Lubidineuse, G.D. & Ors Bevanere Pty Ltd

[1985] FCA 327

Re: GAETAN DJINO LUBIDINEUSE; SUZETTE MAURICETTE LUBIDINEUSE; ROBERT GERVAIS
LEZARE and BRIGITTE MARGARETTE LEZARE
And: BEVANERE PTY LIMITED
No. G.89 of 1984
Trade Practices

COURT

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Wilcox J.

CATCHWORDS

TRADE PRACTICES - Misleading or deceptive conduct - Assessment of damages - Sale of beauty clinic - Clinic operated at a loss by purchasers - Claim for recovery of both purchase price and trading losses - Apportionment of total outlays between loss occasioned by the conduct of the respondent and other causes.

Trade Practices Act 1974 ss.52,82,87

Brown v Jam Factory Pty Limited (1981) 53 F.L.R. 340; Gates v City Mutual Life Assurance Society Limited (1983) 68 F.L.R. 101, Gould v Vaggelas (1984) 56 A.L.R. 31 applied.

HEARING

SYDNEY
#DATE 18:7:1985

ORDER

1. Judgment be entered in the Application in favour of the applicants against the respondent in the sum of thirty-five thousand dollars ($35,000).

2. The contract between the applicants and the respondent dated 12 October 1983 for the sale by the respondent to the applicants of the business known as Deidre Prussak Cosmetic Clinic be varied by reducing the agreed purchase price from forty thousand dollars ($40,000) to thirty-five thousand dollars ($35,000) and by deleting from clause 4 of Annexure A to the contract the covenant by the applicants to pay to the respondent the sum of five thousand dollars ($5,000) by the instalments contained in the draft Bill of Sale, Annexure B to the contract.

3. Within twenty-one (21) days of this order, the respondent discharge and deliver up to the applicants or to their solicitors all security documents held by them in relation to the payment of the said sum of five thousand dollars ($5,000).

4. The Cross-claim be dismissed.

5. The respondent pay to the applicants their costs of the Application and of the Cross-claim.

NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

On 31 August 1984 I delivered judgment on liability in this matter, finding in favour of the claim of the applicants that the respondent had engaged in conduct that was misleading or deceptive within the meaning of s.52 of the Trade Practices Act 1974, in relation to the sale by the respondent to the applicants of a business known as the Deidre Prussak Cosmetic Clinic. That decision, now reported at (1984) 3 F.C.R. 1, was the subject of an appeal to a Full Court of this Court (Morling, Neaves and Spender JJ.). On 24 April 1985 the appeal was dismissed. The matter now comes back to me for the purposes of assessing the damages to which the applicants are entitled and of making appropriate orders to dispose of their Application and of the respondent's Cross-claim. In the meantime, on 12 June 1985, the solicitors formerly acting for the respondent have withdrawn from the matter. The respondent has not instructed other solicitors. Although notice of the hearing in respect of damages was given to the respondent, it did not appear at that hearing so that I have not had the benefit of any evidence or submissions on behalf of the respondent in relation to damages.

The conduct found proved against the respondents was that it represented to the applicants that a particular employee, the "head girl", Mrs Dragica Kostic, would remain as an employee to assist them in running the business, when in fact the respondent was aware that she intended to leave her employment almost immediately. Mrs Kostic left the clinic only three days after the purchase and, ten days later, she opened her own beauty salon across the road. Some, at least, of the customers of the Deidre Prussak Clinic followed Mrs Kostic to the new business and failed, or ceased, to patronise the applicants.

The purchase turned out badly for the applicants. The contract contained warranties that the gross takings of the business for the financial year ending 30 June 1983 were an average amount of $1,600 per week and that, to the best of the respondent's knowledge, the gross takings of the business for the financial year ending 30 June 1983 were not less than the average amount for the previous financial year. Nothing was said about the period between 1 July 1983 and 12 October 1983, the date both of the contract of sale and of the delivery of possession of the business, but in the absence of any suggestion of a relevant change in circumstances it is reasonable to assume that the takings would have continued at least at this level until the date of sale. After sale they were not long maintained at that level. According to evidence contained in an affidavit by the first applicant, Mr G D Lubidineuse, who is a qualified accountant -- which affidavit was filed some months before the matter went undefended but has not been contested -- the gross takings of the business for the 47 weeks following the purchase of the business totalled only $38,234.90, an average of only $813.50 per week. The pattern is interesting. The takings during the 11 weeks between the date at which the applicants took over the business and the end of 1983 -- ignoring odd cents -- were: $1,574, $1,923, $1,568, $1,184, $1,349, $1,688, $1,807, $1,295, $1,048, $1,549, $1,897. During 1984, until the week ending 2 September, takings exceeded $1,000 in only three weeks; in those cases the figure was barely exceeded. Takings were more usually in the range of $500-$600 per week, and sometimes even less. Mr Lubidineuse also deposed to the number of clients attending the clinic during various weeks until the end of June 1984. This list shows that, whereas during October to December 1983 figures in the range of 60-80 were normal, after the beginning of 1984 the usual range was 30-50. Only once in the first half of 1984 did more than 50 clients attend the clinic in a single week. Mr Lubidineuse said that he had examined the client cards kept at the clinic and delivered by the respondent to the applicants at the time of the purchase, that the majority of the persons named on the cards had failed to visit the clinic since the purchase and that some of the clients had visited since purchase on one or two occasions and then not returned. In the result, the business ran at a loss, so much so that the applicants could not keep up rent payments for the premises in the Strand Arcade. They were forced to leave those premises on 10 August 1984 and to move temporarily to 99 York Street, a location more remote from the major retail area. On 27 November 1984 the business moved again, this time to the Mid-City Centre in Pitt Street. In oral evidence at the hearing in relation to damages Mr Lubidineuse brought the evidence up to date. According to him, and despite a reduction of staff and all other possible economies, the business incurred a trading loss of $27,467.60 between the date of purchase, 12 October 1983, and 27 November 1984. Costs of $9,594.05 were incurred in setting up in the Mid-City Centre premises but, since the move to those premises, the business has traded profitably. The net profit for the period 27 November 1984 to 30 May 1985 was $13,031.09 before allowing for this setting up cost, or $3,437.04 after making that allowance. However, Mr Lubidineuse said that the improvement in the business since November "is based mostly on the passing-by trade, and due to advertisement that we have done. It is entirely new customers that we have got". In relation to goodwill the current business appears to be largely a new business developed by the applicants themselves, taking advantage of a location more obvious to the passing trade.

The evidence of Mrs Lubidineuse, who has operated the clinic since purchase, is that she is a trained and experienced beautician who previously successfully operated a beauty clinic at Mona Vale in Sydney. She said in her affidavit that the operation and conduct of the business purchased from the respondent continued unchanged after she entered into occupation, that the same services and treatments were offered to clients as before, that she consciously made every effort to ensure that former clients were not disturbed by the change of ownership of the business and made special efforts to improve the services offered to former clients and to ensure a high degree of hospitality. She denied receiving any complaint from a client as to the quality of services offered, as to any lack of courtesy or as to any employee of the clinic. I accept this evidence. I think that Mrs Lubidineuse did do her best to maintain the business at its previous level but was frustrated by the loss of the personal goodwill attaching to Mrs Kostic, a disadvantage compounded by the fact that Mrs Kostic set up business nearby in competition with the clinic. I think that it is significant that the patronage of the clinic remained fairly constant -- although, after the first three weeks, at an average takings level less than the average figure warranted for the year ending 30 June 1983 -- for a few weeks after the takeover but then dropped substantially. This is consistent with the possibility that many clients came to the business for treatment after the changeover but did not return after discovering Mrs Kostic had left. Of course, Mrs Prussak had also left. This may have disappointed some customers. It is theoretically possible that there may have been some other change unacceptable to customers but none appears from the evidence. In view of Mrs Lubidineuse's evidence I must conclude that Mrs Kostic's absence was a major factor. The evidence that many clients did not come at all after 12 October, and that the takings were almost immediately below the previous average, is consistent with the possibility of clients having learned of Mrs Kostic's new business and having followed her there without ever returning to the business purchased by the applicants.

Mrs Kostic was, of course, free to leave her employment at the clinic at any time. If she had left immediately after the applicants had taken over the business, and without there being any element of misleading or deceptive conduct engaged in by the respondent, the applicants may have suffered exactly the same disadvantages as they did in fact suffer. But it is no answer to a claim to recover damages arising as a result of the misleading or deceptive conduct of a person that, in the absence of that conduct, the same loss might have been occasioned in circumstances not attracting damages. The test postulated by s.82 of the Trade Practices Act is whether, in the events that have happened, there is a causal relationship between the relevant conduct and the loss or damage which has occurred. The section relevantly provides that "a person who suffers loss or damage by conduct of another person that was done in contravention of a provision of Part IV or V may recover the amount of the loss or damage by action against that other person".

The proper approach to the assessment of damages for contraventions of s.52 of the Act has been discussed in a number of decisions in this Court. It is now well settled that the correct approach is to compare the position of the applicants with the position in which they might have been expected to be if the misleading or deceptive conduct had not occurred: see the decision of Fox J. in Brown v Jam Factory Pty Limited (1981) 53 F.L.R. 340 at p.351, which decision has been followed in a number of subsequent cases - Mister Figgins Pty Limited v Centrepoint Freeholds Pty. Limited (1981) 36 A.L.R. 23 at p.59, Hubbards Pty Limited v Simpson Limited (1982) 41 A.L.R. 509 at pp.517-518, Yorke v Ross Lucas Pty Limited (1982) 45 A.L.R. 299 at p.315. The application of this approach to a case where an applicant has been induced by misleading or deceptive conduct to enter into a purchase may mean an award of damages exceeding the difference between the price paid and the true value of the purchase: see Mister Figgins at p.59. Consequential losses which are sufficiently connected to the respondent's conduct may also be recovered: see Frith v Gold Coast Mineral Springs Pty Limited (1983) 47 A.L.R. 547 at pp.565-566. Damages are not available to compensate for a loss of prospective profits or a loss of a prospective benefit: see Shepherd v Noyes Bros Pty Limited (Spender J., 4 July 1985, not reported, at p.12). The question, to use the words of a Full Court in Gates v City Mutual Life Assurance Society Limited (1983) 68 F.L.R. 101 at p.104, is always "how much worse off he" (the applicant) "is by reason of having taken the steps which he did in reliance on the statements".

I think that it follows from these principles that there is no question, in the present case, of allowing the applicants damages for the loss of the profits which they had hoped to earn from conducting the business which they purchased from the respondent. The question is how much worse off are they because of the misleading conduct of the respondent in inducing them to believe, and to act upon the belief, that Mrs Kostic would remain in the business after they completed its purchase. There is no doubt that the question whether the existing staff, including Mrs Kostic, would remain to help them in the operation of the business was a matter of major concern to them in making their decision to purchase. I am satisfied that, but for the conduct of the respondent in inducing them to believe that the staff -- including Mrs Kostic -- would remain in the business, they would never have entered into the contract to purchase. The price fixed by the contract was $40,000 inclusive of stock, which sum was payable as to $35,000 on completion and $5,000 at the end of 12 months. During negotiations the stock had been estimated to be worth about $7,000-$8,000. The first investment of $35,000 was in fact paid upon completion; the $5,000 which was secured by a Bill of Sale, has not been paid.

In addition to the outlay on purchase price the applicants lost $27,467.60 in trading until 26 November 1984. During that period the applicants were endeavouring to re-build the turnover of the business to its former level. There is no evidence that they attempted to mitigate their losses by selling the business but it was not until January that the full consequences of the loss of Mrs Kostic became apparent. After that time there would have been little prospect of selling at anything like the purchase price. The business then had a weekly turnover of less than half that upon which their purchase price had been negotiated; moreover it was trading at a loss. This was a case, to use the words of Gibbs C.J. in Gould v Vaggelas (1984) 56 A.L.R. 31 at p.35 "in which the purchaser continues to trade . . . because he has no real alternative . . . and in those circumstances incurs losses which are not represented by the difference between the price and the value of the business". In such a case, and dealing with an action for deceit, his Honour said:

"There is no reason in principle why the defrauded purchaser should not recover damages for all the loss that flowed directly from the fraudulent inducement (unless, possibly, the loss was not foreseeable). If the purchaser, besides paying more for the business than it was worth, has suffered additional losses which resulted directly from the fraud he ought to be compensated for them. Of course the court must be satisfied that the loss did result directly from the fraud and not from some supervening cause such as the folly, error or misfortune of the purchaser himself, and must ensure that no additional compensation is given for losses when those losses, or the probability of their occurrence, has already been taken into account in determining the value of the business."

Once it be accepted -- as it is in the authorities to which I have referred -- that the proper measure of damages in respect of a contravention of s.52 is that sum which represents the loss flowing to the applicant directly from the conduct of the respondent, the words used by Gibbs C.J. in Gould v Vaggelas become applicable to a s.52 case. They entitle a purchaser, forced by circumstances to continue to conduct an unprofitable business which he has purchased by reason of the respondent's misleading or deceptive conduct, to recover by way of damages the losses directly caused by the conduct; at least during such period as is reasonably necessary to allow him to escape his plight. In the present case the applicants had no real alternative other than to continue to trade, at least until November 1984. They could not have hoped to sell. To close down would involve even greater loss. Under those circumstances the losses incurred by the applicants are in principle recoverable.

The question, however, arises as to whether the whole of the outlay -- purchase price and losses -- is recoverable. The applicants are entitled to recover only those damages -- whether representing purchase price or trading losses -- which flowed directly from the respondent's misleading conduct. If, as I have found, it is correct to say that, absent the misleading conduct, the applicants would not have bought the business -- and thus outlaid purchase price and exposed themselves to trading losses -- it may in one sense be said that the total expenditure, that is both the purchase price and the losses incurred, is a direct result of the misleading conduct. But the respondent is liable to compensate the applicants only to the extent that this total expenditure was thrown away. If, despite the misleading conduct, the applicants had ended up with an asset worth their total outlay there could be no recovery; no "loss or damage" would have been suffered as a result of the respondent's conduct. If the asset was worth half the total outlay the applicants could recover only the lost half, and so on. In the event, the outlay of purchase price yielded little more of value than the stock. There was, perhaps, some retained goodwill because even at 99%, York Street -- where the passing trade must have been negligible -- the clinic took about $300 per week. But the question is not the value of the asset held, in return for the total outlay, at 26 November 1984 but what, using hindsight, was the intrinsic value of what was taken at the date of purchase -- a business with a particular established connection and goodwill but which was about to be made unprofitable by the loss of Mrs Kostic and her setting up in active competition nearby. To the extent that the goodwill, and therefore value, of the business was further damaged between that date and 26 November 1984 by other factors unrelated to the conduct of the respondent there can be no recovery in this action. Other factors may have played a part. Mrs Prussak, the founder and manageress of the clinic, left as contemplated at the time of the sale. That must have had some effect. There may have been some measure of unexpressed customer dissatisfaction with the way in which the business was conducted by the applicants. There is no sufficient basis to make any calculation of the relative importance of these matters. I can only say that, having regard to my impression of Mrs Kostic as an extremely efficient and personable "hostess" in the clinic and to Mrs Lubidineuse's evidence as to the lack of change, I have formed the impression that the departure of Mrs Kostic was the major factor in converting a profitable $1,600 per week business into an unprofitable $500 per week business immediately before the clinic moved from the Strand Arcade and a $300 per week business at the end of November 1984. In my judgment the misleading conduct of the respondent was the direct cause of the major proportion of the loss.

I round the total outlay of purchase price and losses to 26 November 1984 at $67,500 and I deduct $7,500 for stock. This deduction is reasonable because the applicants had the benefit of the stock. No doubt they kept up their stock during trading in 1984 but the cost of this is taken into account in fixing the trading loss. I think that it is reasonable to say that two-thirds of the resultant figure of $60,000, that is $40,000, represents the loss or damage suffered by the applicants as a result of the misleading conduct of the respondent. It is mere co-incidence that this is the same figure as the agreed purchase price. The applicants are still indebted to the respondent, under the contract for purchase, in the sum of $5,000. An order should be made under s.87 of the Trade Practices Act for variation of the contract to discharge that indebtedness. There should be judgment in favour of the applicants in respect of the remaining $35,000. The respondent must pay the applicants' costs of the action. The Cross-claim, which seems to recover the $5,000 balance, must be dismissed.