Joshua Brook Pty Ltd v Outdoor Centre Holdings Pty Ltd and Anor (No.3)

[2012] FMCA 910

FEDERAL MAGISTRATES COURT OF AUSTRALIA

JOSHUA BROOK PTY LTD v OUTDOOR CENTRE HOLDINGS PTY LTD & ANOR (No.3) [2012] FMCA 910

TRADE PRACTICES – Alleged misleading and deceptive conduct – sale and purchase of business.

CONTRACT – Alleged breach of contractual warranty of accuracy.

CONTRACT – Counterclaim – alleged breach of warranty retention monies clause – whether consultation with and approval and verification by vendor necessary before warranty work completed.

WORDS AND PHRASES – “overview” – “consultation”.

Evidence Act 1995 (Cth), ss.59(1), 135
Trade Practices Act 1974 (Cth), ss.51A, 52, 82

Arnotts Ltd & Ors v Trade Practices Commission (1990) 24 FCR 313
Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485
Bond v WorkCover Corporation of South Australia and Allianz Australia Workers’ Compensation (SA) Ltd (2005) 93 SASR 315; [2005] SASC 464
Butcher & Anor v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592; [2004] HCA 60
Clifford v Vegas Enterprises Pty Ltd (ACN 009 078 048) & Ors (No. 5) (2010) 272 ALR 198; [2010] FCA 916
Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31
HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640; [2004] HCA 54
JLW (Vic) Pty Ltd v Tsiloglou [1994] 1 VR 237
Leichhardt Municipal Council v Minister for Planning (1992) 78 LGERA 306
Metropolitan Transit Authority (Vic) v Waverley Transit Pty Ltd [1991] 1 VR 181
Middleton v Aon Risk Services Australia Ltd [2008] WASCA 239
Professional Services of Australia Pty Ltd v Computer Accounting and Tax Pty Ltd (No. 2) (2009) 261 ALR 179; [2009] WASCA 183
Sita Queensland Pty Ltd v Beattie [2000] 2 Qd R 433
Wardley Australia Limited and Another v The State of Western Australia (1992) 175 CLR 514

The Concise Oxford Dictionary of Current English (Oxford: Clarendon Press, 1982) (7^th Edn)

Applicant: JOSHUA BROOK PTY LTD

First Respondent: OUTDOOR CENTRE HOLDINGS PTY LTD

Second Respondent: PAUL NICHOLLS

File Number: PEG 198 of 2008

Judgment of: Lucev FM

Hearing dates: 23-26 November and 15 December 2010

Date of Last Submission: 15 December 2010

Delivered at: Perth

Delivered on: 19 October 2012

REPRESENTATION

Counsel for the Applicant: Mr C Slater

Solicitors for the Applicant: MacKinlays Solicitors

Counsel for the Respondents: Mr P Mendelow

Solicitors for the Respondents: Kott Gunning

ORDERS

1. That:

   (a)the Applicant’s application be dismissed;

   (b)there be judgment for the First Respondent on the First Respondent’s counterclaim in the sum of $40,000, to be paid by 16 November 2012, together with interest:

   (i)on the sum of $20,000 at the rate of 6% per annum from 2 March 2009 to the date of judgment;

   (ii)on the sum of $20,000 at the rate of 6% per annum from 2 March 2010 to the date of judgment (“Judgment Sum”); and

   with interest on the Judgment Sum at the rate of 6% per annum from the date of judgment until payment.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA
AT PERTH

PEG 198 of 2008

JOSHUA BROOK PTY LTD

Applicant

And

OUTDOOR CENTRE HOLDINGS PTY LTD

First Respondent

PAUL NICHOLLS

Second Respondent

REASONS FOR JUDGMENT

Introduction

1. This is an application alleging:

   a)misleading and deceptive conduct under s.52 of the Trade Practices Act 1974 (Cth),[1] including an alleged future matter representation under s.51A of the TP Act; and

   b)breach of contract,

   in relation to the sale of a patio, home improvement and room expansion business.[2]

   [1] “TP Act”.

   [2] “the Business”.

2. The applicant, Joshua Brook Pty Ltd,[3] alleges that:

   a)there were four material representations (including one by silence) which constituted the misleading and deceptive conduct in relation to the purchase of the Business from the first respondent, Outdoor Centre Holdings;[4] and

   b)there was an express breach of a term of the sale agreement.[5]

   [3] “Joshua Brook”.

   [4] “OCH”.

   [5] “Sale Agreement”.

3. Joshua Brook says that the representations suggested that the financial performance of the Business was capable of being sustained based on disclosed employees which disclosure did not include Steven Nicholls as an employee, and the tasks that he undertook for the Business.[6] Joshua Brook alleges that the services provided to the Business by Steven Nicholls were not provided to the Business after it was sold to Joshua Brook.

   [6] “Steven Nicholls Labour”.

4. Joshua Brook says that it relied on the representations in purchasing the Business. Joshua Brook further says that the representations were false. It is argued that Steven Nicholls Labour was an important part of the employment structure of the Business, and that in the absence of Steven Nicholls the Business could not perform in the manner represented to Joshua Brook, and consequently the Business was worth less than the amount paid by Joshua Brook to purchase the Business.

5. Joshua Brook also alleges a breach of the Sale Agreement by OCH, relying on the terms of the Sale Agreement, under which it says that OCH gave a contractual warranty of accuracy in relation to information given to Joshua Brook with respect to the Business, including assets and financial information.

6. OCH and Paul Nicholls denied that the alleged representations were made, or that they were false or misleading. Further, they say that there is no evidence that Joshua Brook relied upon the representations at the time of Settlement, and that there is no evidence of any loss suffered by Joshua Brook.

7. Joshua Brook also rely upon a contractual warranty of accuracy said to arise as a term of the Sale Agreement which Joshua Brook asserts has been breached by the representations, or at least some of them. OCH and Paul Nicholls deny that there has been any such breach of the Sale Agreement.

8. OCH counterclaims for monies says to be owed under a warranty retention money clause in the Sale Agreement. Joshua Brook claims that no money is owing to OCH, and that it has complied with the clause.

9. There is no dispute that OCH and Paul Nicholls were acting in the course of trade or commerce at all material times.

10. The principal persons involved in these proceedings are:

    a)Gary Dunlop: a director of Joshua Brook, and principal representative of Joshua Brook as purchaser of the Business;

    b)Paul Nicholls: the owner of the Business, and a director of OCH; and

    c)Steven Nicholls: the son of Paul Nicholls, and about the provision of whose services to the Business there is a significant dispute in these proceedings.

Evidence – admission of late affidavits

1. On the first morning of the hearing the parties sought to have further affidavits admitted into evidence. In relation to both applications the Court dismissed the applications for leave to file further affidavits and ordered that the costs of the applications be costs in the cause. Short reasons for those orders now follow.

2. Joshua Brook sought to admit survey evidence so as to establish a salary level for an equivalent general manager to a general manager of the Business. In the Court’s view the survey evidence:

   a)was inadmissible as hearsay;[7]

   [7] Evidence Act 1995 (Cth) (“Evidence Act”), s.59(1); but compare Arnotts Ltd & Ors v Trade Practices Commission (1990) 24 FCR 313 at 360 per Lockhart, Wilcox and Gummow JJ.

   b)was, in any event, unreliable because:

   i)it was a small survey;

   ii)there was no necessary correlation between the tasks of a general manager in the survey and the tasks of a general manager of the Business; and

   iii)the basis for the performance pay component of the salaries of the general managers in the survey was not explained; and

   c)ought to be excluded under s.135 of the Evidence Act because:

   i)it was evidence which was liable to be confusing (for reasons already set out above); and

   ii)was likely to cause or result in undue waste of time, as the deponent of the affidavit was not available for cross-examination, and it was not known when he would be available for cross-examination, if ever.

3. Further, the affidavit was late, and it was evidence which ought to have been filed and served much earlier, together with the other expert evidence in the proceedings.

4. OCH and Paul Nicholls sought to admit further affidavit material comprising further profit and loss statements for the year ending 30 June 2007. The Court rejected the tender of the material because:

   a)it was late; and

   b)because it was late, and because of its nature, Joshua Brook would have needed an adjournment to obtain further evidence in reply from Gary Dunlop and from Joshua Brook’s experts, which would have necessitated a further delay in the hearing of the matter, it being a matter which at that stage was almost two years old and had already been the subject of four prior applications in a case and two prior interlocutory judgments of this Court.[8]

   [8] Evidence Act, s.135.

Evidence - agreed facts

1. Joshua Brook, OCH and Paul Nicholls filed a statement of agreed facts[9] prior to the hearing, in which they agreed that:

   [9] “Agreed Statement”.

   a)before 1 March 2008 OCH owned and operated businesses trading as “Spacemaker”, “Perth Home Improvement Centre” and “1/2 Price Patios and Pergolas”;[10]

   [10] Statement of Claim, para.1; Defence, para.1.

   b)Paul Nicholls was a director of OCH and the father of Steven Nicholls;[11]

   [11] Statement of Claim, paras.2 and 3; Defence, para.1.

   c)at the end of February 2007 Steven Nicholls asked Paul Nicholls to return to the Business and he did so in or around March 2007;[12]

   [12] Affidavit of Paul Nicholls, sworn 5 May 2010 (“Paul Nicholls’ 5 May 2010 Affidavit”) paras.25-27.

   d)on 4 December 2007 a marketing report on the Business[13] was provided to Gary Dunlop of Joshua Brook by Helen Sharman, the appointed agent for the sale of the Business;[14]

   [13] “Marketing Report”.

   [14] Affidavit of James Gary Dunlop, sworn 19 February 2010 (“Dunlop’s February 2010 Affidavit”) para.3; Affidavit of James Gary Dunlop, sworn 19 March 2010 (“Dunlop’s March 2010 Affidavit) para.7; Affidavit of James Gary Dunlop, sworn 23 June 2010, (“Dunlop’s June 2010 Affidavit”) para.3.

   e)at the time Gary Dunlop received the Marketing Report he was provided with a confidentiality agreement,[15] which he signed;[16]

   [15] “Confidentiality Agreement”.

   [16] Dunlop’s June 2010 Affidavit, para.3.

   f)on 20 December 2010 Joshua Brook entered into the Sale Agreement for $2.4m;[17]

   [17] Statement of Claim, para.10; Defence, para.8.

   g)settlement was subject to, amongst other matters, a satisfactory due diligence;[18]

   [18] Dunlop’s March 2010 Affidavit, para.11, Annexure JGD-04 – Special Conditions of Sale – Annexure A, cl.1.

   h)between 20 December 2007 and 29 January 2008 either or both of Paul Nicholls and Helen Sharman provided information on the Business in the course of the due diligence;[19]

   [19] Dunlop’s March 2010 Affidavit, para.12.

   i)between 20 December 2007 and 1 March 2008 Paul Nicholls for OCH provided financial information to Joshua Brook;[20]

   j)on 18 January 2008 Gary Dunlop requested an extension of the due diligence period which was granted on 21 January 2008;[21]

   k)on 29 January 2008 Gary Dunlop signed off on the completion of the due diligence and the decision to proceed to settlement;[22]

   l)on 1 March 2008 settlement occurred and keys were handed over;[23]

   m)on 30 June 2008 Joshua Brook sent an invoice to OCH for the sum of $16,954.19;[24]

   n)in August 2008 Paul Nicholls sent a letter to Gary Dunlop;[25]

   o)on 27 August 2008 OCH by its solicitors wrote to Joshua Brook in relation to, amongst other things, warranty claims;[26]

   p)on 6 September 2008 Gary Dunlop responded to the letter from OCH’s solicitors;[27]

   q)on 19 September 2008 Paul Nicholls sent a letter to Gary Dunlop regarding a warranty claim;[28] and

   r)on 23 September 2008 Gary Dunlop sent a letter to Paul Nicholls.[29]

   [20] Statement of Claim, para.12; Defence, para.10.

   [21] Paul Nicholls’ 5 May 2010 Affidavit, para.94.

   [22] Dunlop’s March 2010 Affidavit, para.20; Paul Nicholls’ 5 May 2010 Affidavit, para.95.

   [23] Paul Nicholls’ 5 May 2010 Affidavit, para.104 (“Settlement”).

   [24] Dunlop’s June 2010 Affidavit, para.24; Paul Nicholls’ 5 May 2010 Affidavit, Annexure PN-13 (“30 June 2008 Invoice”).

   [25] Dunlop’s June 2010 Affidavit, para.25; Paul Nicholls’ 5 May 2010 Affidavit, Annexure PN-14 (“5 August 2008 Letter”).

   [26] Dunlop’s June 2010 Affidavit, para.28 and Annexure JGD-03 (“27 August 2008 Letter”).

   [27] Dunlop’s June 2010 Affidavit, para.29 and Annexure JGD-04 (“6 September 2008 Letter”).

   [28] Dunlop’s June 2010 Affidavit, para.30 and Annexure JGD-05 (“19 September 2008 Letter”).

   [29] Dunlop’s June 2010 Affidavit, paras.25-32; Paul Nicholls’ Affidavit, Annexures PN-15 and PN-16 (“23 September 2008 Letter”).

The total labour representation

1. Joshua Brook alleges that OCH and Paul Nicholls represented the total staffing requirements of the Business as follows in the Marketing Report:

Category	Number of Staff	Average salary per staff	Total salary per category
Staff control, accounting and marketing	1 (being the owner)	Owner’s drawings	Owner’s drawings
Sales	8	$75,000	$600,000
Administration	4	$40,000	$160,000
Factory leading hand	1	$40,000	$40,000
Factory workers	5	$30,000	$150,000
Supervisors	4	$45,000	$180,000
Part time office / sales	5	$15,000	$75,000
Total	$1,205,000 plus owner’s drawings

[30]

[30] “Total Labour Representation”.

1. OCH and Paul Nicholls deny the Total Labour Representation as alleged by Joshua Brook, but in any event, say that it was heavily qualified by reason of:

   a)the statement on the cover of the Marketing Report which says that:

   The analysis supplied is for information purposes only and no representation is made as to the completeness or accuracy.[31]

   b)the “Disclaimer” on the second page of the Marketing Report, that:

   Recipients of this report should satisfy themselves that they have obtained all the information they require relating to the sale of this business. While the information provided herein is believed to be accurate and reliable, neither the vendors nor Business Mergers and Sales Perth makes any representations or warranties, expressed or implied as to the accuracy or completeness of such information. In furnishing this report Business Mergers and Sales Perth reserves the right to amend or replace the report at any time and undertakes no obligation to provide the recipient with access to any additional information. Nothing in this report should be relied upon as a promise or representation to the future.

   The background information contained was prepared expressly for the use herein and is based upon certain assumptions and management’s analysis of information at the time the report was prepared. There is no representation, warranty, or other assurance that any of the projections will be realised.[32]

   [31] Dunlop’s February 2010 Affidavit, Annexure JGD-01; Marketing Report, trial bundle (“TB”), page 8.

   [32] Dunlop’s February 2010 Affidavit, Annexure JGD-01; Marketing Report, TB, pages 9 and 10.

2. OCH and Paul Nicholls also note that:

   a)item 1.2 - Introduction of the Marketing Report which states that the Business carries “25 staff”;[33]

   b)item 2.8 of the Marketing Report which describes the role of the Business owner[34] as follows:

   [33] Dunlop’s February 2010 Affidavit, Annexure JGD-01; Marketing Report, TB, page 15.

   [34] “Owner”.

   The current owner has 3 main functions within the business;

   1. Staff control – being in constant communication with every employee and keeping a tight control.

   2. Accounting

   3. Marketing

   Keeping a tight control over the business ensures that it is run smoothly, however, it can and has been run without the owner present for short periods of time.[35]

   c)item 3.1 of the Marketing Report provides a staffing overview which lists 27 staff members;[36] and

   d)the Marketing Report allocated a sum of $136,363 to management fees as a non-recurring expense,[37]

   and consequently submit that the Marketing Report did not purport to be an accurate representation of staff requirements of the Business upon which reliance could be placed to accurately compute the cost of all staffing arrangements, nor could it have reasonably been so construed.

   [35] Dunlop’s February 2010 Affidavit, Annexure JGD-01; Marketing Report, TB, page 20 (“Owner’s Functions”).

   [36] Marketing Report, item 3.1, table entitled “Staffing Overview” (“Staffing Overview”).

   [37] Dunlop’s February 2010 Affidavit, Annexure JGD-01; Marketing Report, TB, page 31.

3. Joshua Brook argues that the reference to the Owner in the Marketing Report is a reference to Paul Nicholls. OCH and Paul Nicholls do not admit this, but say that the reference to the Owner was reasonably capable of being construed as a reference to the person performing the role of Owner. Joshua Brook says that OCH had actual knowledge of the Steven Nicholls Labour because Paul Nicholls on behalf of OCH was in constant communication with, and kept tight control over, all staff and was responsible for accounting and marketing.

4. Joshua Brook also alleges that from 4 December 2007 Paul Nicholls had actual knowledge of the Total Labour Representation, and further or alternatively the Adjusted Net Profit Representation,[38] by reason of:

   a)the Owner’s Functions as set out in the Marketing Report;

   b)a meeting held on 10 December 2007 at Helen Sharman’s offices, and attended by her, Paul Nicholls and Gary Dunlop, at which it is alleged that Paul Nicholls confirmed to Gary Dunlop the accuracy of the contents of the Marketing Report including, in particular, the Total Labour Representation and the Adjusted Net Profit Representation; and

   c)a conversation in Paul Nicholls’ car on 13 December 2007, in which Paul Nicholls confirmed to Gary Dunlop the accuracy of the Total Labour Representation.

   These matters are not admitted by OCH and Paul Nicholls.

   [38] The terms of the “Adjusted Net Profit Representation” are set out below: see para.30.

5. In evidence, Gary Dunlop was taken to the Staffing Overview.[39] He said that he viewed the Staffing Overview as a comprehensive statement of staff numbers.[40] Gary Dunlop thought that existing staff would remain with Joshua Brook as the new employer,[41] and was aware that the sale of the Business was not being disclosed to current employees, and that there was limited opportunity to talk to those employees.[42] Gary Dunlop acknowledged that employee records for the Business would show that specific employees varied, but he said that he was concerned to check that the levels of staffing disclosed met the level actually employed.[43]

   [39] Transcript at 82.

   [40] Transcript at 84.

   [41] Transcript at 106.

   [42] Transcript at 105 and 94.

   [43] Transcript at 111.

6. Gary Dunlop agrees that he could have asked to see information with respect to employees, and that nothing was withheld from him.[44] Joshua Brook says that there was no information that OCH and Paul Nicholls can point to which would have put Gary Dunlop on inquiry as to the Steven Nicholls Labour.

   [44] Transcript at118.

7. Paul Nicholls acknowledged that the Marketing Report was prepared by his business broker, Helen Sharman, but that the answers were those originally provided by him in response to a questionnaire about the Business[45] which he prepared for Helen Sharman. Paul Nicholls further agreed that he actually prepared the draft of the Staffing Overview, and that in so doing, he was attempting to describe the people involved in the Business,[46] but he did not include Steven Nicholls.

   [45] “Questionnaire”.

   [46] Transcript at 264.

1. There was no dispute that Steven Nicholls effectively ran the Business for a period after Paul Nicholls had a heart attack in September 2004 until Paul Nicholls returned to the Business around March 2007.[47]

   [47] Exhibit 10, Transcript at 260 and 263.

2. In the Questionnaire Paul Nicholls did not identify any other key employees who could perform his role, or who could be trained to do so.

3. In the Questionnaire Steven Nicholls was not identified as a contractor, and at hearing Paul Nicholls said that he was in fact a sub-contractor. Technically, that was correct as Steven Nicholls provided his services to OCH through another company, Mustique Investments Pty Ltd.[48] In any event, Steven Nicholls was not identified in the Marketing Report as a contractor or sub-contractor who would withdraw from providing assistance to the Business under new ownership. The omission of Steven Nicholls from the Marketing Report, or arguably from any other form of disclosure, was contrasted at hearing with the contents of the draft of the Questionnaire in which, in identifying handover assistance, Paul Nicholls wrote that that assistance could be provided either by Paul Nicholls or by Steven Nicholls, for a fee. Paul Nicholls admitted that in approving the Marketing Report he knew that it did not disclose the existence of Steven Nicholls.[49]

   [48] “Mustique Investments”.

   [49] Transcript at 289-290.

4. In his evidence Paul Nicholls agreed that there were inquiries from Gary Dunlop to ascertain how the Business would run after the sale, and that he acknowledged that people were an important element in how the Business ran.[50] Paul Nicholls, however, denied that there was a specific discussion as to the employees. Joshua Brook says that it is a reasonable inference that Gary Dunlop made inquiries as to the employees and that Paul Nicholls’ refusal to agree that he did so arises from his knowledge of its consequences for OCH in this action.

   [50] Transcript at 292.

5. Joshua Brook suggests the questions put by Gary Dunlop to Paul Nicholls during their meetings contained broad elements, and that the responses were confined to sales being a single element from those questions.[51]

   [51] Transcript at 295-300.

6. There is no dispute that Paul Nicholls was aware of the due diligence process, and complied with all requests for information which were made by Joshua Brook.[52]

   [52] Transcript at 301.

The Adjusted Net Profit Representation

1. The Adjusted Net Profit Representation is pleaded at paragraph 9 of the Statement of Claim in the following terms:

   By the 4 December 2007 Report [Marketing Report], the First Respondent [OCH] represented that the adjusted net profit generated by the Business (allowing for add-backs customarily used in the sale of a business to calculate the profit before owner’s remuneration, interest and borrowing costs and other charges and non-recurring income) in the financial year ending 30 June 2007 was $840,265 …[53]

   [53] “the Adjusted Net Profit Representation”.

2. The Marketing Report sets out a “Financial Situation Analysis”, which includes an “Add-back Schedule”.[54] The Add-back Schedule is as follows:

   [54] TB 31-32 and 244-245.

Outdoor Centre Holdings Pty Ltd	ADD BACKS 2007	ADD Backs 2006
ITEM
Advertising Pre-Paid portion yellow & white pages	25,000	-
Borrowing Costs Relates to vendors private structure.	583	583
Depreciation Non Cash Item	51,105	53,801
Donations Discretionary	3,636	2,323
Filing Fees Relates to vendors private structure	212	9,847
Fines and Penalties Non-recurring of one Item	-	15,648
Hire of Plant and Equipment Paid out by vendor	21,575	23,968
Insurance Relates to Vendors private portion	20,000	20,000
Interest Costs Relates to Vendors private structure	59,731	55,670
Management Fees Non recurring	136,363	-
Motor Vehicle Expenses Relates to Vendors private use	11,435	10,791
Postage, Printing, Stationary Pre-paid brochures	10,000	-
Repairs and Maintenance Portion related to private repairs	13,000	-
Rent Adjustment Rental difference for Mandurah property	-(22,888)
Royalties Non-recurring expense	42,000	42,000 taken from cogs
Superannuation Associates Private drawings	210,000	131,289
Telephone Portion relates to Vendors private portion	2,691	2,738
Travel Portion relates to Vendors private travel	23,795	3,905
TOTAL ADD BACKS	$608,738	$372,563
Plus Net Profit as per Accounts	$320,884	$127,019
ADJUSTED NET PROFIT	$840,265	$466,964

[55]

[55] TB 31-32 and 244-245. At hearing there was no dispute that an allowance for a certain amount of payroll tax was needed to make the above figures tally.

1. Joshua Brook thus alleges that by the Marketing Report, OCH represented that the Adjusted Net Profit generated by the Business in the financial year ending 30 June 2007 was $840,265.

2. OCH and Paul Nicholls admit that the Marketing Report states that the Adjusted Net Profit of the Business, based on add-backs referred to in the Marketing Report, was $840,265 for the financial year ending 30 June 2007.

3. Joshua Brook alleges that it acted in reliance on the Adjusted Net Profit Representation by entering into the Sale Agreement on 20 December 2007, in an amount of $2,400,000, on the basis that the purchase price was calculated such that the Adjusted Net Profit represented a return on the purchase price of no less than 35%.

4. Joshua Brook also alleges that at all material times from 1 July 2006 until Settlement the Business required all of the labour identified in the Total Labour Representation and the Steven Nicholls Labour to make true the Adjusted Net Profit Representation. OCH and Paul Nicholls deny this, and say that at all material times any work performed by Steven Nicholls for the Business was:

   a)subsumed within the Owner’s Functions; or

   b)subsumed within the management fee; or

   c)work of a non-recurring nature not required to sustain the Adjusted Net Profit of the Business.

5. Gary Dunlop knew of the importance of the Adjusted Net Profit Representation, and that due diligence was necessary to check the information provided,[56] although he did not consider that it was necessary in the due diligence process to conduct an audit of figures disclosed by OCH.[57]

   [56] Transcript at 108.

   [57] Transcript at 117.

6. OCH and Mr Paul Nicholls submit with respect to the alleged Adjusted Net Profit Representation that:

   a)the words “(allowing for add-backs customarily used in the sale of a business to calculate the profit before owner’s remuneration, interest and borrowing costs and other charges and non-recurring income)”[58] constitute an interpolation by Joshua Brook which is not supported by the wording of the Marketing Report, or any other evidence;

   b)the words “ADJUSTED NET PROFIT” - $840,265” which appear in the Add-back Schedule, constitute the sum of the “Net Profit as per Accounts”, a sum of $320,884, added to the “TOTAL ADD BACKS” of $608,738 (with allowance for the payroll adjustment referred to above);[59]

   c)the Total Add Backs fall within “management’s analysis of information at the time the [Marketing] Report was prepared”;[60] and

   d)the Adjusted Net Profit Representation does not arise by the Marketing Report, and all that is set out is that the net profit as per the accounts annexed can be increased by a sum of $608,738 based on management’s analysis of what constituted “Add-backs”.

   [58] See Statement of Claim, para.9.

   [59] TB 32 and 245; see fn.55 above.

   [60] TB 9 and 249.

7. The Marketing Report expressly provides that:

   a)it is provided for “information purposes only and no representation is made as to the completeness or accuracy”;[61]

   b)recipients of the Marketing Report “should satisfy themselves that they have obtained all the information they require relating to the sale” of the Business;[62]

   c)no representation or warranty, [was] express or implied, as to the “accuracy or completeness” of the information provided in the Marketing Report;[63] and

   d)the information in the Marketing Report was “based upon certain assumptions and management’s analysis of information at the time the [Marketing] [R]eport was prepared” and that there was “no representation, warranty, or other assurance that any of the projections will be realised”.[64]

   [61] TB 8 and 222.

   [62] TB 9 and 249.

   [63] TB 9 and 249.

   [64] TB 9 and 249.

8. Gary Dunlop was, in the course of the due diligence, provided with a profit and loss statement showing a net profit of $236,323,[65] rather than the net profit of $320,859 shown on the profit and loss statement attached to the Marketing Report signed by Mr Paul Nicholls and Mr Dunlop.[66] Also, in the course of the due diligence, Mr Dunlop was provided with a document which showed that in the financial year ended 30 June 2004 a management fee of $48,194 had been payable in respect to Perth Home Improvement Centre. There is no dispute that the Add-back Schedule in the Marketing Report showed a non-recurring management fee of $136,363 for the financial year ended 30 June 2007.[67]

   [65] TB 205.

   [66] TB 252.

   [67] TB 166 and TB 31 and 244 (“the Management Fee”).

9. Joshua Brook lead no evidence in relation to:

   a)the financial performance of the Business:

   i)between 1 July 2007 and 1 March 2008;

   ii)after Settlement;

   iii)the level of profit between 1 July 2007 and 1 March 2008, and whether that level of profit was more or less than the level of profit in the financial year ending 30 June 2007; and

   iv)whether the profit generated after Settlement was greater than that before Settlement, whether it be $236,323 or $320,859,[68] irrespective of the alleged expenditure of $220,413 on additional labour to replace the Steven Nicholls Labour.

   [68] See TB 205 and TB 252 respectively.

10. There is no assertion that the profit and loss statement, or the differing net profits of $236,323 and $320,859, were misleading or deceptive.

11. Gary Dunlop proceeded with the sale, paid the sum of $2.4 million to purchase the business, and verified that he had undertaken due diligence in so doing.

The systems representation

1. Joshua Brook says that OCH, by its agent, Paul Nicholls and its employees, provided financial information to Joshua Brook in relation to the Business from the date of the Sale Agreement, being 20 December 2007, to Settlement, being 1 March 2008. There is no dispute that certain financial information was provided to Joshua Brook.

2. Joshua Brook says that on or around 10 and 13 December 2007 Paul Nicholls, and further or alternatively Paul Nicholls for OCH, orally represented to Joshua Brook that given the systems already in place in the Business, Paul Nicholls could see no reason why the Business could not continue performing after settlement as it had done prior to settlement.[69]

   [69] “the Systems Representation”.

3. The Systems Representation was said to have been made at a meeting on 10 December 2007 at the offices of the business broker, Helen Sharman, in the presence of Helen Sharman and Gary Dunlop, and subsequently in a conversation between Gary Dunlop and Paul Nicholls on 13 December 2007.

4. Joshua Brook alleges that the Systems Representation was false by reason of the fact that OCH knew that the cost of the Steven Nicholls Labour was not disclosed as an expense of the Business, and that the Steven Nicholls Labour contributed substantially to the performance of the Business.

5. Gary Dunlop gave evidence that the Staffing Overview was critical in relation to net profitability, and that his interest in it was the labour component as a percentage of sales and its impact on profit.[70]

   [70] Transcript at 87, 91, 99 and 114-115.

6. OCH and Paul Nicholls argue that the Systems Representation is not, as is alleged by Joshua Brook, a representation as to a future matter invoking the operation of s.51A of the TP Act, but rather a representation as to an existing fact, namely the state of mind of Paul Nicholls.[71]

   [71] Citing Middleton v Aon Risk Services Australia Ltd [2008] WASCA 239 at para.19 per McLure JA (“Middleton”).

7. In relation to the Systems Representation OCH and Paul Nicholls argue that:

   a)the words alleged to constitute the Systems Representation are vague and fail to articulate any aspect of performance, and are not capable of being a meaningful representation capable of being falsified;

   b)the words “performing after settlement” embody various meanings, and could reasonably be considered to be referable to:

   i)performance in relation to profitability; or

   ii)performance in relation to level of sales,

   but on a sensible interpretation of the words they are confined to the overall financial performance of the Business linked to levels of profitability;

   c)in order to falsify such a representation Joshua Brook would need to prove that:

   i)after settlement the financial performance of the Business was below the level of financial performance before Settlement; and

   ii)Paul Nicholls could see a reason why the Business could not continue to perform financially after Settlement at the same level as it had done prior to Settlement;

   d)the referral to “systems already in place” is vague and generalised, and it is not readily discernible what it is that is being referred to; and

   e)the representation is not readily capable of being cogently falsified.

The Steven Nicholls Labour and non-disclosure representation

1. Joshua Brook also alleges that at no time prior to the date of the Sale Agreement or Settlement, being 20 December 2007 and 1 March 2008 respectively, did either OCH or Paul Nicholls disclose, or cause to be disclosed, to Joshua Brook or its agent, by way of financial information obtained from OCH, or otherwise, the Steven Nicholls Labour or the existence of Steven Nicholls. It is common ground that from Settlement onwards Steven Nicholls did not provide any labour to Joshua Brook to assist in the running of the Business. Joshua Brook says that to replace the Steven Nicholls Labour it would have been required to expend an annual cost of $220,413. The details of that amount are as follows:

Description	Additional annual cost
(a)	On 10 March 2008 the Applicant assigned to Stephen Alderson additional management responsibility in relation to room additions, previously the responsibility of Steven Nicholls	$33,180
(b)	On 20 March 2008 the Applicant assigned to Andrew Hammett and James Deimel additional responsibilities in relation to job quantification, material purchasing, liaising with clients and scheduling of subcontractors previously the responsibility of Steven Nicholls	$17,696
(c)	On 20 March 2008 the Applicant assigned to Benjamin Giblin additional responsibilities to assist Andrew Hammett and James Deimel	$22,958
(d)	On 9 June 2008 the Applicant employed Jeremy Prince to assist Benjamin Giblin	$38,245
(e)	On 28 May 2008 the Applicant employed John Senior to provide practical building expertise in relation to room additions and to assist with compliance with the Building Code of Australia, previously the responsibility of Steven Nicholls.	$74,940
(f)	On 7 July 2008 employed Mandy Oberholster to carry out part of Steven Nicholls’ administrative work.	$33,394
$220,413

1. Joshua Brook therefore says that the Adjusted Net Profit Representation was false, as the actual Adjusted Net Profit was in fact only $619,852 and not $840,265 as represented.

2. Joshua Brook asserts that from 1 July 2006 until Settlement Steven Nicholls managed and controlled the activities of the Business on a full-time or near full-time basis as it related to the sales, construction and installation of room additions, being all or almost all of the trading activity of Spacemaker and a substantial amount of the trading activity of Perth Home Improvement Centre.

3. Joshua Brook says that the Steven Nicholls Labour included but was not limited to:

   a)quantifying jobs;

   b)liaising with clients;

   c)scheduling sub-contractors;

   d)ensuring all jobs complied with building codes;

   e)representing OCH in relation to complaints to the Building Disputes Tribunal;

   f)coordinating the completion of remedial work;

   g)authorising all:

   i)purchase orders;

   ii)invoicing payments including payments to contractors;

   iii)credits to customers;

   iv)variations to customer contracts; and

   v)payments of sale commissions; and

   h)managing staff by providing instructions by way of circulars, directives and product updates.[72]

   [72] Statement of Claim, para.4.

4. Based on the evidence of Paul Nicholls and Steven Nicholls, Joshua Brook alleges that the following roles were carried out by Steven Nicholls in the period prior to Settlement, and were not roles which were minor or easily substitutable following Settlement:

   a)training;[73]

   b)checking orders by staff after the fraud of Mr Hathenwaite;[74]

   c)ensuring compliance with solar energy laws;[75]

   d)product development;[76]

   e)ensuring buildings complied with regulatory codes;[77]

   f)acting as a branch development manager;[78]

   g)liaising with the Building Disputes Tribunal;[79] and

   h)undertaking a role with respect to customer complaints.[80]

   [73] Transcript at 333-334.

   [74] Transcript at 221, 231, 240, 325, 327, 328 and 339.

   [75] Transcript at 225, 241, 243 and 329.

   [76] Transcript at 216 and 325.

   [77] Transcript at 245, 330 and 336.

   [78] Transcript at 217-218 and 324.

   [79] Transcript at 238 and 338.

   [80] Transcript at 234-235, 238, 261 and 330.

5. The Steven Nicholls Non-Disclosure Representation is said to be based upon a failure to disclose the Steven Nicholls Labour or the existence of Steven Nicholls:

   a)by way of the financial information pleaded in paragraph 12 of the Statement of Claim; or

   b)otherwise.

6. The financial information pleaded in paragraph 12 of the Statement of Claim is particularised in paragraphs 12.1 to 12.10 of the Statement of Claim. The documents referred to in paragraphs 12.1 to 12.10 of the Statement of Claim were specifically requested by Joshua Brook as part of the due diligence. They were received by Gary Dunlop.[81] Gary Dunlop made no attempt to inspect any other records at the premises of OCH prior to settlement.[82]

   [81] Transcript at 101.

   [82] Transcript at 116-117.

7. The “Steven Nicholls Labour” is defined at paragraph 4 of the Statement of Claim to constitute fulltime, or near fulltime, management and control of the Business as it related to “the sales, construction and installation of room additions, being all or almost all of the trading activity of Spacemaker and a substantial amount of the trading activity of Perth Home Improvement Centre”.

8. OCH and Paul Nicholls deny the allegations concerning the Steven Nicholls Labour. They say that:

   a)Steven Nicholls was employed by Mustique Investments, a company of which Paul Nicholls was the sole director and shareholder;

   b)from at least 1 July 2006 to approximately 30 June 2008 OCH made regular payments to Steven Nicholls, and to his wife Karen Nicholls, on account of services rendered by Steven Nicholls to entities associated with the interests of Paul Nicholls, and continues to do so in relation to Steven Nicholls;

   c)during the period between 2006 and March 2008 Steven Nicholls did a variety of work at the instruction of Paul Nicholls, some of which work related to the operation of the Business;

   d)until September 2004, Paul Nicholls, on a full-time basis, performed the following functions on behalf of OCH as the Owner of the Business:

   i)various accounting and administrative tasks;

   ii)supervision of sales staff including general staff; and

   iii)responsibility for marketing and customer relations including dealing with customer complaints;

   e)in September 2004 Paul Nicholls suffered a heart attack and during the period between September 2004 and September 2006 he substantially reduced the time he spent carrying out the Owner’s Functions;

   f)during the period between September 2004 and September 2006 Paul Nicholls instructed Steven Nicholls to assume the Owner’s Functions that Paul Nicholls was unable to do, which Steven Nicholls agreed to perform and did perform;

   g)in or about September 2006 Paul Nicholls instructed Steven Nicholls to take over the Owner’s Functions, which Steven Nicholls agreed to do;

   h)during the period between October 2006 and February 2007 Steven Nicholls took over the Owner’s Functions and Paul Nicholls played little or no part in performing the Owner’s Functions within the Business;

   i)in or about March 2007 Paul Nicholls resumed the Owner’s Functions in place of Steven Nicholls;

   j)between approximately March and July 2007 Steven Nicholls’ primary duty with respect to the Business was re-designing most of the Business’ building products as a result of a change in government regulations with respect to solar requirements, which work was substantially complete by July 2007;

   k)from early August 2007 until the Settlement Steven Nicholls spent the vast majority of his time (approximately 95%) working on a new business that he was intending to commence with Paul Nicholls, known as “Classic Garage Enhancements”, which business did not form part of the Business sold to Joshua Brook, except for a period between May 2007 to mid-November 2007, where he was primarily responsible for training James Deimel to take on the role of a supervisor of the Business following the resignation of Colin Haithenwaite;

   l)Steven Nicholls took over the role of Colin Haithenwaite on a temporary basis between December 2006 and March 2007, in addition to performing the Owner’s Functions between December 2006 and February 2007, and, ultimately, in May 2007 James Deimel was hired to perform the tasks undertaken by Colin Haithenwaite, and Steven Nicholls was responsible for training him in that supervisor’s role;

   m)from December 2007 until Settlement, Steven Nicholls assisted Paul Nicholls where requested in the operation of the Business, as a matter of convenience only and on a very limited ad hoc basis; and

   n)for the period from December 2007 until Settlement, OCH and Paul Nicholls contend that the work that Steven Nicholls did for the Business could equally have been done by Paul Nicholls or another existing employee of the Business, without having to engage Steven Nicholls’ services to perform those tasks.

1. OCH and Paul Nicholls admit that they did not, and nor did their agent, disclose the existence of Steven Nicholls.[83] OCH and Paul Nicholls say that the existence of Steven Nicholls was not relevant to the purchase of the Business, and did not affect the truth of any representations made by them with respect to the sale of the Business, and was unrelated to the sustainability of the net profit of the Business.[84]

   [83] Defence, para.13.

   [84] Defence, para.13.

2. In relation to the sum of $220,413 alleged by Joshua Brook to have been necessary to replace the Steven Nicholls Labour OCH and Paul Nicholls say that:

   a)no additional expenditure was required to replace the services previously supplied by Steven Nicholls to the Business;

   b)Mandy Oberholster was employed shortly after Settlement to assist with the performance of a new aspect of the Business, namely an expansion into the area of property maintenance and renovation, which was subsequently discontinued by the Business, and as a consequence of which her services were subsequently dispensed with by the Business;

   c)in order to sustain the level of profit previously derived by the Business it required the services of a proficient Owner carrying out the Owner’s Functions;

   d)Gary Dunlop did not proficiently perform the Owner’s Functions, and had he done so no additional labour expenses would have been required to be incurred in the running of the Business;

   e)after 30 March 2008 Gary Dunlop did not request Paul Nicholls to continue to work for the Business, for a maximum of 12 hours a week without remuneration until 30 June 2008, and thereby did not avail himself of Paul Nicholls’ services to assist him with any staffing issues that he may have had; and

   f)Gary Dunlop instead hired additional staff, including staff whom Paul Nicholls recommended not be employed, to perform services, but that these were not services provided by Steven Nicholls, or services in respect of which he played an integral role in relation to ongoing sustainability of levels of income for the Business.

3. The evidence establishes:

   a)that between July 2004 and March 2008 Mustique Investments was engaged by OCH to provide the services of Steven Nicholls to OCH;

   b)from September 2004, following a heart attack, Paul Nicholls reduced his working hours for OCH to four days a week, and that by September 2006 the day-to-day running of OCH and the Business was conducted by Steven Nicholls. Those arrangements are entirely consistent with the services of Steven Nicholls being provided to OCH through Mustique Investments;

   c)Paul Nicholls returned to the Business in or around March 2007 at the request of Steven Nicholls;

   d)after Paul Nicholls returned Steven Nicholls spent approximately four to five months from February-March 2007 to July 2007 re-designing the Business’ products to meet changed government solar energy regulations. That, on the evidence, was a specific one-off task;

   e)in the period from August 2007 to November 2007 Steven Nicholls trained Mr Deimel as a supervisor;

   f)from in or about July 2007 Steven Nicholls was aware, because he had been told by Paul Nicholls, that the Business was to be sold; and

   g)Classic Garage Enhancements was set up, and in the period from January 2008 to February 2008 Steven Nicholls was moving from the premises of the Business to premises leased and prepared for Classic Garage Enhancements.

Disclaimer and due diligence conditions

1. A note and disclaimer is set out in the Marketing Report in the following relevant terms:

   The analysis supplied is for information purposes only and no representation is made as to the completeness or accuracy. [sic]

   DISCLAIMER.

   This Report (the “Report”) has been prepared solely for information purposes and does not, and is not intended to, form part of any agreement.

   It provides information about Outdoor Centre Holdings Pty Ltd.

   This Report will be provided to parties who have expressed an interest in acquiring the assets of Outdoor Centre Holdings Pty Ltd.

   Outdoor Centre Holdings Pty Ltd has retained Business Mergers and Sales Perth to act as its exclusive agent in offering the business assets for sale. This report has been compiled from information supplied by the vendor. Business Mergers and Sales Perth has relied upon and assumed, without independent verification, the accuracy and completeness of all information supplied by the vendors.

   Recipients of this report should satisfy themselves that they have obtained all the information they require relating to the sale of this business. While the information provided herein is believed to be accurate and reliable, neither the vendors nor Business Mergers and Sales Perth makes any representations or warranties, expressed or implied as to the accuracy or completeness of such information. In furnishing this report Business Mergers and Sales Perth reserves the right to amend or replace the report at any time and undertakes no obligation to provide the recipient with access to any additional information. Nothing in this report should be relied upon as a promise or representation to the future.

   The background information contained was prepared expressly for the use herein and is based upon certain assumptions and management’s analysis of information at the time the report was prepared. There is no representation, warranty, or other assurance that any of the projections will be realised. This report may not be distributed, reproduced, or used without the express consent of Business Mergers and Sales Perth or for any purpose other than evaluation of the sale of the assets by the person to whom this report has been delivered. Business Mergers and Sales Perth will arrange all contracts of sale for appropriate due diligence by potential purchasers.

   All enquiries or requests for additional information should be submitted or directed to Business Mergers and Sales Perth.[85]

   [85] TB 8-10.

2. The Marketing Report contained Part 9 relating to special conditions of sale. Part 9 read as follows:

   9. SPECIAL CONDITIONS OF SALE

   To reassure the purchaser that the business has no hidden problems, the vendor is willing to accept the following special conditions of sale.

   (1)DUE DILIGENCE.

   1.1    Prior to Due Diligence taking place, the vendor is to sign each page of the attached Business Mergers and Sales Perth Marketing report, confirming each page as an accurate statement of the business’s trading position. In the event of page changes or inaccuracies, the vendor will reword and initial each and every alteration. Both the vendor and purchaser agree this signed report shall supersede all other reports on this business.

   1.2    This offer is subject to the Purchaser’s nominated accountant approving and being satisfied that the business can maintain an annual Net Profit as stated. In order to facilitate this the Vendor shall supply to the Purchasers accountant within two days all financial accounts, balance sheets, tax returns and trading figures and any other books and records that the Purchaser’s deem as necessary. This condition is to be cleared within five days from acceptance date of this offer.[86]

   [86] TB 10 and 250.

3. Due diligence was a condition of the Sale Agreement. Special Condition 1 of the Sale Agreement was as follows:

   1.DUE DILIGENCE

   The purchasers and or their accountant verifying and being satisfied that the Net Profit as presented is maintainable. The vendor agrees to supply to the purchaser or their accountant’s financial statements, tax returns, bank statements, deposit books and any other books of account that maybe requested to verify turnover and profitability. The vendor is to supply all the above information to the purchasers within 5 days of acceptance of this offer. This Due Diligence condition is to be satisfied within 30 days from the vendor delivering all the nominated books and records to the purchaser’s accountant. Both purchaser and vendor agree to sign the Business Mergers and Sales document [the Marketing Report] as a true representation of the business. The due diligence process is arranged by the purchaser, at the purchaser’s expense to verify representations made by the vendor and the purchasers satisfaction of this clause is entirely at the purchasers discretion.[87]

   [87] TB 70.

Consideration

1. Consideration of the issues in relation to the alleged representations involve a considerable overlap in the factual matrix between each of the issues, and does not necessarily allow for a neat dissection of the issues on the basis of the four separate alleged representations. The following considerations reflect the fact that there is an overlap between the factual position with respect to each of the alleged representations.

2. Joshua Brook complains that the Marketing Report represents the “total staffing requirements of the Business”.[88]

   [88] Statement of Claim, para.5.

3. The staffing section of the Marketing Report commences with a heading:

   3.1 Staffing Overview

4. Details are contained in a table under the above heading. The table is as follows:

Number of staff	Responsibility	Average length of service	Salary
8	Sales	6-10 years	$75kpa/ Commission 6% average
4	Administration	1-3 years	$40k pa
1	Factory Leading Hand	5 years	$40k pa
5	Factory Workers	1 year	$30k pa
4	Supervisors	5 years	$45k pa
5	Part time Office/ Sales	1 year	$15k pa

[89]

[89] “Staff Table”.

1. On the Staff Table “Commission 6%” was crossed out, by hand, and the words “retainer $25 plus 6% Sales commission” added underneath, again by hand.

2. At item 2.8 of the Marketing Report the Owner’s Functions were set out as appears at paragraph 18 above. It is a composite of the information in the Staffing Overview at item 3.1, and the Owner’s Functions at item 2.8, of the Marketing Report that is alleged to be the Total Labour Representation.[90]

   [90] See the table at para.16 above.

3. At item 1.2, in the Introduction to the Marketing Report, reference is made to the “group … carrying 25 staff”.

4. At item 3.2 of the Marketing Report reference is made to “approximately 30 contractors employed” carrying out installation of patios.[91]

   [91] TB 22.

5. Essential to the representations said to have been made with respect to the Total Labour Representation, the Adjusted Net Profit Representation and the Systems Representation are what is alleged to have been said in meetings on 10 and 13 December 2007. Gary Dunlop’s version of those two meetings is given in:

   a)Dunlop’s February 2010 Affidavit as follows:

   4. At approximately 1.30pm   on 10 December 2007, I attended a meeting with Helen Sharman of Business Mergers and Sales and the Second Respondent [Paul Nicholls] at the office of Business Mergers and Sales at 96 Royal Street, East Perth to discuss the 4 December 2007 Report [Marketing Report] and the Business. The meeting lasted approximately one hour.

   5. During this meeting, we all sat at a table and I had a hard copy of the 4 December 2007 Report [Marketing Report] open on the table on front of me. This was the critical document I was relying on in assessing the Business and during the meeting I referred to it constantly. During the meeting the Second Respondent [Paul Nicholls] said that the figures for staff salary set out in the report were the current annualised staff salaries exclusive of superannuation, workers’ compensation and payroll tax.

   6. I spent the day of 13 December 2007 with the Second Respondent [Paul Nicholls] inspecting the various retail outlets of the Business by car.

   7. While we were driving, I discussed the salaries of the sales staff with the Second Respondent [Paul Nicholls]. The Second Respondent [Paul Nicholls] confirmed that the $75,000 per annum average salary of the sales staff set out in the 4 December 2007 Report [Marketing Report] was inclusive of commission.

   8. In response to my questions in relation to the staff salaries, the Second Respondent [Paul Nicholls] said words to the effect that he didn’t believe that the Business was either under staffed or over staffed; that he believed that the salaries set out in the 4 December Report [Marketing Report] were the market rates; and that the only reason staffing costs would increase would be if sales increased.

   b)in Dunlop’s March 2010 Affidavit as follows:

   8. On about 10 December 2007 at a meeting at approximately 1.30pm at the offices of Business Mergers and Sales at 96 Royal Street East Perth, Mr Paul Nicholls said to me in substance the following:

   “Given the systems in place I can see no reason why the business could not continue to perform after settlement as it had done prior to settlement” and

   “The report (referring to the 4 December 2007 Report [Marketing Report]) was accurate including its contents referring to the people employed, the financial performance as a result of employing those people and the appropriateness of the deductions from profit mentioned in the report when it calculated net profit.”

   9. On about 13 December 2008 [2007] Mr Paul Nicholls took me in his car to inspect the metropolitan display branches of the Business I said to Mr Nicholls words to the effect of “I am concerned about the level of payroll tax. How likely is it that the Business will incur a similar payroll tax liability post settlement”. Mr Nicholls said words to the effect of “The only reason the Business had its current level of payroll tax liability was because of my personal superannuation contribution. You shouldn’t need to change the number of employees stated in the broker’s report (meaning the 4 December 2007 Report [Marketing Report]) unless sales volume increased employee workloads”.

6. In Paul Nicholls’ 5 May 2010 Affidavit he says as follows:

   69. With reference to paragraph 8 of the affidavit of Gary Dunlop’s sworn 19 March 2010 (“Gary’s Affidavit”) [Gary Dunlop’s March 2010 Affidavit], I say the following:

   (a) Gary asked me, using words to the following effect, “Is there any reason why the Business would not continue to perform after settlement?”;

   (b) I replied using words to the effect, “absolutely not”, as long as you maintain the sales.”

   …

   75. With reference to paragraph 9 of Gary’s Affidavit [Gary Dunlop’s March 2010 Affidavit], a conversation took place between Gary and myself which is more fully set out hereunder:

   (a) I explained the inflated payroll tax figure for the 2007 financial year to Gary using words to the following effect, “I transferred a larger amount of money into my superannuation this year because I wanted to take advantage of more relaxed contribution allowances following Costello’s attempt to get people to contribute. What actually happened was the extra money contributed to my Super fund was counted as a wage and therefore the $850,000 payroll tax threshold was breached and we attracted more tax than normal.”

   (b) Gary replied with words to the effect, “I need to be careful regarding the payroll tax, as the grouping exercise Nicky uses includes wages paid to employees at her restaurant and agistment facilities.”

   (c) I did not say, “You shouldn’t need to change the number of employees stated in the broker’s report [Marketing Report] unless sales volume increased employee workloads”, but the exchange described below did occur.

   (d) Within the context of the discussion about payroll tax, Gary stated words to the effect, “I really want to push the turnover for the Business”.

   (e) In response, I said words to the effect, “If you increase advertising, you’ll increase your unit sales, you’ll get more work and have to pay more sales staff commission, and you will need more supervisors to handle the work.”[92]

   [92] Paul Nicholls’ 5 May 2010 Affidavit, paras.69 and 75.

7. The Court prefers the account of the 10 and 13 December 2007 meetings given by Paul Nicholls. Paul Nicholls accounts are more detailed. They are also more natural in their flow, and sound like what would have been likely to have been said. Further, having observed Paul Nicholls in the witness box, the exchanges detailed in Paul Nicholls’ 5 May 2010 Affidavit also sound like what he would have said. Further, the Court accepts that Paul Nicholls understood the question to refer to one element of performance, namely sales, and he answered the question as such.[93] To the extent that Paul Nicholls made a representation, it was a representation about financial performance, and specifically sales, not about the overall operation of the Business. The evidence establishes that, in context, the representation made was a very limited one and not the broad Systems Representation alleged by Joshua Brook.

   [93] Transcript at 297.

8. Even if the Systems Representation was made in the terms asserted by Joshua Brook it is the case that a prudent investor would be expected to demand and scrutinise relevant information, and in particular source documentation relevant to general representations made in meetings, conversations and in “overview” documents.[94] In this case, there was no scrutiny of information relevant to the broad Systems Representation which Joshua Brook alleges was made, and in particular, no scrutiny of any available information in relation to specific operating systems and employee numbers and terms and conditions (save for the Marketing Report which is general in its terms and in its most relevant part expressly said to be an “overview”).

   [94] Clifford v Vegas Enterprises Pty Ltd (ACN 009 078 048) & Ors (No. 5) (2010) 272 ALR 198 at 259 per Barker J; [2010] FCA 916 at para.341 per Barker J (“Clifford (No. 5)”): “One simply expects in such circumstances that the prudent investor will demand and scrutinise sales information.”

9. The Staff Table is said to be an “… Overview”. An “overview” is a “general survey”.[95] The general description does thus not lend itself to a representation of the exactitude posited by Joshua Brook, and would, in the Court’s view, immediately put a prospective purchaser on notice that the staff numbers in the Staff Table were not exact, or at the very least, ought to be carefully checked.[96]

   [95] The Concise Oxford Dictionary of Current English (Oxford: Clarendon Press, 1982) (7^th Edn) page 732.

   [96] Clifford (No. 5) ALR at 259 per Barker J, FCA at para.341 per Barker J.

10. The staffing details in the Staff Table are also more consistent with any representation being an overview, and not a precise representation of the actual staffing position of the Business. A prospective purchaser reading the Marketing Report with any degree of attention, and arriving at the Staff Table, would note that there are 27 staff referred to, whereas earlier in the Marketing Report (in the Introduction) the “group” is referred to as carrying 25 staff. That difference ought to have conveyed that there was a degree of imprecision about the staffing numbers in the Marketing Report, which would warrant careful checking of the actual numbers employed in the Business. The assertion that the alleged Total Labour Representation was a representation of the total staffing requirements of the Business is further weakened by the fact that Gary Dunlop was aware of the discrepancy in numbers between 25 and 27 staff referred to above,[97] and his concession that the labour requirements of the Business changed from month to month.[98] And, thus, the concession in submissions for Joshua Brook that the labour requirements of the Business were “dynamic”.

    [97] Transcript at 84.

    [98] Transcript at 43.

11. It is manifest that staff salaries have generally been rounded in the Staff Table, but whether up or down is not apparent. Assuming, for present purposes, that the Adjusted Net Profit Representation was important to Joshua Brook, then the salaries actually payable to the employees must also have been important. Joshua Brook, however, at no stage checked the actual numbers, status, hours or salaries of the employees set out in the Staff Table.

12. The reference in item 3.2 of the Marketing Report to “approximately 30 contractors employed” is ambiguous. Whilst it might be assumed that these are contractors on contracts “for” service, as opposed to employees on contracts “of” service, it is not at all clear, and a prospective purchaser, particularly one who is an accountant, with experience in conducting due diligences, might be expected to consider and check that issue. Obviously, whether these persons were employees or contractors might have an impact upon critical issues such as the amount they are paid, taxation and leave entitlements, all of which an incoming purchaser of the Business might have an interest in ascertaining. Furthermore, the fact that they were referred to as “employed” might indicate that the Business employed 55, or 57, or more people, and that would have a significance not only for the issues referred to above, but also for management and supervision. Moreover, the fact that “approximately” prefaced the number of contractors “employed” must also have put a prospective purchaser on notice that there was a need to check the actual numbers who were “employed”, because a difference of one or two contractors might make a significant difference to the Business’ outlays, depending upon what the contractors were paid. What the contractors were paid is not evident from the Marketing Report, and that fact is also one which ought to have put a prospective purchaser, such as Joshua Brook, on notice that there was a need to check, in a detailed way, by way of due diligence, both the status and remuneration of the “approximately 30 contractors employed”.

1. The Total Labour Representation sets up a limited form of representation based upon part of the Marketing Report. The Marketing Report must, however, be read as a whole. When the Marketing Report is read as a whole it is apparent that it provides that the Management Fee (actually described as “Management Fees”) of $136,363 was incurred, on a non-recurring basis, for the year ended 30 June 2007. On the evidence, the Management Fee was incurred for the services provided by Steven Nicholls through Mustique Investments to OCH, including, but not limited to, services provided to the Business for the fulfilment of the Owner’s Functions during the period between October 2006 and February 2007. There was, therefore, disclosure of the fact that management fees were paid for some purpose on a non-recurring basis in the year to 30 June 2007. The fact that the fees are in relation to “management” makes it clear that they are in relation to the provision of some kind of service in relation to the running of the management of the Business for the year ended 30 June 2007.

2. The Total Labour Representation is said to be misleading because it did not disclose the Steven Nicholls Labour. The Management Fee was however disclosed, at least until 30 June 2007. This ought to have put Joshua Brook, particularly through Gary Dunlop, an experienced accountant with experience in doing due diligences, upon inquiry as to whom, and for what, the Management Fee was being paid for. The evidence suggests that, at its highest in favour of Joshua Brook, Gary Dunlop raised the issue of the Management Fee with Paul Nicholls, and was told that it was a payment to a related entity. That is correct because it was a payment to Mustique Investments. Such an answer, if given, however, raises more questions than it answers. It does not answer the question of why it was paid, and what is was paid for, or in respect of. It is inconceivable that a person of Gary Dunlop’s experience would not ask these questions, or demand to see and scrutinise invoices which resulted in the payment of the Management Fee to Mustique Investments. Thus, the simplest and most basic of due diligence inquiries, and an examination of the most obvious documents ascertainable in respect of the Management Fee, would in all likelihood have disclosed the reason for the payment of the Management Fee, that is the provision of services by Steven Nicholls through Mustique Investments to OCH, some of which were in respect of the Business, and, on the evidence, some not.

3. The complaint concerning the non-disclosure of the Steven Nicholls Labour really has two elements. The first is what is said not to have been disclosed, and the second is what is said to have been required to be done to replace the Steven Nicholls Labour.

4. The Total Labour Representation is said by Joshua Brook to be misleading as it understates staffing costs by $220,413, with the consequence that the adjusted net profit for the financial year ending 30 June 2007 should have been adjusted downwards to take account of the additional expense of $220,413. The $220,413 is said to be the cost of filling the roles said by Joshua Brook to have been undertaken by Steven Nicholls prior to Settlement, as set out in the table at paragraph 50 above.

5. Steven Nicholls’ evidence establishes that he ran the Business for a considerable period of time up until Paul Nicholls returned to run the Business in March 2007. Steven Nicholls ran all aspects of the Business during that time, save perhaps for some financial and accounting matters which he was not comfortable carrying out. After Paul Nicholls returned to the Business in March 2007, Steven Nicholls was engaged on particular projects in relation to the Business. They included:

   a)a project to ensure that there was product compliance with new solar energy regulation;

   b)filling in as a supervisor after Simon Ingram resigned; and

   c)training Mr Deimel in his role as a supervisor.

6. The above tasks were completed by about December 2007. Steven Nicholls also undertook some minor tasks from time to time until Settlement, including, for example ongoing liaison with respect to the handling of a complaint made to the Building Disputes Tribunal concerning a property in South Guildford which he had been integrally involved in over the years, and some assistance with queries from supervisors on the job in relation to technical and other aspects of the work being undertaken by them. It was however far from a fulltime role, and the evidence clearly establishes that Steven Nicholls was engaged for 90%-95% of his time in the establishment of a separate business to be run by OCH, namely, Classic Garage Enhancements.

7. It is clear from Steven Nicholls’ evidence concerning the alleged neglected tasks, evidence from which he was not diverted in cross-examination, that the position with respect to the neglected tasks was as outlined above.

8. The Court is therefore of the view that there was no non-disclosure of the Steven Nicholls Labour as alleged by Joshua Brook, because the Steven Nicholls Labour as alleged by Joshua Brook did not exist, and had not existed as such since March 2007. To the extent that Steven Nicholls did undertake some tasks during the period following March 2007 those tasks, at least until December 2007, were usually quite specific. Thereafter, until Settlement, they appear to have been far more sporadic, and the Business was run during that latter period without any significant labour input from him at all. The tasks undertaken by Steven Nicholls in the period after March 2007 are entirely consistent with Mustique Holdings being paid a management fee for the provision of his services to OCH.

9. There is no general duty of disclosure, but rather a question as to whether, having regard to the relevant circumstances, there has been conduct that is misleading or deceptive.[99] Upon an examination of all of the relevant circumstances in this case the Court is of the view that there was no non-disclosure of the Steven Nicholls Labour as alleged by Joshua Brook, not only because it did not exist as alleged, but also because the labour that was provided by Steven Nicholls, was not provided in the capacity of employee, or as a contractor of the type referred to in the Marketing Report, but under a management fee arrangement with a company, Mustique Investments, contracting to OCH. And that was an arrangement which was disclosed, or at the very least, readily discernible upon the usual inquiries, which were simply not made by Joshua Brook or Gary Dunlop.

   [99] Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31 at 32 per Black CJ.

10. In the above circumstances, it is strictly unnecessary for the Court to deal with the assertions made by Joshua Brook with respect to the labour said to be necessary to replace the Steven Nicholls Labour.

11. With respect to the replacement of the Steven Nicholls Labour, although it is strictly unnecessary to deal with it because of the conclusions reached above, the Court does not consider that the evidence establishes either the necessity for the labour or the costs said to be involved in the additional labour.

12. With respect to the labour of Steven Alderson there was an additional annual cost of $33,180 said to be incurred as a consequence of him undertaking the responsibilities which Joshua Brook said were undertaken by Steven Nicholls. Cross-examined on this Gary Dunlop admitted that Mr Alderson was given a pay rise because he, Gary Dunlop, needed to rely upon his technical expertise, and not because of the additional tasks that he was required to undertake.[100] Further, part of the additional cost was for a new Ford XR6 Craig Lowndes utility, the necessity for which was not readily apparent given that Mr Alderson already had a work vehicle.[101] Finally, the Court accepts the evidence given by Mr Alderson, both generally, and specifically with respect to the neglected tasks, that post-Settlement there was no change with respect to the manner in which his work was carried out in the Business. He was the person best placed to make that judgment, and there is no reason to doubt its veracity. There were, therefore, no additional tasks undertaken by Mr Alderson of the kind alleged by Joshua Brook.

    [100] Transcript at 59.

    [101] Transcript at 376.

13. A sum of $17,696 is claimed as an additional annual cost by reason of the assignment to Andrew Hammett and James Deimel for additional responsibilities in relation to job quantification, material purchasing, liaising with clients and scheduling of sub-contractors previously said to be the responsibility of Steven Nicholls. It is clear from Mr Deimel’s evidence that the so called neglected tasks did not give rise to any additional work for him post-Settlement as he had been trained by Steven Nicholls to perform that work. It is also clear that he had been performing that work for a period of some months prior to the Settlement.[102] The evidence also establishes that Mr Deimel was given a pay increase of $4,000 immediately after Settlement, unrelated to any matter to do with the carrying out of additional duties supposedly consequent upon Steven Nicholls not working in the Business.[103] The evidence lead by Joshua Brook with respect to the duties of Mr Hammett was inconclusive. By contrast, Steven Nicholls gave evidence that Mr Hammett was able to take over a new role as a supervisor in the patio division with very little training, because he had been a factory manager and then a patio supervisor previously at the Joondalup store, and simply needed to have explained to him how the Spacemaker product and components fitted together. Steven Nicholls gave evidence as to how Mr Hammett performed in the role of supervisor. The effect of that evidence is that it was unnecessary for there to be any cost associated with any additional responsibilities in lieu of labour provided by Steven Nicholls because Mr Hammett had already been trained to take over from Simon Ingram who had resigned in August 2007, and that Mr Hammett “took over the role with very little training.”[104]

    [102] Affidavit of James Deimel, affirmed 6 May 2010, paras.32-38 (“Deimel Affidavit”).

    [103] Deimel Affidavit, para.41.

    [104] Transcript at 334.

14. A cost of $22,958 is assigned to additional responsibilities undertaken by Benjamin Giblin to assist Mr Hammett and Mr Deimel. In circumstances where Mr Deimel undertook no additional responsibilities consequent upon Steven Nicholls not being with the Business, and where Mr Hammett likewise was already trained to undertake his position well prior to Settlement, it is not apparent what additional responsibilities Mr Giblin is said to have assisted Mr Hammett and Mr Deimel with. Nor was there any specific evidence lead by Joshua Brook to establish the so-called additional responsibilities.

15. An additional annual cost of $38,245 is claimed in respect of an employee, Jeremy Prince, who was employed to assist Benjamin Giblin. Mr Prince was employed to assist Mr Giblin who had additional responsibilities to assist Mr Hammett and Mr Deimel with respect to additional responsibilities previously said to be the responsibility of Steven Nicholls, which the Court has found not to be the case. In any event, Mr Prince was only employed for a period of two months, and only paid the sum of $5,737.38.[105] Gary Dunlop said that the cost of $38,245 was an annualised cost because his work would have “evolved elsewhere”.[106] There is not only no evidence of the duties that Mr Prince was required to assist Mr Giblin with, nor is there evidence of where his duties “evolved” to. There is, further, no evidence as to what those duties actually were, and therefore no means of ascertaining whether or not they were in, or in relation to, any labour that Steven Nicholls might have provided, through Mustique Holdings, to OCH.

    [105] Transcript at 75.

    [106] Transcript at 75.

16. A sum of $74,940 as an additional annual cost is claimed to be attributable to the employment of John Senior to provide practical building expertise in relation to room additions and to assist with compliance with the Building Code of Australia, previously said to be the responsibility of Steven Nicholls. It was not the case, however, that Mr Senior was solely employed to undertake some of the allegedly neglected tasks, particularly in relation to compliance. Mr Dunlop admitted that Mr Senior in fact took over some of the tasks of Damien Green, who was employed by the Business as a supervisor. Mr Senior took over “some of the more difficult technical issues” involved in Damien Green’s tasks, according to Gary Dunlop. Mr Alderson gave evidence that Mr Senior was in fact hired because a supervisor (presumably Mr Green) had left. Further, Mr Deimel’s evidence, indicates that to the extent that Mr Senior was employed to assist with compliance matters, he was not of much assistance at all. It thus appears that Mr Senior was in fact employed, or at least employed in part, because Mr Green left the Business. And, at least in part, Mr Senior undertook difficult technical tasks which had been undertaken by Mr Green. To that extent at least, he was not engaged to replace any labour provided by Steven Nicholls through Mustique Holdings to OCH, or at the very least any labour that was being provided at, or shortly before, Settlement. The claim with respect to the additional annual cost of Mr Senior’s labour cannot therefore succeed.

17. With respect to Ms Oberholster an additional annual cost of $33,394 is claimed on account of her carrying out part of Steven Nicholls’ administrative work. Mr Dunlop explained what he considered Ms Oberholster did as follows:

    Steve Alderson was made operations manager. He was transferred. Part of his new responsibilities were looking after the room division, the Spacemaker division. As part of that he wasn’t able to carry out his – all of his normal duties which included warranty work so Mandy [Oberholster] was put on to look after warranty work company wide; to schedule, to talk to customers and to organise repairs with installers.[107]

    [107] Transcript at 45.

18. Two things might be said about this evidence. First, it is not readily apparent how it is that it relates to tasks which Steven Nicholls was said to be undertaking, given that the reason for Ms Oberholster to be employed was said to arise from duties which were not to be undertaken by Mr Alderson as a consequence of a transfer, seemingly initiated by Joshua Brook. Second, and perhaps more pertinently, the evidence of Mr Alderson, which the Court has accepted, was that his duties did not change post-Settlement, at least in relation to the so-called neglected tasks. It follows, therefore, that Ms Oberholster’s employment could not have been to assist Mr Alderson with respect to any of the so-called neglected tasks, because Mr Alderson was not carrying out duties which were any different to those that he had undertaken pre-Settlement.

19. Joshua Brook has therefore failed to establish that there is any additional annual cost for what it says, but which it failed to establish in any event, was required to be done to replace the Steven Nicholls Labour by any of the persons said to have been performing the tasks comprising that Labour. The Court also makes this observation, which is open on the evidence. That is that it is wholly incongruous that it would take up to seven people at an annual cost of $220,413 to replace what Joshua Brook says was the Steven Nicholls Labour which had been undertaken by Steven Nicholls in the year ending 30 June 2007 for a management fee of $136,363 payable to Mustique Investments. For all of the above reasons, the additional annual cost of $220,413 said to be attributable to the necessity to replace the Steven Nicholls Labour has not been established, in any event.

20. In the Court’s view a reasonable purchaser, let alone one represented by a person with the accounting and due diligence expertise of Gary Dunlop, would not, in the circumstances, consider the information in the Marketing Report to be a precise representation of staffing numbers for the Business, and certainly would not rely upon it without detailed scrutiny of other relevant information.

21. Even if the Total Labour Representation had been made out, it is not apparent that any additional cost needed to be, or was, incurred by Joshua Brook in running the Business following the Settlement by reason of Steven Nicholls’ non-involvement in the Business following its purchase by Joshua Brook.

22. The total Add-backs in the Add-back Schedule were a matter of management analysis. Having regard for the fact that Management Fee was disclosed, and that for reasons set out above it has not been established that the $220,413 alleged cost of the Steven Nicholls Labour was necessary to fill a staffing void in the Business, it cannot be established that the Adjusted Net Profit Representation was false or misleading.

23. In any event, the Adjusted Net Profit is an entirely subjective amount, based on management’s analysis of the information available as to what constituted add-backs. There is, therefore, no representation of an Adjusted Net Profit at all, but rather a representation of how the net profit might be increased by the Add-backs concerned.

24. The terms of the disclaimer are such that it puts Joshua Brook on notice that any representations made in the Marketing Report were not to be relied upon, and that it should conduct its own investigations as to the veracity of the information provided in the Marketing Report, and otherwise.[108] Gary Dunlop did in fact confirm that he had conducted what he perceived to be relevant due diligence, and proceeded to enter into the Sale Agreement on that basis. At no stage, however, did Gary Dunlop seek to establish precise staff numbers, status, hours or roles, or what the Management Fee of $136,363 in the Add-back Schedule referred to, or whether it was in fact non-recurring or not.

    [108] Butcher & Anor v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592 at 605 per Gleeson CJ, Hayne and Heydon JJ; [2004] HCA 60 at paras.38-39 per Gleeson CJ, Hayne and Heydon JJ (“Butcher”).

25. Ultimately, a proper due diligence by Joshua Brook would readily have disclosed that a management fee of $136,364 appears in the financial statements for the financial year ending 2007, and to whom, and for what, it was paid. A similar management fee appears in the financial analysis at Part 8 of the Marketing Report as a non-recurring expense. The fact that a management fee was paid to Mustique Investments for the work carried out by Steven Nicholls for OCH is entirely consistent with the evidence given by Paul Nicholls and Steven Nicholls as to the nature and frequency of that work. The Management Fee was not hidden, not secret, and was disclosed and discernible upon a due diligence inquiry of the most basic kind. There was no omission or silence by OCH and Paul Nicholls in relation to the Steven Nicholls Labour or Steven Nicholls’ existence, “otherwise”[109] or at all.

    [109] Statement of Claim, para.15.

26. In the Court’s view, where the disclaimer was in the terms set out, it properly put Joshua Brook on notice that it ought not to rely on any representations made, and ought to conduct its own proper due diligence, which it did not do. In the circumstances, the conduct of OCH and Paul Nicholls was not misleading or deceptive conduct for the purposes of s.52 of the TP Act.

27. For all of the above reasons, Joshua Brook has not established that OCH or Paul Nicholls engaged in misleading and deceptive conduct under s.52 of the TP Act. The relevant representations, whether express or by silence, were not established, and even if they had been, the terms of the disclaimer, where relevant, were such as to prevent reliance upon the representations to which the disclaimer applied.

Loss – damages

1. Joshua Brook has failed to prove what, if any, loss it would have suffered, even if it had made out reliance on false and misleading representations. It failed to prove loss because it did not prove the value of the Business as at the date of acquisition, that is as at 1 March 2008. There is no evidence as to the value of the Business as at 1 March 2008. Such evidence is necessary because:

   a)section 82 of the TP Act requires proof of actual loss or damage;[110] and

   b)the ordinary measure of damage is the difference between the price paid for the asset and its true value at the time of acquisition.[111]

   [110] JLW (Vic) Pty Ltd v Tsiloglou [1994] 1 VR 237 at 241 per Brooking J and 251 per Tadgell and JD Phillips JJ.

   [111] HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640 at 656-567 per Gleeson CJ, McHugh, Gummow, Kirby and Heydon JJ; [2004] HCA 54 at para.35 per Gleeson CJ, McHugh, Gummow, Kirby and Heydon JJ; Professional Services of Australia Pty Ltd v Computer Accounting and Tax Pty Ltd (No. 2) (2009) 261 ALR 179 at 201 per Martin CJ (with whom Buss JA and Newnes J agreed, at 206); [2009] WASCA 183 at para.101 per Martin CJ (with whom Buss JA and Newnes J agreed, at paras.123 and 124 respectively).

1. In this case there was nothing to prevent Joshua Brook from giving evidence as to the value of the Business as at 1 March 2008. It simply failed to do so. In those circumstances, it has not established the value of the asset acquired, and therefore cannot establish any loss suffered. Thus, even if the relevant representations had otherwise been made out, there would have been no cause of action because loss or damage is the gist of the statutory cause of action for which s.82(1) of the TP Act provides.[112] It is, therefore, unnecessary to deal with the issues which otherwise arise in relation to the valuation evidence.

   [112] Wardley Australia Limited and Another v The State of Western Australia (1992) 175 CLR 514 at 526-527 per Mason CJ, Dawson, Gaudron and McHugh JJ.

Breach of contract

1. Joshua Brook relies upon the terms of the Sale Agreement to found an allegation that there was a breach of contract by OCH with respect to a contractual warranty of accuracy.

2. Clause 10 of the Sale Agreement provided as follows:

   The Vendor acknowledges he is not aware of any circumstances that are likely to adversely affect the trading position of the business.

3. Clause 12 of the Sale Agreement provided as follows:

   The Vendor warrants and represents to the Purchaser as an inducement to the purchaser to enter into the Agreement and to purchase the Business that each of the following statements is true complete and accurate and on the Settlement Date will be true and correct:

   (a)All information which has been given by or on behalf of the Vendor to the Purchaser with respect to the Business and Assets (including financial information) is true and accurate in all respects.

4. Joshua Brook asserts that the relevant information given with respect to the Business for the purposes of clause 12 is the Total Labour Representation and the Systems Representation, as set out above.

5. The Court has concluded above that the Total Labour Representation and the Systems Representation were not made as alleged by Joshua Brook, and were not misleading or deceptive. It therefore follows that the claim of breach of contract based upon the information said to have been given with respect to the Business on the basis of those representations cannot succeed.

Counterclaim by OCH – breach of contractual warranty by Joshua Brook

1. OCH claims for a breach of a contractual warranty by Joshua Brook under the Sale Agreement. OCH says that clause 11 of the Sale Agreement includes terms to the following effect:

   a)that Joshua Brook will withhold an amount of $40,000 from Settlement for potential warranty claims on past work completed by OCH;[113]

   b)that no warranty work was to be undertaken without consultation with OCH, and that OCH would not unreasonably withhold consent for the warranty work;

   c)at the expiration of 12 months from Settlement $20,000 would be paid to OCH, less any warranty claims before that period; and

   d)at the expiration of 24 months from Settlement the balance of $20,000 would be paid to OCH, less any warranty claims for the period.

   [113] “the Withheld Monies”.

2. It is not in dispute that at Settlement Joshua Brook withheld a sum of $40,000 from payment of the purchase price.

3. OCH alleges that, thereafter, Joshua Brook did not consult with OCH, or Paul Nicholls, with respect to any warranty claims, and that consequently, Joshua Brook was not entitled to apply any of the Withheld Monies towards any warranty claims. Joshua Brook denies this assertion. OCH claims to be entitled to have been paid the sum of $20,000 on 1 March 2009, and a further sum $20,000 on 1 March 2010, and says that Joshua Brook has failed to pay those sums. Joshua Brook denies that OCH is entitled to payment. OCH also claims interest to the date of judgment on those sums, and costs.

4. Special Condition 11 of the Sale Agreement headed “Product Warranty” provides as follows:

   The Purchaser will withhold an amount of $40,000 from settlement for potential warranty claims on past work completed. No warranty work will be undertaken without consultation with the vendor and the vendor will not unreasonably with hold (sic) consent. An independent arbiter may be engaged where a warranty disagreement arises. At the expiration of 12 months from settlement $20,000 will be paid to the vendor less any warranty claims for the period. At the expiration of 24 months from settlement the balance will be paid to the vendor less any warranty claims for the period.

5. OCH submits that this clause means that the prior approval and verification by OCH is essential before any warranty work can be carried out. OCH submits that Joshua Brook failed to consult, and consequently the monies set aside for warranty work were impermissibly used in circumstances where OCH did not have the opportunity, following consultation, to use Paul Nicholls’ experience and particular knowledge of the relevant projects to advise on whether or not the warranty work was appropriate. OCH therefore submits that Joshua Brook was not authorised to spend the amounts concerned, and that the entire sum of $40,000 should be repaid to OCH in accordance with Special Condition 11 of the Sale Agreement.

6. OCH submits that Joshua Brook’s evidence fails to identify a single instance of:

   a)the naming of a customer who requested warranty work;

   b)provision of a description and cost estimate of such work to OCH for approval; and

   c)OCH unreasonably rejecting any claim.

7. In cross-examination Gary Dunlop admitted that some warranty work was done by Joshua Brook, and that the cost was then put to OCH through Paul Nicholls.[114] Further, OCH says that there is no evidence of Joshua Brook consulting with OCH with respect to any particular warranty work before doing it, and that there should be either documentary or oral evidence given by someone on behalf of Joshua Brook if this in fact had occurred. Paul Nicholls denied that there was any consultation by Joshua Brook with OCH with respect to any warranty work.[115]

   [114] Transcript at 119.

   [115] Transcript at 311-312.

8. Joshua Brook says that it was authorised to undertake warranty work and account for the costs in an account which operated as a waiver of the obligation to consult prior to the carrying out of the warranty work. In any event, Joshua Brook says that OCH was consulted, and consent was unreasonably withheld, in relation to warranty work performed. Joshua Brook says that there is unchallenged affidavit material that there were conversations at which warranty claims were raised and not resolved, and that OCH has not brought any evidence to suggest that warranty work disclosed as done and paid for was inappropriately done. Further, Joshua Brook says that OCH has not commenced any arbitration proceedings to recover the warranty amount.

9. Joshua Brook says that there were a number of meetings, specifically on 30 March, 3 April, 16 April and 22 April 2008, at which the issue of warranties was raised but not resolved. Joshua Brook says that on 22 May 2008 the warranty claims were again raised, after which OCH wrote to Joshua Brook concerning the establishment of a completion account. The relevant terms of that letter are as follows:

   The contract of sale provided for the retention of $40,000 for uncompleted and warrantee (sic) work. I authorise you to establish a completion account with a credit of $40,000. All disputed matters may be credited against that account.[116]

   [116] Paul Nicholls’ 5 May 2010 Affidavit, Annexure PN 12 (“22 May 2008 Letter”).

10. Joshua Brook says that the conversations relevant to the above letter constitute the consultation or waiver of the need for consultation prior to the commencement of warranty work.

11. There were further discussions between Joshua Brook and OCH on 24 May 2008 during which warranty claims were raised, but aside from agreeing that they needed to be resolved, nothing material appears to have been agreed at this meeting.

12. Joshua Brook set up an account to record the warranty claims and this is reflected in a transaction detail report of 19 June 2010, which represents all invoiced work for warranty claims arising from the work of OCH. On 30 June 2008 Joshua Brook sent an invoice to OCH for the sum of $16,954.19.[117]

    [117] Paul Nicholls’ 5 May 2010 Affidavit, Annexure PN 13.

13. The 5 August 2008 Letter from Paul Nicholls on behalf of OCH to Gary Dunlop at Joshua Brook is in the following relevant terms:

    I am actually responding to your invoice number 779 for labour originating from the room installation office with a value of $16,954.19. I am not accepting this invoice as it is without legal or moral foundation and no authorization from this Company has or can be established.[118]

    [118] Paul Nicholls’ 5 May 2010 Affidavit, Annexure PN 14.

14. A second 5 August 2008 letter was written by Paul Nicholls on behalf of OCH to Debra Anderson at Joshua Brook concerning warranty repairs.[119] The terms of that letter are as follows:

    [119] Paul Nicholls’ 5 May 2010 Affidavit, Annexure PN 15 (“Second 5 August 2008 Letter”).

    Thankyou for providing me for (sic) a statement of warranty claims. I am returning these to you to have customer warranty forms attached in order for Gary and I to approve the claim in accord with our warranty arrangements.

    Prior to handing over the business to Joshua Brook there was a strict system of vetting claims to ascertain genuine claims from owner home maintenance. I will assume that this has continued.

    Using Gary’s own words at my last meeting on Saturday the 24^th May “the warranties would only apply with Gary’s and my pre-approval”.

    This letter should not be construed as my intention not to accept warranty costs but I am not prepared to have a cart blanch (sic) of liability just because somebody rings up with a leak. There has to be an agreed procedure to allow Gary and I to approve all warranty claims.

    …

    I am available at any time to go through any claims with Gary that you feel should be authorised prior to incurring costs.

15. In a letter dated 7 August 2008[120] from Gary Dunlop at Joshua Brook to Paul Nicholls at OCH issues with respect to the 30 June 2008 Invoice were raised.[121] It is clear that the 30 June 2008 Invoice is considered by Joshua Brook to be in relation to the completion of work in progress. At one point the 7 August 2008 Letter says as follows:

    If you are unwilling to settle on the invoice you have returned I will book it to the warranty retention account. If you disagree with this treatment then we will engage an independent arbiter.

    [120] “7 August 2008 Letter”.

    [121] Paul Nicholls’ 5 May 2010 Affidavit, Annexure PN 16.

16. Joshua Brook says that the parties have consulted in relation to the warranty claims that they could not resolve, or alternatively, OCH no longer required consultation prior to the work being done. Joshua Brook says that the warranty clause does not prevent it from undertaking any warranty work, and the clause operates to provide that where it does so, OCH has an entitlement to commence an arbitration to resolve any difference. It says that OCH has not commenced any arbitration proceedings to resolve the warranty claim. Further, that no evidence was lead at trial that any warranty work undertaken by Joshua Brook was not appropriately undertaken. Joshua Brook therefore says that the warranty work clause was not breached, or its term requiring consultation before commencement was waived, or not required because OCH unreasonably withheld consent.

17. OCH and Mr Paul Nicholls say that the 22 May 2008 Letter does not make a representation in the terms asserted by Joshua Brook, and that if a representation is to be relied upon for the purposes of estoppel it must be clear and precise.[122] It is said that it is difficult to understand exactly what is meant by the relevant paragraph of the letter, but that on any reading of it, it cannot have the meaning attributed to it by the applicant.

    [122] Citing Metropolitan Transit Authority (Vic) v Waverley Transit Pty Ltd [1991] 1 VR 181 at 209 per Murphy, Marks and Gobbo JJ (“Metropolitan Transit”).

18. OCH and Paul Nicholls referred to evidence in Gary Dunlop’s cross-examination where he indicated that it was his “interpretation” that Joshua Brook “can go ahead with warranty and book the warranty cost to the completion account”,[123] and when asked whether Joshua Brook thought it was entitled to do so, on the basis of the letter, without seeking prior approval from Paul Nicholls, Mr Dunlop responded “his prior approval was not forthcoming.”[124]

    [123] Transcript at 119.

    [124] Transcript at 119.

19. OCH and Paul Nicholls also say that there is no evidence of an unconscionable departure from an assumption, or of an assumption, that OCH waived compliance with its contractual entitlements. OCH and Paul Nicholls say that any assumption made by Joshua Brook on the basis of the 22 May 2008 Letter was wholly unreasonable, and there was no evidence that OCH knew that Joshua Brook had adopted that interpretation.[125]

    [125] Citing Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 (“Marlborough Gold Mines”).

20. OCH and Mr Paul Nicholls point out that Joshua Brook has not used the monies to pay for warranty work alone, but has also withdrawn from the account, or threatened to do so, monies relating to a dispute with Mr Paul Nicholls over a customer contract that failed to become unconditional.[126] That is a dispute OCH and Mr Paul Nicholls say is unrelated to warranty work. OCH and Mr Paul Nicholls say that Joshua Brook cannot allege unconscionable conduct on one hand whilst taking monies to which it was not entitled on the other. This, it is said, strengthens the view that the actions of OCH with respect to the matter are not unconscionable.

    [126] Transcript at 121-122, 7 August 2008 Letter at TB 417.

21. OCH and Mr Paul Nicholls further say that if it is asserted that there was an unreasonable withholding of consent by OCH then there was a contractual option open to Joshua Brook which was not exercised, namely, the appointment of an arbitrator. OCH and Mr Paul Nicholls say that it was not the responsibility of OCH to appoint an arbitrator in circumstances where there had been no prior consultation with it with respect to a particular warranty claim.

22. Special Condition 11 of the Sale Agreement provides for the Withheld Monies in the amount of $40,000, to be withheld from the proceeds at Settlement. There is no dispute in this case that that has been done. What is ultimately in dispute in this case is the withdrawal of the Withheld Monies by Joshua Brook and their use in relation to what is said to be warranty work in connection with jobs completed by OCH prior to Settlement. Special Condition 11 of the Sale Agreement however, provides that “No warranty work will be undertaken without consultation with the vendor …”. This is an absolute prohibition on warranty work being carried out unless there has been consultation with the vendor. What does “consultation” mean in this context? Consultation takes its meaning from the circumstances which require it to occur, and in this case means that OCH had to be told by Joshua Brook and know what was proposed by way of warranty work, before being expected to express a view about the warranty work, and that it be given a reasonable opportunity to state those views.[127] Consultation may occur either orally or in writing.[128]

    [127] Leichhardt Municipal Council v Minister for Planning (1992) 78 LGERA 306 at 338 per Sheller JA, followed in Bond v WorkCover Corporation of South Australia and Allianz Australia Workers’ Compensation (SA) Ltd (2005) 93 SASR 315 at 329 per Gray J; [2005] SASC 464 at paras.48-49 per

    [128] Bond SASR at 328-329 per Gray J; SASC at paras.46-49 per Gray J; see also Sita Queensland Pty Ltd v Beattie [2000] 2 Qd R 433 at 446 per Williams J, where the Queensland Supreme Court held that a requirement of consultation was fulfilled by the forwarding of written material, and that the statute did not require that there be oral debate amongst the Ministers concerned in order to satisfy the requirement of consultation.

23. Consultation does not, however, equate with consent or approval. Special Condition 11 of the Sale Agreement goes on to provide that OCH “will not unreasonably with hold (sic) consent.” Although Special Condition 11 of the Sale Agreement does not expressly say so it is implicit in the fact that OCH must not unreasonably withhold consent that its consent is otherwise required following consultation before warranty work can be carried out. This is the plain meaning of the entire sentence which reads: “No warranty work will be undertaken without consultation with the vendor and the vendor will not unreasonably with hold (sic) consent.”

24. If there is a disagreement about warranty work then Special Condition 11 of the Sale Agreement provides for an independent arbitrator who “may be engaged”. Therefore, in order to expend the Withheld Monies Joshua Brook would be required to:

    a)consult with OCH; and

    b)obtain consent from OCH,

    or, in the event that there is a disagreement between Joshua Brook and OCH about warranty work, obtain a finding from an independent arbitrator. The form of these provisions makes it clear that it is intended that Special Condition 11 operate on a case-by-case basis. That said, it would be possible for OCH to give a blanket consent to Joshua Brook to carry out any warranty work in relation to work previously completed by OCH, and to expend the Withheld Monies on that warranty work. But absent such a blanket consent, Special Condition 11 of the Sale Agreement does not provide for the expenditure of the Withheld Monies by Joshua Brook without consultation with, and the consent of, OCH, to that warranty work, and in the event of any disagreement, a finding of an independent arbitrator.

25. In this case Joshua Brook argues that the 22 May 2008 Letter amounts to a blanket consent by OCH for Joshua Brook to expend the Withheld Monies for warranty work conducted by Joshua Brook on work previously completed by OCH. However, the relevant terms of the 22 May 2008 Letter, as set out above, simply provide for:

    a)the establishment of an account to hold the Withheld Monies; and

    b)the use of the Withheld Monies in respect of “disputed matters”.

26. The 22 May 2008 Letter, however, says nothing which affects the requirement for consultation and consent by OCH under Special Condition 11 of the Sale Agreement prior to the Withheld Monies being expended by Joshua Brook, or a finding of an independent arbitrator in the event of disagreement. Joshua Brook has therefore not established that the 22 May 2008 Letter operated as a consent to the expenditure of the Withheld Monies in relation to warranty work, either on a blanket basis or in relation to specific cases.

27. On one view of the evidence it can be asserted that Gary Dunlop agreed that Joshua Brook expended the Withheld Monies on warranty work without any prior consultation with OCH.[129] It would follow therefore that no warranty work could have been completed, and no funds expended from the Withheld Monies by Joshua Brook.

    [129] Transcript at 120.

28. The Court has, however, come to the view on a consideration of all of the evidence that there was some consultation on at least some of the warranty claims, both orally and in writing, between Joshua Brook and OCH and their respective agents, Gary Dunlop and Paul Nicholls. On the proper construction of Special Condition 11 of the Sale Agreement that is not, however, sufficient to warrant expenditure of the Withheld Monies. In order for the Withheld Monies to be expended there must be either consent from OCH, or, in the event of disagreement about the warranty work, a finding of an independent arbitrator allowing the expenditure of the Withheld Monies. Without that consent Joshua Brook was not entitled to do the warranty work, and nor was it entitled to expend the Withheld Monies from the relevant account.

1. It is not sufficient to argue that OCH may have unreasonably withheld their consent, because in the event that they did so there would clearly be a disagreement about warranty work, and before Joshua Brook could legitimately expend the Withheld Monies there would need to be a finding by an independent arbitrator allowing them to do so. In the circumstances, it would probably be incumbent upon Joshua Brook to initiate the arbitration proceedings. In this case, it is immaterial in any event, because there is no, or no sufficient, evidence to establish that OCH unreasonably withheld consent in relation to any warranty work. That is a matter in respect of which the Court would require, given the nature of the disputes concerning the warranty work, expert evidence, of which there was none, in relation to that warranty work.

2. In the circumstances, OCH has established its claim that Special Condition 11 of the Sale Agreement has been breached by Joshua Brook, and OCH is entitled to judgment on its counterclaim.

Conclusion and orders

1. The Court has concluded for reasons set out above that:

   a)Joshua Brook’s application in relation to alleged misleading and deceptive conduct by OCH and Paul Nicholls has not been made out, and must therefore be dismissed; and

   b)OCH’s counterclaim with respect to the breach of the warranty retention money provision of the Sale Agreement has been made out, and there will be judgment for the First Respondent on the First Respondent’s counterclaim in the sum of $40,000 to be paid by 16 November 2012, together with interest:

   i)on the sum of $20,000 at the rate of 6% per annum from 2 March 2009 to the date of judgment;

   ii)on the sum of $20,000 at the rate of 6% per annum from 2 March 2010 to the date of judgment (“Judgment Sum”); and

   with interest on the Judgment Sum at the rate of 6% per annum from the date of judgment until payment.

2. There will be orders accordingly.

3. The Court will hear the parties as to costs.

I certify that the preceding one hundred and forty-seven (147) paragraphs are a true copy of the reasons for judgment of Lucev FM

Date:  19 October 2012

Gray J (“Bond”).