualified accountant. The Notes to the financial statements for each financial year expressly stated that all revenue stated was net of GST. None of those financial statements provided any breakdown of income for the respective components of the business.
There is objectively a clear difference between finalised, accountant-prepared, financial statements for the years 2012 to 2015 on the one hand, and a handwritten table of figures on the other. The latter document was plainly not prepared or provided by the accountant. The figures had been pulled together by Mrs Dawn and were described as ‘a few figures for the respective areas of the pub over the last twelve months’ along with some brief notes about why ‘takings’ could not be split and when certain parts of the business premises operated.
In circumstances where the document itself was silent either way as to whether the figures in the Schedule included GST, and in light of the above surrounding facts, I do not accept that a statement that the figures were GST exclusive was a reasonable implication to draw. In particular, I do not accept that such an implied representation arises even for a person in the position of the plaintiffs, who had received previous detailed financial statements. They are so different from the handwritten Schedule both in form and in substance that they really could not inform the content of the Schedule in any meaningful way.
The highest the conduct rises is an implication that the figures in the Schedule could be inclusive or exclusive of GST.
Was the Second Representation misleading or deceptive, or likely to mislead or deceive?
The effect of the above finding is that the Schedule was unclear whether the figures were inclusive or exclusive of GST. Conduct that merely creates ‘confusion or wonderment’, is not necessarily co-extensive with misleading or deceptive conduct: Google Inc at 443, citing Taco Company of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177 at 201, which was approved in Campomar at [106].
Recalling that the characterisation of conduct takes into account circumstances and context, including silence, and includes the knowledge of the person to whom the conduct is directed, any common assumptions or practices established between the parties or prevailing in the particular industry (Miller at [20]), the following circumstances are relevant.
First, the Schedule itself was entirely silent on whether GST was included or excluded. The figures were also not in a form that would suggest they were likely to be GST exclusive (such as forming part of full financial statements detailing sales income). If anything, the reference in the notes to takings being hard to split due to cross-over at the tills would point to the figures being ‘pulled together’ from the till receipts and therefore being inclusive of GST.
Second is the evidence of the plaintiffs, which I accept, that they were misled or formed an erroneous belief. Such evidence is admissible and relevant to establishing that the conduct was likely to mislead or deceive: Global Sportsman at 87.
Third, the evidence did not establish that there was either an industry practice or a practice established between the parties that figures such as those in the Schedule were commonly reported as GST exclusive, whether based on the language used (see [67] above) or otherwise.
Fourth, the email correspondence from Mrs Dawn and the Broker did not suggest anything as to GST. In this regard, silence is relevant as the timing of the email chain set out above shows that the Broker queried the figures before emailing them through to the plaintiffs. It is regrettable that the Broker knew the figures were inclusive of GST, yet did not pass that information on to the plaintiffs when forwarding what became the Schedule.
However, mere silence does not amount to misleading conduct unless the circumstances are such as to give rise to a reasonable expectation that if some relevant fact exists, it would be disclosed: Kimberley NZI Finance Ltd v Torero Pty Ltd (1989) ATPR (Digest) 46-054 at 53, 195 per French J (as his Honour then was in that Court), approved in Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31 (Demagogue) at 41 per Gummow J (with whom Black CJ and Cooper J agreed). That proposition in Demagogue was then cited by French CJ and Kiefel J in Miller at [18]-[19].
There was nothing in the Schedule or the email correspondence that could have created a reasonable expectation in the mind of the plaintiffs that if the figures were not exclusive of GST, that fact would be disclosed. Nor does the previous supply of financial statements to the plaintiffs create such an expectation. They were in an entirely different form, prepared by a different person and for a different purpose, and were therefore of little assistance in understanding or drawing inferences from the Schedule.
At its highest, the unspecified figures created confusion in the mind of a prospective purchaser in the position of the plaintiffs, so as to require the asking of a further question in order to clarify the true position. The likely reaction of a reasonable person in the position of the plaintiffs, and with the knowledge of the plaintiffs, is reflected in the conduct of the Broker on receipt of the figures, namely to email immediately and ask whether the figures were exclusive of GST. That is insufficient here to demonstrate conduct that was likely to mislead, notwithstanding that such an error occurred.
I am mindful of authority to the effect that, where a person who has been the subject of a misrepresentation could have discovered the misrepresentation had he made proper inquiries, this does not absolve the maker of the misrepresentation from liability for breach of s 18: Neilsen v Hempston Holdings Pty Ltd (1986) 65 ALR 302 at 309; and Collins Marrickville Pty Ltd v Henjo Investments Pty Ltd (1987) 72 ALR 601 at 612-613, affirmed on appeal in Henjo Investments v Collins Marrickville Pty Ltd (1988) 39 FCR 546 (Henjo) at 558. However, the circumstances of the present case do not establish that the course of conduct as a whole was sufficient to establish a breach. I am not satisfied that there was any misrepresentation in the first place in relation to the Schedule.
The belief that the figures in the Schedule were exclusive of GST was a product of Mr Barnes’ own erroneous assumption. While the assumption was not fanciful, in that it was a possibility that the figures excluded GST, as stated above, such an assumption lacked a reasonable basis in light of the surrounding circumstances and context.
Were the Further Representations made, and if so, were they misleading or deceptive, or likely to be so?
The Further Representations may properly be said to follow from the making of the First Representation. The case regarding the business paying all its bills and financially supporting itself was solely directed to the issue of rent. There was no suggestion in the evidence that any other bills were outstanding or unpaid, or that if they were, they were matters of significance to the plaintiffs.
The conduct in question is pleaded as a course of representations made during oral conversations and as arising through silence. In the present case, the plaintiffs plead that Sapme was silent on the following occasions:
(a) 15 July 2016 (when Mr Barnes met Mr Dawn at the business premises);
(b) 18 July 2016 (when Mrs Dawn provided the handwritten figures in the Schedule);
(c) 26 July 2016 (when Mr Barnes met Mr Dawn at the Olive restaurant);
(d) 30 July 2016 (when Mr Barnes met Mr Dawn at the Kingston Hotel); and
(e) 24 August 2016 (when Mr Barnes met with Mrs Dawn at her residential home).
It is unnecessary to set out again the relevant legal principles regarding the identification of the conduct, and its characterisation, including the role of silence.
I have taken the surrounding circumstances to include all conduct up to 2 September 2016 as that is the date by which it is clear Jornad considered itself bound by an agreement to purchase the business. Given the absence of any more formal agreement to purchase being made, that is the date when the agreement for purchase may be taken as being concluded.
The following matters are what I consider to be the relevant context or surrounding circumstances:
(a) the contents of the Information Memorandum;
(b) the full financial statements for the 2012 to 2015 financial years;
(c) the unavailability of the financial statements for the 2016 financial year;
(d) the discussions between Mr Dawn and Mr Barnes at the business premises, the Olive restaurant and the Kingston Hotel; and
(e) an email exchange on 29 August 2016, between Mrs Dawn and Mr Barnes.
With regard to the Information Memorandum, I accept that it created an initial impression that the business was financially supporting itself, including paying rent of about $850,00 a year (being approximately $15,000 a week). The express words of the document have already been discussed in relation to the First Representation. A further indicator contained in the document under the heading ‘About Uni Pub’, is the statement that ‘[t]he new owner will be acquiring a profitable business with a fit-out that looks new and can walk in without having to spend anything.’ The reference to the business being described as ‘profitable’ appears again elsewhere in the document, albeit it was made clear that the profitability of the business had decreased, and that the business had been poorly managed in years past.
There were some financial figures accompanying the Information Memorandum which did not include a reference to the payment of rent. However, those figures were overtaken by the full financial statements which were then provided at Mr Barnes’ request.
Each of the profit and loss statements for the financial years ending 2012 to2015 included ‘rent on land & buildings’ as an expense. The rent was stated as:
(a) $845,493.29 in 2012;
(b) $844,496.84 in 2013;
(c) $855,342.46 in 2014; and
(d) $860,223.43 in 2015.
There is no way to read those figures other than that the business was paying rent in those sums for those particular financial years. The statements showed that the business had been profitable in 2013, had made a big loss in 2014 (but that there was still sufficient profit from previous years for the business to remain viable), and that in 2015 there was a loss of approximately $100,000 (but again, there were historical retained profits of more than $300,000). There was some evidence that the loss figure for 2015 was in fact wrong and that the true position was more than double the loss stated, however that was not relied upon by the plaintiffs as part of the pleaded case concerning the Further Representations.
The material contained in the Information Memorandum must then be considered in the light of what followed during the negotiations. The critical meeting was that between Mr Dawn, Mr Barnes and the Broker at the business premises. Mr Barnes gave evidence that he expressly asked Mr Dawn during the initial meeting at the business premises whether the bills were paid up to date, and whether the rent was being paid as well. Mr Dawn told him ‘all our bills are paid and the rent is paid up to date’.
Mr Dawn’s evidence was that he told Mr Barnes the business premises was running at a loss. However, he accepted that there was a conversation about the payment of outgoings. His recollection in evidence in chief was as follows:
Mr Dawn: [Mr Barnes] asked me – he asked me if all outgoings were up to date, all rent was up to date and I said there were no outstanding accounts.
Mr Walker SC: Including no outstanding rent?
Mr Dawn: Yes. …
In cross-examination, Mr Dawn confirmed that he was specifically asked whether the rent was up-to-date, and that he said ‘there are no outstanding accounts’.
Given that the conversation was between the plaintiffs and a director of Sapme (as well as the Broker), during a meeting held for the purpose of providing information about the business to a prospective purchaser, it clearly forms part of the overall course of conduct attributed to Sapme, and it was a critical conversation. Mr Dawn’s evidence was that the Broker contributed very little to the provision of information during this meeting and Mr Barnes did not state that the Broker said anything of significance on this issue.
Spoken words must be proven with a degree of precision sufficient to enable the court to be reasonably satisfied that they were in fact misleading in the proved circumstances: Watson v Foxman (1995) 49 NSWLR 315 (Watson) at 318-319, cited in Julstar Pty Ltd v Hart Trading Pty Ltd [2014] FCAFC 151 at [73], and referred to most recently in a misleading and deceptive conduct context by Slattery J in Ng v Chan [2020] NSWSC 954 (delivered on 27 July 2020) at [14].
In Watson, McLelland CJ in Eq went on to say at 319:
... human memory of what was said in a conversation is fallible for a variety of reasons, and ordinarily the degree of fallibility increases with the passage of time, particularly where disputes or litigation intervene, and the processes of memory are overlaid, often subconsciously, by perceptions or self-interest as well as conscious consideration of what should have been said or could have been said. All too often what is actually remembered is little more than an impression from which plausible details are then, again often subconsciously, constructed. All this is a matter of ordinary human experience.
That observation has since been cited across the jurisdictions, including in the Territory in cases such as Ryan v Vizovitis [2017] ACTCA 3 at [134].
Mr Dawn may have been careful to phrase his evidence in terms of outgoings and outstanding accounts instead of bills or an express reference to rent. The nuanced reference to outgoings may technically have excluded rent. However, nothing turns on the differences between the two recollections of that part of the meeting. On either version of the conversation, and having regard to the whole circumstances, there was no disclosure to the plaintiffs that the rent was not being paid, so that whatever language was used, what was likely to be communicated was at best a half-truth and at worst a lie.
When the documentary evidence received by Mr Barnes otherwise gave the impression that substantial weekly rent was being paid, the circumstances in this case were such as to create an expectation that if something as significant as a current rent holiday arrangement for 2016 existed, such a fact would be disclosed, whether the discussion was about ‘outgoings’, ‘accounts’, ‘bills’, or ‘rent’. That is particularly the case when Mr Barnes asked for more recent figures, but was told that the 2016 financial statements (which were part of the evidence before the Court and would have disclosed the rent holiday) were not yet available, and all that was provided to Mr Barnes in terms of financials for the financial year ending 2016 was the Schedule.
Mr Barnes gave evidence that he asked about the rent on subsequent occasions and that on each occasion he was told the rent was up to date. Mr Dawn’s evidence was that the question about rent and/or outgoings being up to date was not asked again during two further meetings (at the Olive restaurant and at the Kingston Hotel) or a subsequent coffee meeting at the Waldorf Hotel.
Again, it does not matter whether the issue was raised again and the same answer given, or whether the issue was never raised again. The factual result was that there was no change to the understanding about the status of the business with regard to rent, communicated to Jornad and Mr Barnes, either expressly or impliedly through silence.
Added to this is an email exchange between Mrs Dawn and Mr Barnes on 29 August 2016, shortly before Mr Barnes signed a lease and two weeks before Mr Barnes was given access to the business premises.
It is useful to set out the parts of the exchange in detail, as they are also relevant to the case of accessorial liability pleaded against Mrs Dawn. Mr Barnes wrote early on 29 August 2016:
Morning Anne,
Hope you had a good weekend.
I am wondering if I could get a few things off you.
· Some current invoices...so I can see what you currently pay. I just want to ensure when I meet with [the suppliers] that I get the same rates.
· Niki has asked for the past few weeks turn over and expenses please. Just to get an understanding of cash flow etc.
Thanks Anne.
Regards
Kevin
Mrs Dawn initially told Mr Barnes she would ‘get to the figures and expenses a bit later today’. She then sent the following email:
Hi Kevin,
These are the expenses for July and August, together with some turnover. Bear in mind that July and August tend to be the slowest months.
I’ve only given you the overheads, not the purchases of food and alcohol which would be irrelevant.
Kind regards,
Anne
Mr Barnes then replied as follows:
Thanks Anne,
What about rent?
Why is food and alcohol irrelevant?
Regards
Kevin
Mrs Dawn replied as follows:
Kevin,
The rent isn't included because you obviously know what your rental figure is!
Food and alcohol are never included in expenses, they are dealt with in the gross profit section. If you want a complete set of figures for the last few weeks you’ll need to call Steve.
Kind regards,
Anne
That response was plainly false. What Mr Barnes had asked for was the expenses for the business in the past few weeks. The reason rent was not included in the expenses for that period was because Sapme did not pay rent during that period.
However, that was not what Mrs Dawn told Mr Barnes. The explanation that Mr Barnes knew what he had negotiated in terms of a rental figure had no bearing whatsoever on the recent past expenses incurred by Sapme, which was what had been requested. I will return to the explanation given by Mrs Dawn below. It suffices to find for the present issue that the last email exchange had the effect of continuing the silence or non-disclosure in terms of the Further Representations, right up until the point where Mr Barnes executed the lease on 2 September 2016, and then took occupation of the premises of 12 September 2016.
However, it should also be made clear that the above email exchange was not relied upon by the plaintiffs as itself constituting a representation that involved misleading or deceptive conduct, or as a circumstance where the defendants ought to have corrected the existing non-disclosure as to the payment of rent. Accordingly, that exchange is limited to simply forming part of the surrounding circumstances of the Further Representations being made.
I am satisfied that the Further Representations were made to the extent that the conduct communicated the payment of rent of approximately $850,000 and that the rent was up to date.
However, I am not persuaded that the whole course of conduct established a representation that the business was financially supporting itself given the detailed financial statements, the evidence of Mr Dawn confirming that the business was currently making a loss, and consistent with that, an email from Mr Barnes to the Broker on 27 July 2016, part of which states:
The past trading figures of the pub, of which everyone is aware that the trading figures have been in decline over the past few years and as such is not really profitable at this point in time.
As to whether the Further Representations constituted conduct that was likely to mislead or deceive the plaintiffs, it will be apparent from the above reasons that I am also satisfied that has been established, given the undisputed fact that the true position was the opposite of what had been represented, namely that rent was not being paid at all in the 2016 financial year, including at the time of the Further Representations.
Reliance and Causation
In order to recover damages, the plaintiffs must prove that the loss or damage suffered was ‘because of’ conduct in breach of the Australian Consumer Law: s 236.
The issue is to be approached in a practical or common sense way: Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 (Wardley) at 525, although it has subsequently been doubted whether there is any “common sense” notion of causation which can provide a useful legal norm: Travel Compensation Fund v Tambree [2005] HCA 69; 224 CLR 627 (Travel Comp Fund) at [45] per Gummow and Hayne JJ..
As long as the breach materially contributed to the damage, or had a substantial effect on the person’s considerations, causation will be established. In other words, the breach need not be the sole cause of alleged loss or damage: I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd [2002] HCA 41; 210 CLR 109 (HTW Valuers) at [33], [57], [62] and [90]; and Henville v Walker [2001] HCA 52; 206 CLR 459 (Henville v Walker) at [14], [61] and [63], subject now to statutory apportionment considerations (s 137B of the Competition and Consumer Act 2010 (Cth)).
Relevant to the sale of a business, if a material representation is materially likely to induce the representee to enter into a contract and the person actually enters the contract, a fair inference arises that the representation operated as an inducement: Gould v Vaggelas (1985) 157 CLR 215 (Gould) at 236-238.
The inference of inducement may of course be refuted by other relevant circumstances, with the defendant bearing the evidentiary onus as to why the inference ought not be drawn. One example of such circumstances is where the plaintiff, either by his words or conduct, disavows any reliance on the misrepresentation: Gould at 238.
The evidence of Mr Barnes was that he did his own financial projections and that, in making his own calculations, he relied on the figure in the Information Memorandum of $15,000 plus GST per week in rent and on the belief that rent in that amount was being paid. Mr Barnes even went to the trouble of preparing a detailed business plan, which was completed on 31 July 2016 and which he provided to his accountant for advice on the purchase of the business. The business plan refers to an intended negotiated lease of a 2-month rent free period, followed by $10,000 per week for six months, and $12,000 per week thereafter.
Direct evidence of reliance is not necessary (Dominelli Ford (Hurstville) Pty Ltd v Karmot Auto Spares Pty Ltd (1992) 38 FCR 471 at 483), but in this case it exists. There is an email to the Broker on 27 July 2016, which is consistent with Mr Barnes’ evidence as to his reasoning and thinking at the time. Mr Barnes was negotiating the lease as part of the negotiations to buy the business. One of the items Mr Barnes stated he had taken into account in making the offer of $11,000 per week was that the ‘current rent for the Uni pub based on the building sqm is $443 [per] sqm’, which he considered would be ‘at the very high end of the current market’. The email goes on to include Mr Barnes’ view that a rental of $11,000 per week ‘would align more with the current commercial rental market today and takes into consideration the down turn in the current business and its ability to meet its liabilities’.
It is not necessary for a person to be able to explain with exact precision the mental process by which the person was induced to act: Reiffel v ACN 075 839 226 Ltd [2003] FCA 194 (2003) 132 FCR 437 at [67] per Gyles J (see also the cases cited at [68]). The question is really one for the fact finder looking at the evidence in the case.
Looking at the evidence, Mr Barnes sought financial information, then sought updated financial statements, then sought the most recent sales figures for 2016 and the breakdowns of those figures for each component of the business. He prepared a detailed business plan and sought advice from his trusted accountant. All of this shows him to be a prudent purchaser, and one for whom the financial viability of the business was a material contributing factor in the decision for Jornad to purchase the business.
As is plain from the email of 27 July 2016, ensuring that the business could meet its liabilities was plainly a matter of significance for Mr Barnes. The proposed rental figures were based on what Mr Barnes believed were the existing rental figures, with some adjustment for different matters which were also specified in the email. That then fed into Mr Barnes’ business plan, which formed the basis of Mr Barnes’ decision to proceed with the purchase.
Also significant to the surrounding circumstances relevant to causation is the advice of Mr Stewart, the accountant for Mr Barnes, who gave detailed and considered evidence and was cross-examined. His evidence, which I accept, was that he reviewed the business plan provided by Mr Barnes as part of the documents supplied to him. He told Mr Barnes that he had to convince himself that the figures in the business plan were achievable. Consistent with that approach, Mr Barnes said that he formed the view that with a few savings, which would result in a 10 per cent growth in sales, the business would be a viable proposition.
The above evidence is sufficient to establish that the ongoing and up to date payment of rent at $15,000 per week plus GST was a material part of the factual matrix the plaintiffs took into account and relied upon in determining to take on the business. However, there are further circumstances which support such a finding, namely what happened when Mr Barnes discovered the business had not been paying rent for a substantial period of time.
Mr Barnes gave evidence that in October 2016, once he had taken over the business and started operating, a letter was received at the business premises from the solicitors for the landlord, informing him that the business owed $955,357.53 in unpaid rent.
There was a dispute between the parties about whether the letter itself was admissible. In particular, the defendants argued that the letter should not be admitted to prove the truth of the representation contained in it, namely that the business owed the sum stated. I admitted the document and indicated that I would give reasons as part of the substantive judgment.
In order to understand the relevance of the document and the nature of the defendants’ objection, it is necessary to set out part of the letter, which was dated 11 October 2016, as follows:
1.1 Rental arrears totalling $955,357.53 accrued over a period of 13 months and 11 days up until 11 September 2016 as no rent was paid by you to our client as required pursuant to clause 6.1.1 of the Lease (Outstanding Rent).
1.2 Our client demands payment of the Outstanding Rent…
1.3 Our client requests that you contact them by 5.00pm on 21 October 2016 to arrange payment of the Outstanding Amounts.
1.4 If the matter cannot otherwise be resolved we anticipate instructions to commence formal recovery of the Outstanding Amounts
…
The plaintiffs sought to tender the document pursuant to s 69(1) of the Evidence Act 2011 (ACT) as a business record. They argued it was a letter sent to the business from the landlord regarding the sublease of the business premises, and therefore it was a document belonging to or kept by the business for the purposes of the business.
The relevance was said to be that if Mr Barnes as a potential purchaser had understood that the business had not been able to fund such a large amount, then he would have formed the view that the business was not viable.
The defendants objected to the tender on the basis of s 63(3)(a) of the Evidence Act. The material words of that provision relevant to the objection here are that there is an exception to the non-application of the hearsay rule if the document was either prepared for or obtained in contemplation of, or in connection with, an Australian proceeding.
The defendants argued that paragraph 1.4 in the letter set out above indicated that legal proceedings for recovery of the amount said to be owing were ‘in contemplation’. Therefore, while the defendants accepted the document was a business record, it could not be admitted if the purpose was to prove the truth of the representation. The defendants had no objection to the document being limited to a non-hearsay purpose.
The plaintiffs accepted that the words ‘in contemplation of’ and ‘in connection with’ have wide meaning, but argued that there had to be more than simply a reference to a possibility of legal proceedings. The proceedings in relation to which the representation is ‘prepared’ or ‘obtained’ must be likely or reasonably probable, relying on Nikolaidis v Legal Service Commissioner [2007] NSWCA 130 at [61] and the cases there-cited.
Paragraph 1.4 of the letter states an anticipation of instructions to commence formal recovery of the amount said to be owing. I was prepared to draw the inference that formal recovery was likely to be a reference to litigation (particularly given that the letter was written by a lawyer). However, as the writer did not yet have instructions to take steps to commence proceedings, I was not satisfied that those words indicated anything more than a possibility of legal proceedings.
Further, although there was a deadline for the recipient of the letter to make contact to arrange payment, there was no reference to commencing proceedings if the deadline was not met (such as, ‘proceedings may be commenced without further reference to you’). The reference to ‘formal recovery’ was more in the nature of a caution ‘if the matter cannot otherwise be resolved’. In my view, the question of whether to admit the document was one of fact and degree. The possibility of legal proceedings being brought was not fanciful, but nor was it imminent. Ultimately, I decided on balance that it fell short of establishing that legal proceedings were actually reasonably likely or ‘in contemplation’. Although the conclusion might well be one about which reasonable minds differ, on balance the document was admitted.
Ultimately, the plaintiffs did not need to prove that a certain specified amount of rent was unpaid, and that was particularly so in light of the subsequent financial statements that were tendered and the concession made by the defendants as to non-payment of rent during 2016. However, in the middle of the hearing when the ruling was sought, it was difficult to predict how the factual matrix was likely to play out.
Returning then to the effect of the letter, Mr Barnes said that when he read it, besides nearly vomiting, he felt “absolutely gutted”. He said that had he known of the substantial non-payment of rent, “I definitely wouldn’t have proceeded with taking over the Uni Pub. There’s no way that the business would be viable with that sort of inability to pay its rent or bills.”
Mr Stewart’s evidence was that if he had known that for at least a substantial part of the 2015/2016 financial year, the Uni Pub was not paying any rent apart from outgoings, he would have advised Mr Barnes to ‘run a mile’. The proper figures would not have been saveable under his model.
For completeness, it should be noted that any claims as to unpaid rent made by the landlord against the plaintiffs have been settled and there was evidence given by Mr Michael Dawn in the proceeding that the letter had been subsequently withdrawn. The importance of the letter now is really more as part of the chronology, being the point when Mr Barnes and Jornad discovered that there was a significant problem with what they had been told about the previous rent.
The defendants’ submissions on reliance
The defendants made detailed oral and written submissions as to why the Court should find that reliance and thus causation had not been established. I have grouped them into four arguments:
(a) evidence given in hindsight as to what a plaintiff would have done should be treated with great caution;
(b) Mr Barnes relied on his own figures, none of which depended in any way upon Sapme’s previous rental obligations or lack thereof;
(c) the subjective factors affect the overall credibility of Mr Barnes; and
(d) the objective factors do not support a finding that Mr Barnes would not have purchased the business, had he known about the non-payment of rent.
I will deal with each in turn.
Hindsight evidence
The defendants submitted that the Court should be cautious when hearing evidence (from both Mr Barnes and the accountant) as to what they would have done had they known the true position as to the substantial non-payment of rent. That is consistent with authority to the effect that any question of what the person claiming reliance would have done if information had been disclosed is necessarily hypothetical and therefore carries little weight: Barnes v Forty Two International Pty Ltd [2014] FCAFC 152; 316 ALR 408 at 451.
It is for this reason that what has been set out above distinguishes between what inferences may be drawn from the circumstances and contemporaneous documents leading up to the decision of Mr Barnes and Jornad to purchase the business, and what witnesses say would have happened had they known the true position.
Nevertheless, even if the Court were to disregard the accountant’s oral evidence as to what he would have advised had the true position been disclosed to him, it is easy to understand why an accountant, who had already advised a client to make sure that the figures were achievable before committing to a business, would have advised against entering into the transaction if it was known that the particular business was not profitable even without having to pay any rent.
Independent assessment made
The key difficulty raised by the defendants is that Mr Barnes did his own modelling and calculations in the business plan he prepared. That plan included the payment of rent at between $10,000 and $12,000 per week. The defendants submit that the income projections in the business plan prepared by Mr Barnes were entirely unrelated to Sapme’s rental payments and that the remainder of the figures supplied to Mr Barnes were correct.
It is true that the business plan indicates that Mr Barnes had factored in the payment of rent in the amounts stated above, and thought he would still be able to reduce expenses by more than half a million dollars from the 2015 financial year. This leads the defendants to submit that on Mr Barnes’ figures, he would have purchased the business anyway. They point to this as a break in the causal link of the First Representation or the Further Representations having any inducement on Mr Barnes and Jornad in deciding to purchase the business.
That argument ought to be rejected. Reliance in this case is not assessed merely by considering the numbers in the business plan. As is clear from the circumstances set out above, the business sustaining a payment of rent at $15,000 per week was the starting point for Mr Barnes’ projections as to a significant component of the expenses for the business. The error is not cured merely by Jornad entering into a new rental agreement based on financial projections made by Mr Barnes which included the payment of rent at a certain rate. The information that led to those projections was false in a significant respect and it was relevant to the bigger picture of the overall viability of the business.
There are other considerations that the disclosure is likely to have affected. For example, Mr Barnes’ evidence was that he did not think he would have to spend any significant sums of money on the business at the outset (although he was willing to). He drew this inference from the Information Memorandum which stated:
The new owner will be acquiring a profitable business with a fit-out that looks new and can walk in without having to spend anything.
Knowing that the business was losing money and had insufficient sales to sustain the rent is likely to have influenced Mr Barnes’ thinking as to whether he could in fact expect to walk in without having to spend anything.
It is unnecessary to detail further the various nuanced ways in which the information may have influenced the thinking of a person in Mr Barnes’ position in deciding whether to take over the business. It suffices to find that the non-payment of rent for the best part of a year would have caused real concern in the mind of a prospective purchaser, and specifically, in the mind of Mr Barnes on behalf of Jornad. Further questions would almost certainly have been asked as to how the arrangement came about. The knowledge that the business was not profitable and the additional disclosure that it was losing money even with a substantial rent holiday, would have indicated to Mr Barnes that, at the very least, the figures that he was using to create his projections were unduly optimistic or somehow unreliable in some unspecified way.
The evidence in this case establishes that although Mr Barnes knew that the business was not profitable, he believed he could turn it around with some adjustments, including taking into account a reduced rent from that which he believed was being paid. If in fact the business was in a poor financial state even with a substantial rent holiday, that is highly likely to have influenced Mr Barnes’ view as to whether his projected figures were achievable.
In Travel Comp Fund, Gummow and Hayne JJ stated at [32] (references omitted):
Misrepresentation will rarely be the sole cause of loss. If, in reliance on information, a person acts, or fails to act, in a certain manner, the loss or damage may flow directly from the act or omission, and only indirectly from the making of the representation. Where the reliance involves undertaking a risk, and information is provided for the purpose of inducing such reliance, then if misleading or deceptive conduct takes the form of participating in providing false information, and the very risk against which protection is sought materialises, it is consistent with the purpose of the statute to treat the loss as resulting from the misleading conduct.
Mr Barnes was seeking the financial information, including information about the rent, to guard against the risk of buying and investing in (whether by his time or money or both) a business that was not financially viable. Part of the financial information supplied was false, and the very thing that Mr Barnes had hoped to avoid materialised. The plaintiffs have established the causal link.
Subjective factors (Credibility of Mr Barnes)
The defendants submitted that Mr Barnes had previously been struck off as a real estate agent for conduct that was dishonest. His credit was further challenged on the basis of his involvement with the accounting records of Jornad, which revealed figures changed, descriptions of entries altered and improper claims made for items that had been paid for by third parties. There were also unsatisfactory gaps in Mr Barnes’ evidence, such as the inability to explain who made up the creditors totalling $144,000, and Mr Barnes on occasion changed his evidence as to why he did things, such as to require the rapid departure of the previous manager of the business.
I accept many of the underlying facts relied upon by the defendants, in that Mr Barnes’ improper conduct in past employment endeavours did involve an element of dishonesty and has had the consequence that he is no longer a qualified real estate agent. It must also be accepted that the accounting records were confusing, somewhat unreliable, and required lengthy cross-examination of both Mr and Mrs Barnes and then two qualified Chartered accountants in order to gain a proper understanding of what different items meant. Overall however, I did not form the view that Mr Barnes was not a witness of truth, despite his past shortcomings and difficulties with some of the evidence. That Mr Barnes might have been no angel did not taint the entirety of his evidence to the point that warrants any such finding.
In the crucial respect of reliance on a representation by Sapme that rent was being paid in the said amount and was up to date in determining whether to buy the business, I found him to be credible. Not only was the evidence plausible, but it was supported by contemporaneous emails and was consistent with the accountant’s advice of requiring Mr Barnes to be satisfied that the figures were achievable before he went ahead with purchasing the business.
Objective factors
The defendants listed a number of what were described as objective factors as to why the Court should not accept the argument that Mr Barnes would never have purchased the business had he been informed of Sapme’s rental agreement.
The first objective factor raised is that, on Mr Barnes’ evidence, he did not ask Mr Dawn whether Sapme was making a profit or loss. The defendants inferred from that evidence that Mr Barnes was not interested in Sapme’s overall performance of the business. However, such an inference is not to be drawn when the totality of the evidence is considered, including that Mr Barnes had formed his own view about the business from the financial information contained in the Information Memorandum and the later financial information supplied.
The second objective factor relied upon is that, on Mr Dawn’s version of events, Mr Barnes was informed that the business was making a loss and there was no evidence that Mr Barnes attempted to qualify the loss. Again, Mr Barnes had given evidence that on the financial information provided (in the Information Memorandum), the business was making a small loss, but when the add backs were included, the business made a small profit. Moreover, the argument appears to me to be based in part on reasoning that had Mr Barnes made more specific enquiries, he would have been able to uncover the full financial position. As I have stated at [84] above, that does not absolve the maker of the misrepresentation from liability for breach of s 18 of the Australian Consumer Law.
Both of the above arguments about Mr Barnes’ failure to ask questions concerning the extent of the losses being incurred by the business appear to be directed to a submission that the plaintiffs did not care about the extent of the losses, leading to a further submission that whether the plaintiffs knew the true facts or not, they did not rely on the representation: Gould at 236.
The flaw in that argument is that here, Sapme had provided figures about its financial position in the Information Memorandum in sufficient detail for a prospective purchaser to take a view about the losses being incurred, and these were later supplemented at the request of the plaintiffs by the provision of full financial statements for a number of years. The lack of questioning during negotiations is equally attributable to a prospective purchaser already in possession of financial information about the business or intending to seek it.
This was not a case of the plaintiffs not demonstrating any care about the extent or the nature of the losses being incurred by the business. On the contrary, the position was that the plaintiffs had endeavoured to gain the full financial picture, only through the error in the Information Memorandum and the lack of the up to date financial statements for the 2016 financial year, the picture presented to them was misleading.
The argument also appears to me to be based in part on erroneous reasoning, that had Mr Barnes made more specific enquiries, he would have been able to uncover the full financial position. As I have stated at [84] above, that does not absolve the maker of the misrepresentation from liability for breach of s 18 of the Australian Consumer Law: Henjo at 558.
The third objective factor raised by the defendants is that Mr Barnes knew the business was not profitable and that it would take 12 to 18 months to return to profitability. He was prepared to take on a loss‑making business as he regarded himself to have particular expertise in turning around such businesses.
I have already taken account of that fact in the course of the above reasoning at [154]. It does not assist the defendants’ argument in their case on reliance because of the size of the loss concealed by the non-disclosure. As set out above, what Mr Barnes did not know was the true extent of the lack of profitability, in that the loss did not take account of a very substantial rent holiday which would not be continuing when the business was sold. Mr Barnes’ evidence was that the non-disclosure would have been a deal breaker because it would have meant that the business was just not viable. His hindsight evidence can be accepted because it is supported by the 2016 financial statements when they eventually came to hand as part of this proceeding. They reveal that the profit of $323,921.30 recorded in the Profit and Loss Statement was only achieved because of the rent holiday. In the 2016 financial year, Sapme only paid $83,025.84 in rent. The accounting evidence referred to a figure of $714,713.50 in unpaid rent. Had the business paid rent at $15,000 per week plus GST, as Sapme held out to Jornad was the case, the business would in fact have recorded a substantial loss of at least three times the losses recorded in the previous financial year.
The fourth objective factor relied upon by the defendants is that Mr Barnes at all times knew that he had to negotiate a lease with the landlord and strike his own rent (including because he had been told that fact by Mrs Dawn). He expected a total reduction in expenditure of more than approximately $570,000 in the first year and approximately $420,000 thereafter. This has been addressed above in relation to the independent assessment made by Mr Barnes. Knowing that the business was making a loss even without having to pay any rent would have alerted Mr Barnes to the fact that something about the figures he was using to make the projections was unreliable.
Finally, the defendants relied on conduct after Jornad took over the business as part of the objective circumstances relevant to whether Mr Barnes would have purchased the business, had full disclosure of the rental position been made. The defendants submitted that after receipt of the rental demand letter of October 2016, Jornad continued the business and persevered with plans to renovate and upgrade the nightclub, and when the lease was terminated for non-payment of rent, Jornad applied to the Magistrates Court to prevent termination of the lease.
Contrary to the defendants’ submission, such conduct says nothing about whether Jornad would still have purchased the business. Mr Barnes’ and Jornad’s attempts to save the business after it had been purchased and to try to renegotiate the terms of a lease that had already been executed have very little bearing on what they would have done had they known the dire financial position of the business before it was purchased.
Accordingly, the plaintiffs have established that the business was purchased ‘because of’ conduct in breach of s 18 of the Australian Consumer Law.
Was Mr Dawn knowingly involved in the First Representation?
Section 236 of the Australian Consumer Law extends the recovery of loss and damage against a person to include ‘any person involved in the contravention’. The plaintiffs in the present case have pleaded that Mr Dawn was ‘knowingly concerned’ in the First Representation and Further Representations, relying on paragraph (c) of the definition of ‘involved’ in s 2 of the Australian Consumer Law.
Principles applicable to accessorial liability
A person will only be regarded as ‘involved’ in a contravention if the person intentionally participated in the contravention. This requires actual, not constructive, knowledge of the essential matters or facts that make up the contravention: Yorke v Lucas at 667, 674; Compaq Computer Australia Pty Ltd v Merry (1998) 157 ALR 1 at 4-5; and Quinlivan v Australian Competition and Consumer Commission [2004] FCAFC 175; 160 FCR 1 at [9].
Being ‘knowingly concerned’ in a contravention requires association with, implication in, or a practical connection with the contravening conduct: Qantas Airways Ltd v Transports Workers’ Union of Australia [2011] FCA 470; 280 ALR 503 (Qantas Airways) at [324]-[325]; Trade Practices Commission v Australian Meat Holdings Pty Ltd (1988) 83 ALR 299 Wilcox J at 357 citing Ashbury v Reid [1961] WAR 49 (Ashbury v Reid).
A person cannot become ‘involved’ in an act merely by reason of his or her knowledge of the conduct pursued. There has to be something that implicates the person such that they become associated with the conduct: see R v Tannous (1987) 10 NSWLR 303 (R v Tannous) at 307-308 citing Ashbury v Reid at 51. A close rather than a remote involvement in the contravention is required: Fencott v Muller (1983) 152 CLR 570 at 584, per Gibbs CJ.
The requisite actual knowledge must be present at the time of the contravention. A later acquisition of knowledge of the essential matters is not sufficient: Fair Work Ombudsman v South Jin Pty Ltd [2015] FCA 1456 at [234].
It is not necessary that the person physically do anything to further the contravention. It is sufficient if the person, by what he or she said and agreed to do, in fact became associated with and thus involved, in the relevant sense, in the conduct constituting the contravention. R v Tannous at 308, cited in Leighton Contractors Pty Ltd v Construction, Forestry, Mining and Energy Union [2006] WASC 144; 154 IR 228 per Le Miere J at [29]; and Qantas Airways at [324].
It is unnecessary to prove that the person knew that his or her actual participation was a breach of the statute (in this case, the Australian Consumer Law) or could be characterised as such: Rural Press Ltd v Australian Competition and Consumer Commission [2003] HCA 75; 216 CLR 53. This is consistent with the common law and statutory principle that no person will be excused from liability because of ignorance of the law: Walden v Hensler (1987) 163 CLR 561.
Mr Dawn’s evidence was that he did not approve the contents of the Information Memorandum, and that he left it to the Broker to prepare the information. However, his involvement in the First Representation and Further Representations is established by the following matters.
(1) He was the director of the company who owned the business and had control over the information communicated to prospective purchasers.
(2) He was directly involved in the negotiations for the sale of the business. He was the person who met with the plaintiffs as prospective purchasers numerous times and provided information about the business on each occasion.
(3) He knew that the business was not paying rent.
(4) He knew that the plaintiffs did not know the business was not paying rent. Mr Barnes asked the question in his very first meeting at the business premises whether the rent was up to date. The only inference to draw from that question was that Mr Barnes did not know about the rent holiday.
(5) In answer to the direct question about the rent, Mr Dawn chose not to tell the plaintiffs the business was currently paying no rent but rather to tell him that there were ‘no outstanding accounts’.
Mr Dawn did not give any evidence that he did not know that Mr Barnes had not been told about the rent holiday for the business and indeed, the evidence is to the contrary. In the witness box under cross-examination, as soon as Mr Dawn confirmed his evidence of the words he used, unprompted he said, ‘I wasn’t being deceptive. I just knew from the practice of my wife who does our accounts on a day to day basis that if there was an issue she would phone me or tell me immediately’.
That unprompted evidence indicates Mr Dawn felt the need to explain his words, as without more, they were likely to deceive Mr Barnes as to the rent being up to date.
Mr Dawn went on to say:
In fact I didn’t even consider it to be an issue in view of Mr Barnes’ statement to me that he was very much over the issues of running companies and particularly loss making companies.
That is a further acknowledgement that Mr Dawn gave consideration to the non-payment of rent at the time and formed the view that it was not something significant for Mr Barnes and Jornad to know in light of his statement that he had experience in loss-making companies.
Further, Mr Dawn was the person who introduced Mr Barnes to the landlord (over lunch at the Olive restaurant). It is surprising, to say the least, that Mr Dawn said nothing about the previous rent arrangements at that meeting. The day after that lunch, Mr Barnes sent the email of 27 July 2016 (referred to above at [123]), to the Broker where Mr Barnes wrote to Sapme regarding the lease arrangements for the business, with the significant statement of the matters he had considered in coming up with a figure for the rent, and in particular the statement that the ‘current rent for the Uni pub based on the building sqm is $443 [per] sqm’. The Broker forwarded that email to Mr Dawn, stating as follows:
Steve,
Please see below an email from Kevin in regard to the lease. Can you kindly look over and happy to discuss further before it is forwarded to Michael.
All of this supports the finding that Mr Dawn had a practical connection with the conduct that constituted the contravention. Mr Dawn either knew Mr Barnes was acting under a misapprehension that the business was currently paying rent, or was wilfully blind as to that fact.
The plaintiffs rely in part on the ongoing silence at various meetings between Mr Dawn and Mr Barnes. A further meeting between the two (as well as Nicole Barnes, Mr Barnes’ wife) occurred three days after that email was sent at the Kingston Hotel, and again, Mr Dawn said nothing about rent. He denies that he was asked about rent during that meeting, but that misses the point. He had an obligation to disclose the fact without being directly asked about it, because of what he had said in the first conversation at the business premises, where the language he used was likely to mislead the plaintiffs (regardless of whether Mr Dawn thought at the time he was being deceptive). For these reasons, the facts establish that Mr Dawn had the requisite close connection with the First Representation and Further Representations so as to warrant a finding that he was involved in the conduct.
Was Mrs Dawn knowingly involved in the Further Representations?
The same principles apply to Mrs Dawn in respect of whether she was knowingly involved in the making of the Further Representations.
Mr Barnes’ evidence in respect of Mrs Dawn’s involvement in the Further Representations revolves around one meeting at Mr and Mrs Dawn’s home in Curtin. Mr Barnes attended with his wife Nicole. Mrs Dawn and her bookkeeper were at the house. The purpose of Mr Barnes going to see Mrs Dawn was to pick up a supplier list and some expenditure lists from Mrs Dawn. Those lists were not ready.
Mr Barnes said that he and Mrs Dawn then had a conversation in which he enquired about whether the bills and the rent were paid up to date. On his recollection, Mrs Dawn said, “everything is paid up immediately”. There was no mention at any time of any arrangement with the landlord whereby Sapme was not required to pay rent.
Mrs Dawn’s evidence was that she did not have any direct involvement with the preparation of the Information Memorandum. She rejected the evidence of Mr Barnes that he had asked her about the payment of rent. Although she knew that Sapme was not paying rent, Mrs Dawn’s evidence was that she was not aware of what had previously been discussed with Mr Barnes, and on that basis, did not accept that her conduct in refraining from mentioning anything about a special arrangement concerning the rent was likely to mislead the plaintiffs.
Whether or not there was a specific mention of rent, the fact that Mrs Dawn may have said ‘everything is paid up immediately’ may have further misled the plaintiffs with regard to the rent status of the business. However, that does not of itself mean that Mrs Dawn was ‘knowingly concerned’ in the Further Representations.
Returning to the further email exchange between Mr Barnes and Mrs Dawn dated 29 August 2016 (set out at [107]-[110] above), in which Mr Barnes enquired why Mrs Dawn had not included a rental figure in information provided to him. Mrs Dawn responded to him that she had not done so because he would have to reach his own negotiations.
That email is troubling. Mrs Dawn knew at the time that Sapme was not paying rent. What she told Mr Barnes was, in my view, a convenient reason consistent with the omission, but not the real reason for the omission. The real reason was that Sapme was not in fact paying rent. However, that email was not relied on by the plaintiffs either in their pleading or in submissions on accessorial liability. I was ultimately not persuaded that the evidence established the level of involvement necessary to find that Mrs Dawn was an accessory.
It is important to remember that Mrs Dawn was a not a director of Sapme. Mr Dawn had told Mr Barnes that his wife looked after paying all the bills to make sure they were all paid up on time and the evidence was consistent with that being the case. The evidence did not establish that she was intimately involved in the business so that a position as a de facto or shadow director might be imputed to her. In any event, that was not a fact pleaded by the plaintiffs as supporting a finding that she was knowingly concerned in the Further Representations, and there was no submission otherwise of that type of allegation being made by the plaintiffs.
Further, Mrs Dawn was not present at any of the meetings between the plaintiffs, her husband and the Broker. She had not provided the financial statements for the previous financial years to the plaintiffs. They appear to have been provided by the Broker, who had received them months earlier from Mr Michael Dawn. Mrs Dawn did not give evidence that she was otherwise aware those documents had been provided to the plaintiffs. While Mrs Dawn accepted she had provided information that was included in the Information Memorandum, she did not give any evidence that she knew precisely what had been provided to Mr Barnes or that he was under a false impression with regard to the payment of rent.
Taken together, and bearing in mind the onus of a serious finding such as accessorial liability meeting the Briginshaw threshold (see Briginshaw v Briginshaw (1938) 60 CLR 336 at 362), those facts do not establish that Mrs Dawn had the close or practical connection necessary to give rise to a finding that she was knowingly concerned in the Further Representations. I am not persuaded that the case for accessorial liability against Mrs Dawn has been made out.
Apportionment
The case against the landlord company and the director of such entity was not put by either party as a matter for apportionment.
There was also no reference in the defendants’ pleading to an allegation that Jornad or Mr Barnes failed to take reasonable care (see s 137B of the Competition and Consumer Act 2010 (Cth)) so as to warrant the reduction of the amount of loss or damage, or any detail as to how it was said that Mr Barnes may not have taken reasonable care in terms of the running of the business, so that the loss or damage suffered should be apportioned.
However, the defendants made some submissions directed to the business decisions of Mr Barnes, as part of an argument about a lack of compensable loss and damage. I have taken the approach of considering those arguments notwithstanding the lack of proper pleaded facts and particulars in the defence.
Loss and Damage
In Jardine at [264]-[276], Refshauge J has helpfully collected a number of the authorities setting out the principles applicable to an assessment of loss and damage, which I respectfully adopt. It has only been necessary to refer to some of the authorities there set out.
As the plaintiffs are entitled to loss or damage suffered ‘by conduct’ done in contravention of the Australian Consumer Law, the causal connection must be established between the relevant conduct and the loss and damage suffered: Campbell at [102] per Gummow, Hayne, Heydon and Kiefel JJ.
Recalling that the conduct does not have to be the sole cause of the loss or damage, and that a causal connection may be satisfied by acts done in reliance upon the misrepresentation (dealt with above), if those acts result in economic loss, that will ordinarily be recoverable: Wardley at 525-526 per Mason CJ, Dawson, Gaudron and McHugh JJ.
As to how to assess such economic loss, the assessment usually involves a comparison between the position in which the person who suffered the loss or damage is in and the position the person would have been in had there been no contravening conduct: Marks v GIO Australia Holdings Ltd [1998] HCA 69; 196 CLR 494 at [42] per McHugh, Hayne and Callinan JJ.
Consistent with that principle, where a business is purchased relying on misleading or deceptive conduct, the measure of damage is the difference between the price paid and the actual value of the business at the time of purchase, or any subsequent diminution caused by matters inherent in the business at the time of the acquisition, together with any consequential losses attributable to causes inherent in what was purchased and not to supervening independent, extrinsic or accidental causes: Wardley at 530; and Jardine at [275].
Assessments of compensation or value at one date are commonly made taking account of all matters known at the later date when the court’s assessment is being carried out: HTW Valuers at [39] where the High Court adopted the approach taken in Kizbeau Pty Ltd v WG & B PtyLtd (1995) 184 CLR 281 at 291-296; and see also Jardine at [272].
In some cases, however, taking such an approach does not adequately compensate the plaintiff for the losses in fact sustained by the contravening conduct. Here, the business was purchased for $1 plus stock at value. The business has now ceased, and the business premises have been vacated. The continuing occupation of the business premises would have been critical to any subsequent continuation or re-enlivening of the business. The value of the business is thus $0. The loss of the value of the business would in no sense compensate the plaintiffs for the losses in fact sustained by the contravening conduct.
Accordingly, making allowance for the consequential losses is appropriate.
The losses claimed by the plaintiffs fall broadly into three distinct categories:
(a) The operating or trading losses (including repairs and maintenance);
(b) The capital amounts lost and interest on borrowings; and
(c) Damages to compensate for unrewarded labour.
The defendants focus on any recovery by the plaintiffs being limited to losses actually caused by the breach, as opposed to independent causes. Not all losses after an acquisition are necessarily ‘caused’ by the contravention.
This has been stated in different ways:
(a) Allowance for trading losses post purchase of a business infected by contravening conduct is by no means automatic: Tuggeranong Town Centre Pty Ltd v Brenda Hungerford Pty Ltd (No 2) [2017] ACTSC 88 (Tuggeranong Town Centre) at [1044], where Refshauge J pointed to the facts of Henjo at 562 as a case where a substantial portion of the trading losses were found to be attributable to matters other than the relevant breach.
(b) The contravening party is not the insurer of the plaintiff’s success: Henville v Walker at 471 [23], [1039]; Netaf Pty Ltd v Bikane Pty Ltd (1990) 26 FCR 305 at 308.
(c) It is clear that the contravention need not be the only cause of the loss or damage. However, if some other cause is properly to be treated as ‘the real, essential, substantial, direct, appreciable or effective cause’ of the damage, the fact that the damage would not have occurred but for the contravention may be insufficient to establish liability: HTW Valuers at 120 [29] per Gleeson CJ, and 137 [88] per McHugh J.
It is for the contravening party to disentangle, as far as possible, the various contributing factors: Henville v Walker at 507 [148].
The defendants’ primary submission on this aspect of the case is that any loss that the plaintiffs may have suffered derives not from any fault of the defendants but from the lack of business acumen (that is, the ineptitude) of Mr Barnes as the owner of the business, and manager of the whole operation.
I accept that Mr Barnes was not a particularly skilful manager, but the Australian Consumer Law does not merely protect ‘the careful or the astute’: Henville v Walker at [13] per Gleeson CJ.
Accepting that losses arising from a plaintiff’s ineptitude in the conduct of the business will not be recoverable (see for example, Gould at 267 per Gibbs CJ, Henville v Walker at [31]), the threshold for such a finding may fairly be said to be high.
Examples of language taken from the authorities include where the conduct is ‘intentional’: HTW Valuers per McHugh J at 141 [104]; Henville per Gaudron J at 483 [72]. Other descriptions are that the conduct must be ‘so dominant as to constitute a novus actus interveniens’ or be ‘grossly unreasonable’ so as to constitute a ‘supervening cause’: HTW Valuers at 136 [85] per McHugh J, and at 119 [27] per Gleeson CJ.
The defendants relied on the fact that the business was being sold for $1, yet Mr Barnes did not think that he would have to invest any money in the business. Given that is what the Information Memorandum itself told Mr Barnes (see [151] of the reasons above), that hardly demonstrated a lack of business acumen.
The defendants next rely on Mr Barnes and Mrs Barnes holding a view that they could run the business while working full time. That submission must fail in light of the evidence, which I accept, that Mr Barnes left his job and worked in the business full time, and Mrs Barnes spent up to 30 hours per week, managing the accounts as well as working in the bars.
The accountant evidence was clear that the primary cause of the operating losses was that the sales were significantly reduced from previous years. The defendants argue that the significant reduction in income was due to a variety of decisions, such as:
(a) closing the nightclub for renovations during what the defendants submit was one of the busiest times of the year;
(b) firing a manager that had significant experience without replacing him;
(c) changing the brand of beer being sold from Fosters to Tooheys; and
(d) cancelling certain specials on nights that had previously been popular with patrons (the ‘schnitzel/parma’ night) and increasing the prices of the specials on steak nights by $2.
It is difficult to attribute any one or any combination of these decisions to the significant shortfall in sales. Other reasons or assumptions made by Mr Haley, the accountant for the defendants, included, for example, that there was a possible decline in the market in the general area, including a general decline in the commercial clientele in the area.
As a result, I was not at all satisfied that the evidence as a whole established such a lack of reasonable care or mismanagement on the part of Mr Barnes for the first plaintiff as to find that the plaintiffs’ conduct was itself a supervening cause.
Perhaps with different decisions and the benefit of hindsight, the business might have been saved, but it must be remembered that this was already a loss-making venture. It may be that ultimately Mr Barnes did not have the expertise he had thought sufficient to convert what was, at best, a marginal operation into a profitable one. But that does not amount to a management of the business that was so unreasonable as to break the chain of causation between relying on the representations and the losses that flowed from the purchase of the business.
Further, with Mr Barnes and Mrs Barnes working in the business without payment, and the sales figures being sufficient to cover at least the purchase of the stock, there may have been a possibility of the plaintiffs trading on and this is what they initially attempted to do.
Had the rent holiday been disclosed, and Mr Barnes had chosen to proceed with Jornad purchasing the business, Mr Barnes may well have been able to negotiate a similar holiday for a number of months, which would have seen the business established post any renovation work and potentially recover some of the losses sustained in the early months. But the requirement to pay rent at the figures negotiated (which negotiations were infected by the misleading conduct) remained a material expense that very quickly saw the plaintiffs involved in litigation with the landlord in the Magistrates Court for unpaid rent.
Accordingly, the losses claimed remain sufficiently connected to the conduct constituting the contraventions which resulted in the purchase of the business.
Based on expert accounting evidence, the plaintiffs collectively assess their loss at $353,088. Following cross-examination of the expert accountants, it was established that there should be a reallocation of certain monies recorded in the accounts, such that I accept the amount claimed should be reduced by two further amounts of $10,000 and $9,100, bringing the total claimed amount to $333,988.
That amount included damages to compensate for unrewarded labour as follows:
(a) Remuneration for Mr Barnes (managing the pub and working up to 60 hours per week) totalling $150,000 per annum for 24.5 weeks, being $70,673.
(b) Superannuation for Mr Barnes of $6,714.
(c) Remuneration for Mrs Barnes (for business bookkeeping and assistance in the bars up to 30 hrs per week) at $50,000 per annum for 24.5 weeks, being $23,557.
(d) Superannuation for Mrs Barnes of $2,216.
In principle, such losses are recoverable, see Tuggeranong Town Centre at [1143]-[1144] and WP Kidd P/L & Anor v Panwell P/L & Ors [2007] QSC 373 at [176] and the cases there-cited.
The defendants argue that there was no contract of employment for either Mr Barnes or Mrs Barnes and the notion was quite contrary to the business plan. Neither of those matters are necessarily decisively against the loss being compensable. I accept that a claim cannot be made for lost wages for Mrs Barnes in circumstances where she is not a party to the proceedings, and there is no evidence of any contract of employment (implied or express), notwithstanding that she did give evidence of having worked in the business.
Mr Barnes is in a different category given that he is a party to the proceedings and he also gave evidence substantiating the hours he worked in the business, which I accept. However, given that the previous manager of the business, who was highly experienced, earned approximately half of what Mr Barnes has claimed, the amount claimed in lost wages ought be reduced to be more reflective of the market. I consider a figure of $65,000 inclusive of superannuation is more reasonable.
There was some suggestion that the legal fees incurred by Jornad in the sum of $55,103 were for the costs of the current proceedings. Although the detail of the invoices in evidence is scant, the surrounding circumstances and brief references in the evidence to the dispute with the landlord are sufficient to establish that in fact, those expenses were attributable to Magistrates Court proceedings and advice as to that litigation.
Having said that, the defendants challenged the sum of the legal fees, as the invoices in evidence only established that $16,087.93 had been incurred. Accordingly, I would allow the legal fees claimed as properly forming part of the losses of the business, but in that reduced sum.
Otherwise, I accept Mr Stewart’s evidence as to the reasonableness of the claims for the operating losses (including the repairs, advertising expenses, computer expenses and other trading losses), other capital amounts lost (approximately $48,544 in capital improvements) and the interest on borrowing costs (said to be $1,349).
That I have accepted the figures propounded by Mr Stewart is not to detract from the professionalism or quality of the evidence given by Mr Haley on behalf of the defendants. It was simply that a number of issues raised by Mr Haley were already incorporated in the final figure relied upon by Mr Stewart and by the plaintiffs, and Mr Haley’s evidence was otherwise significantly qualified by a number of assumptions that were not borne out by the facts established.
Costs
Costs thrown away by the adjournment of the proceedings in September 2018.
After the first week of hearing in June 2018, the matter was adjourned due to it running over the time allocated. The proceedings were to recommence in September 2018, but were again adjourned in circumstances discussed below until February 2019. On 8 November 2018 I heard an application for costs brought by the defendants seeking the costs thrown away by an adjournment of the proceedings in September 2018. The defendants sought not only that the plaintiffs pay the costs thrown away but that the legal representatives for the plaintiffs personally pay those costs.
The parties applied to the Court for a separate listing of at least half a day for the hearing of this discrete issue. As I made clear at the time the application came before me, it is unsatisfactory for the parties to conduct a substantive and lengthy application about costs thrown away by an adjournment potentially payable by legal representatives in the midst of hearing a case. As conflicts of interest can arise, I wish to lend no encouragement to that litigation strategy.
In any event, the entire application was misconceived. The reason for the adjournment was the late service of an expert report served on the plaintiffs without prior consent or notice. The defendants sought to argue that there were other reasons for the adjournment, including the fact that the plaintiffs’ expert accountant was overseas when the hearing was scheduled to occur, however the plaintiffs had made an application for the accountant to give evidence by telephone or video link and the court did not determine that application due to the fact that the accountant was not in a position to deal with the late served report in any event. As to whether the plaintiffs’ legal representatives should have paid the costs thrown away by the adjournment, that issue falls away in light of the fact that the cause of the adjournment was not the unavailability of the plaintiffs’ expert accountant.
I accept that the defendants received further information which required the further serving of expert evidence. However, simply serving a late expert report is not the manner in which the defendants should have gone about dealing with the additional evidence that was required. Parties who become aware that further expert evidence is required in circumstances where there is a hearing listed, imminent or otherwise, should immediately bring the question of further evidence to the attention of the court. At the very least, the requirement to serve further evidence should have been brought to the attention of the plaintiffs. For those reasons I will not accede to the defendants’ application for the costs thrown away of the adjournment.
That ought to have concluded the matter, however the plaintiffs have in turn sought that the defendants pay their costs thrown away by the adjournment. That submission was also without foundation, as the circumstances which gave rise to the necessity for further evidence arose in part from late provision of documents that ought to have been discovered at an earlier date. Further, although it was not the reason for the adjournment, I cannot ignore the fact that the plaintiffs’ expert was overseas and that the Court may well have required him to be present for the purpose of the detailed cross-examination on the accounting evidence, such as that which ultimately occurred through an expert conclave followed by joint evidence in the witness box when the final tranche of the hearing occurred in February 2019.
I am therefore unpersuaded that the plaintiffs were ready to proceed with the hearing of the expert evidence as had been planned. I do not consider that the plaintiffs are entitled to their costs thrown away by the hearing either. Rather, the appropriate order in the exercise of the Court’s discretion is that each party pay its own costs thrown away by the adjournment.
Costs of the proceedings
The parties otherwise indicated that they each wished to be heard on the costs of the proceedings following the delivery of these reasons. I will hear the parties as to costs and the parties should prepare a timetable for the filing of submissions and any evidence on the issue.
Interest
The plaintiff is entitled to interest on the judgment sum. Such interest will be calculated by reference to the rates specified in the Court Procedure Rules 2006 (ACT), accruing from the date the proceedings were commenced.
Conclusion and Relief
As will be clear from the above reasons, there should be judgment for the plaintiffs in the sum of $256,812.93 plus interest, with the parties to be heard on the costs of the proceedings.
The parties are to bring in short minutes of order to give effect to these reasons.
| I certify that the preceding two-hundred and forty-four [244] numbered paragraphs are a true copy of the Reasons for Judgment of her Honour Associate Justice McWilliam Associate: Date: |
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