Luu v Asaj Pty Ltd
[2016] WADC 143
•23 SEPTEMBER 2016
LUU -v- ASAJ PTY LTD [2016] WADC 143
| DISTRICT COURT OF WESTERN AUSTRALIA | Citation No: | [2016] WADC 143 | |
| Case No: | CIV:3863/2013 | 29-31 AUGUST & 1 SEPTEMBER 2016 | |
| Coram: | BOWDEN DCJ | 23/09/16 | |
| PERTH | |||
| 41 | Judgment Part: | 1 of 1 | |
| Result: | Judgment for defendant | ||
| PDF Version |
| Parties: | NGUYEN HUNG LUU ASAJ PTY LTD |
Catchwords: | / |
Legislation: | Australian Consumer Law Competition and Consumer Act 2010 (Cth) Fair Trading Act 1987 (WA) |
Case References: | Adelaide Petroleum NL v Poseidon Ltd (1990) 98 ALR 431 Argy v Blunts & Lane Cove Real Estate Pty Ltd (1990) 26 FCR 112 BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 226 Elders Trustee & Executor Co Ltd v EG Reeves Pty Ltd (1987) 78 ALR 193 Global Sportsman Pty Ltd v Mirror Newspapers Ltd (1984) 2 FCR 82 Gould v Vaggelas (1985) 157 CLR 215 Henville v Walker [2001] HCA 52; (2001) 206 CLR 459 Jones v Dunkel (1959) 101 CLR 298 Makita (Aust) Pty Ltd v Sprowles (2001) 52 NSWLR 705 Merost Pty Ltd v CPT Custodian Pty Ltd [2014] FCA 97 Newmarket Corp Pty Ltd v Kee-Vee Properties Pty Ltd [2003] WASC 157 Owston Nominees No 2 Pty Ltd v Clambake Pty Ltd (2011) 248 FLR 193; [2011] WASCA 76 Paric v John Holland (Constructions) Pty Ltd (1985) 62 ALR 85 Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd [1982] HCA 44; (1982) 149 CLR 191 Pennington v Norris (1956) 96 CLR 10 Podrebersek v Australian Iron & Steel Pty Ltd (1985) 59 ALR 529 Professional Services of Australia Pty Ltd v Computer Accounting and Tax Pty Ltd [No 2] [2009] WASCA 183 Servcorp WA Pty Ltd v Perron Investments Pty Ltd [2016] WASCA 79 |
JURISDICTION : DISTRICT COURT OF WESTERN AUSTRALIA
- IN CIVIL
- Plaintiff
AND
ASAJ PTY LTD
Defendant
Catchwords:
Misleading or deceptive conduct - Compliance - Causation - Contributory negligence - assessment of damages
Contractual warranty - Implied term - Breach of implied term - Consequences of breach of implied term
Legislation:
Australian Consumer Law
Competition and Consumer Act 2010 (Cth)
Fair Trading Act 1987 (WA)
Result:
Judgment for defendant
Representation:
Counsel:
Plaintiff : Mr G Papamihail
Defendant : Mr M Curwood
Solicitors:
Plaintiff : George Papamihail
Defendant : R O'Shannassy & Co
Case(s) referred to in judgment(s):
Adelaide Petroleum NL v Poseidon Ltd (1990) 98 ALR 431
Argy v Blunts & Lane Cove Real Estate Pty Ltd (1990) 26 FCR 112
BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 226
Elders Trustee & Executor Co Ltd v EG Reeves Pty Ltd (1987) 78 ALR 193
Global Sportsman Pty Ltd v Mirror Newspapers Ltd (1984) 2 FCR 82
Gould v Vaggelas (1985) 157 CLR 215
Henville v Walker [2001] HCA 52; (2001) 206 CLR 459
Jones v Dunkel (1959) 101 CLR 298
Makita (Aust) Pty Ltd v Sprowles (2001) 52 NSWLR 705
Merost Pty Ltd v CPT Custodian Pty Ltd [2014] FCA 97
Newmarket Corp Pty Ltd v Kee-Vee Properties Pty Ltd [2003] WASC 157
Owston Nominees No 2 Pty Ltd v Clambake Pty Ltd (2011) 248 FLR 193; [2011] WASCA 76
Paric v John Holland (Constructions) Pty Ltd (1985) 62 ALR 85
Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd [1982] HCA 44; (1982) 149 CLR 191
Pennington v Norris (1956) 96 CLR 10
Podrebersek v Australian Iron & Steel Pty Ltd (1985) 59 ALR 529
Professional Services of Australia Pty Ltd v Computer Accounting and Tax Pty Ltd [No 2] [2009] WASCA 183
Servcorp WA Pty Ltd v Perron Investments Pty Ltd [2016] WASCA 79
1 BOWDEN DCJ: In late 2012 the plaintiff sold his nail salon (the business) located in the Carillion Arcade, Perth to the defendant, in its capacity as trustee of the A & SL Chan Trust for $650,000.
2 Settlement occurred on 13 December 2012.
3 The final contract was executed on 2 November 2012 and varied on 6 December 2012 (the contract) however nothing turns on this.
4 The plaintiff claims $78,000 being the balance of the purchase price under the contract. It is not disputed that this amount remains outstanding.
5 The defendant, by its pleadings, denies liability to pay the balance of the purchase price and by its counterclaim alleges the plaintiff breached a contractual warranty and made misleading or deceptive representations.
6 The defendant, by its pleadings, had sought a number of orders including specific performance of the contract effectively seeking a refund of the purchase price in return for transferring the business back to the plaintiff as provided in cl 11 of the contract; alternatively a declaration that the contract was void ab initio and an order refunding the purchase price. However, ultimately the only relief sought by the defendant was damages.
The contract of sale (exhibits 1.335 - 1.337 and exhibits 1.431 - 1.432)
7 The contract provided that the sale of the business included all stock, plant and equipment together with intellectual property, business names, business records and goodwill.
8 In addition, the plaintiff was to make available the last two years tax returns and assessment notices from the Australian Taxation Office (ATO) including all profit and loss statements and balance sheets pertaining to the business and the last three quarterly BAS statements and any interim statement (condition 1). The plaintiff warranted that all accounts were true, fair and reasonable (condition 2).
9 The contract was also conditional on the defendant obtaining finance (condition 4) and stipulated that the accounts were to be used for the purpose of obtaining finance only (condition 3). It also provided that the results of legal, financial and tax due diligence 'will need to be satisfactory to the purchaser' (condition 8).
10 Clause 11 of the contract (as varied) provides:
The Vendor warrants that after allowing for wages and rent the takings will not be less than $10,000.00 per week for the period of 3 months following settlement. If the takings do not reach this level and in the opinion of the Purchase falls significant short of this level, the Vendor will return the full purchase price to the Purchaser, and the Purchaser will return the business to the Vendor. (Hereinafter referred to as the contractual warranty).
11 Clause 13 provides:
The Vendor indemnify the Purchaser from and against any Claim or Liability, costs or expense which the Purchaser suffers arising directly or indirectly from or in connection with:
i A Warranty being false and misleading when made or regarded as being made under this agreement, or
ii A breach by the Vendor of this agreement.
A brief outline of the defendant's counterclaim
12 By its counterclaim the defendant alleges that the plaintiff has breached the contractual warranty and engaged in misleading or deceptive conduct pursuant to the Competition and Consumer Act2010 (Cth) (CCA) by falsely representing:
(a) that the business earned a net income of at least $10,000 per week after the payment of wages and rent; and
(b) that if the defendant company purchased the business, it would earn $10,000 per week after the payment of wages and rent.
13 It is the defendant's case that pre-settlement the business did not earn the $10,000 per week figure referred to and in the three months post-settlement did not earn that amount nor were there reasonable grounds for the plaintiff to make the representation the business would earn that amount during that period.
A brief outline of the plaintiff's defence to the counterclaim
14 The plaintiff says that the representations, if made, and contractual warranty were true as the takings less wages and rent were not less than $10,000 per week. In addition the plaintiff says that if the takings did fall below that figure the defendant could not reasonably have formed the opinion that they were significantly short of that level.
15 Further, the plaintiff says that even if it made the representations the defendant did not rely on those representations when he purchased the business.
16 In addition, the plaintiff says the defendant is not entitled to rely on any contractual warranty because the defendant breached an implied term of the contract that the defendant would take all reasonable and proper steps to conduct the business in a business-like manner or, alternatively, would conduct the business in a manner similar to the way the plaintiff conducted the business.
Facts not in dispute
17 It is not disputed that after settlement on 13 December 2012 the plaintiff remained involved in the business on a daily basis for a period of time and that the defendant commenced paying, at the rate of $2,000 per week, the portion of the settlement sum which remained unpaid after settlement pursuant to the contract.
18 After 1 March 2013 the defendant ceased those payments and, by their lawyer's letters of 1 March 2013 (exhibits 1.708 - 1.711) and 28 March 2013 (exhibits 1.712 - 1.715) stated the business was not capable of making $10,000 per week after the payment of rent and wages and invoked its entitlement under cl 11 of the contract to require the plaintiff to return the purchase price for a re-transfer of the business.
19 It is agreed that despite demand the defendant has failed to make any further payment of the outstanding purchase price and $78,000 remains unpaid and, accordingly, the plaintiff is entitled to an order that the defendant pay to it the sum of $78,000 plus interest.
20 That leaves the counterclaim as the central issue to be determined.
21 Hereinafter the plaintiff shall be referred to as Mr Luu and the defendant as Mr Chan. Whilst the defendant is a corporate entity, there is no issue that all the negotiations in respect of this transaction were performed by Mr Chan.
The issues
22 The issues for determination are:
1. Whether Mr Luu represented to Mr Chan prior to the entry into the contract that:
(a) the business earned a net income of at least $10,000 per week after the payment of wages and rent; and
(b) if Mr Chan purchased the business it would earn $10,000 per week after the payment of wages and rent.
2. If Mr Luu made those representations, whether Mr Chan relied upon them when entering the contract.
3. If the representations were made, were they misleading or deceptive or likely to mislead or deceive.
4. Whether the contractual warranty was breached.
5. Whether there was an implied term.
6. If there was an implied term, whether Mr Chan breached that term and, if so, is Mr Chan entitled to rely on the contractual warranty.
7. Is Mr Chan's counterclaim successful and, if so, the amount of damages.
The evidence
23 Mr Chan called five witnesses; his wife, Ms Sook Leng Chan, his son Mr Aaron Chan, an expert witness in business valuation, Mr Martin Smoothy, and an expert witness in forensic accounting, Mr Alan Smit. Mr Chan also gave evidence.
24 Mr Luu called two witnesses; Ms Caitlyn Wright, an independent contractor who worked in the business as a beautician, and an expert witness in forensic accounting, Mr Robert Jacobs. Mr Luu did not give evidence.
25 I summarise the evidence only very briefly below. I provide more details of the significant witnesses (Mr Chan, Mr Smoothy, Mr Smit, Mr Jacob) relevant evidence when I deal with the issues.
Ms Sook Chan
26 Ms Chan said she had known Mr Luu for over five years and was a regular client of his business.
27 On one occasion when she was paying her bill, Mr Luu told her he was interested in selling his business for $650,000. When she asked how much he 'pockets after paying everything' Ms Chan said Mr Luu replied' $10,000 in his pocket'(ts 89). Ms Chan reported this conversation to her husband who later conducted further negotiations with Mr Luu in her absence.
28 Ms Chan said that on one occasion she and her husband met with Mr Luu at his house and on another occasion at their house where he reassured them that Henry, the salon manager, would guide them through business so there was nothing to fear and told them that he, Mr Luu, was going to buy a café in the Carillion Arcade and would be there to help them in the business (ts 89).
29 Post-settlement Ms Chan said her role in the business was relatively minor. On weekends, after she had finished her work at Curtin University, she would go to the salon and would also work on Saturdays and Sundays helping out wherever was needed by doing things such as rolling the towels, washing the instruments and greeting customers.
30 Ms Chan was not cross-examined. She impressed me as an honest and credible witness, but in the overall scheme her evidence was of little importance.
Mr Austin Chan
31 Mr Austin Chan had a background in IT and worked as an analyst for a software company for about 20 years. He eventually decided to look for other business opportunities. Mr Chan had no previous experience in running a nail salon.
32 He said his wife told him that Mr Luu was interested in selling his business and he contacted Mr Luu sometime in the first half of 2012 and they met at a coffee shop in the Carillion Arcade.
33 Mr Chan said his son worked at the business for about three months pre-settlement because Mr Chan felt it would be an advantage to have a family member able to do nails in case staff left. Mr Chan said he asked his son to check on how much cash was being taken.
34 Mr Chan said his son left two days after the business settled because he was 'burnt out', but after being shown an SMS message in which he said his son got 'too close' to staff members (exhibit 1.873) he conceded that may have been one of the reasons why his son was burnt out.
Mr Aaron Chan
35 Mr Aaron Chan said he started working in the salon in about October or November 2012 and worked for three months without being paid. He said he attended four or five days per week, on average between 4 - 6 hours per day (ts 96) and painted nails and learnt the techniques of customer care and sales.
36 Mr Aaron Chan said he worked mainly at the back of the shop and could not observe the amount of the takings. He said his father asked him to keep his eyes open and see how the customers engaged and how the services were provided (ts 98).
37 Mr Aaron Chan said shortly after the business was taken over by his father he stopped working at the business and went into recruitment. He denied his father told him that he was getting 'too close to staff'.
38 When he was asked why he worked unpaid for three months he replied that he did not know but denied he was performing due diligence for his father. He said if anything he would have been there to fill his time between jobs.
39 He agreed that he had discussed his evidence with his father, but had not discussed what his father had said in court.
40 Mr Aaron Chan was assured and unruffled by cross-examination and I accept he was a witness of the truth.
41 His evidence that he was not performing 'due diligence' for his father during the three months must be considered in view of his admission that he was carrying out some investigations at his father's request, in particular trying to ascertain the services provided and the amount of cash paid.
42 I accept his evidence but in the overall scheme of things Mr Chan's evidence is of little consequence.
Mr Martin Smoothy
43 Mr Smoothy has 16 years' experience as a business broker, is a registered business valuer and has operated his own business valuation business for some time. He is one of 22 people who have completed a registered business valuers course conducted by the Australian Institute of Business Valuers.
44 Exhibit 1.768 - 1.801 is the report he prepared in respect of the value of the business at settlement date.
45 He valued the business at a fair market price as an ongoing concern that is, the price at which the business would change hands between a hypothetically willing and able buyer and a hypothetical willing and able seller acting at arm's length in an open and unrestricted market where both had reasonable knowledge of the relevant facts.
46 Mr Smoothy said that there were three basic approaches to valuing a business. The asset based approach which was based on calculating the cost of replacing or duplicating the company's assets. This approach does not recognise the full earning power of the business enterprise.
47 The income approach estimates the value of the business based on the anticipated risk and returns inherent in the investment.
48 The market approach compares the business with the sales of similar businesses and estimates the value of the business accordingly.
49 Mr Smoothy noted in his report that the business may have been supported by sales not recorded in documentation provided to the ATO. Whilst he had the daily journal of cash and EFTPOS sales from 1 July 2013 to 12 December 2013, he noted the absence of documents supporting cash sales. He assumed there were cash sales because some wages appear to have been paid in cash.
50 Mr Smoothy identified several problems with the cash book (exhibit 2, exhibit 1.2228 - 1.239 is a photocopy of exhibit 2). He said it appeared that, other than the first couple of days, the pen used to complete the book was blue and the rest of the time it was black, there was no messing up of the pages, the numbers in the cash book seemed 'the same' and every entry seemed to end in rounded dollars. He said the cash book did not have the appearance of other cash books that he has seen and did not appear to have been opened regularly. He said he had no confidence in the cash book and from a valuation view he could not take into account the cash component of the business because it was undeclared income and unverifiable in a due diligence process.
51 Mr Smoothy adopted the asset based methodology to value the business as that gave the highest valuation for the business. In his opinion the value of the business as at 13 December 2012, at its highest, was $60,000. This was based on an asset value of the plant and equipment of $29,000 and stock of $30,000. Mr Smoothy said the value of plant and equipment was less than the book value because the book value did not represent the true sale value of those items.
52 When asked to assume that the cash component was 33% of the average EFTPOS daily takings, Mr Smoothy calculated the profit that such sales would produce and the trading pattern thereby established and using the return on investment method valued the business at $315,754 including plant, equipment, stock and goodwill as at 13 December 2012.
53 Mr Smoothy said he was not told that Mr Chan had prepared false BAS statements but said this would have no effect on his valuation because he was not taking into account any BAS statements relating to post-settlement trading as he was valuing the business at the day of settlement.
54 He acknowledged that some purchasers pay overinflated prices for businesses and that regular clients were essential for any business, and that replacing valuable staff with family members could affect the profitability or value of a business.
55 Mr Smoothy is an experienced and a competent valuer. He gave his evidence in a straightforward and credible manner and I accept his valuations.
Mr Alan Smit
56 Mr Smit is a highly experienced chartered accountant who is also a specialist forensic accountant. He has specialised in claim evaluations and the financial analysis of claims for the past nine years, and has in the past prepared reports for both plaintiffs and defendants.
57 I found Mr Smit to be an honest and impressive witness and I accept the methodology he used and conclusion as detailed later in this judgement.
Ms Caitlyn Wright
58 Mrs Wright was not employed by Mr Luu, however she provided 'contract' services to customers from the premises of the business between 16 April 2012 and 1 February 2013.
59 She performed waxing, eyelash and eyebrow tinting, eyelash extensions, spray tanning and helped out with manicures and pedicures. Her financial arrangement with Mr Luu and Mr Chan was such that she would receive one-half of any amount that the customers paid the business for her services. The other half would be paid to the business. Ms Wright said she worked the same hours for Mr Chan as she did for Mr Luu.
60 Ms Wright said that when Mr Luu ran the business it was a fun environment to work in, everybody got on, and the business was professionally run. Mr Luu, she said, would welcome customers and build a rapport with them and always promoted her services and built up her business.
61 She said that when Mr Chan took over the business to begin with it was good, however she felt that the workload taken on by Mr Chan in light of his lack of knowledge of the industry and lack of experience meant that he was overwhelmed and she said he stopped promoting her business. Eventually she stopped working because the decline in her earnings meant it was not worthwhile for her to continue.
62 Ms Wright struck me as an honest witness, although there were some inaccuracies in her evidence which I deal with later.
63 She worked with Mr Chan for about seven weeks. The tenor of her evidence was that the business changed when Mr Chan took over and, at least from her point of view, there was not as much work and her business was not being promoted as much.
Mr Robert Jacobs
64 Mr Jacobs is a highly qualified certified practising accountant, a registered liquidator, has a Bachelor of Commerce, and has been a senior investigator with ASIC and its predecessor Corporate Affairs. He has given expert evidence previously and has 35 years' experience in corporate and forensic investigations.
65 Whilst I do not doubt Mr Jacobs' expertise and accept that he is an honest witness, I preferred the evidence of Mr Smit because Mr Jacobs' primary conclusions was based on assumptions not supported by evidence and because of inconsistencies between Mr Jacobs' evidence and his report.
The issues
Did Mr Luu represent to Mr Chan prior to the contract that:
(a) the business earned a net income of at least $10,000 per week after the payment of wages and rent (the current earning representation); and
(b) if the defendant purchased the business it would earn $10,000 per week after the payment of wages and rent (the future earning representation)?
66 Mr Chan's evidence was that at his first meeting with Mr Luu sometime in May 2012, Mr Luu told him that the business would provide him with a very good income and that after payment of rent and wages he put $10,000 into his pocket with minimal input (ts 24).
67 Subsequent to this conversation, Mr Luu prepared a contract which the parties executed on 6 July 2012 (exhibit 1.246 - 1.248 'the first contract'). Mr Chan said he received some financial documents from Mr Luu including a tax return and some BAS statements. Mr Luu told him these financial documents were not going to be 'totally relevant' because around March or April 2012 the business had tripled in size when it took over the adjoining tenancy and because he had not declared all his income within the tax returns or financial documents (ts 24).
68 As of November 2012 Mr Chan said he had been unable to obtain finance pursuant to the first contract which required $650,000 to be paid at settlement and he asked for his deposit back (exhibit 1.334).
69 Mr Chan said he and Mr Luu subsequently entered into another contract dated 2 November 2012, (exhibit 1.335 - 1.337) which was later varied on 6 December 2012 (exhibit 1 .431 - 1.432) and is the subject of these proceedings.
70 Mr Chan said that before the contract was executed he met Mr Luu several times and queried Mr Luu about the $10,000 figure and challenged him by saying that he (Mr Luu) seemed to be 'quite confident' about that figure. Mr Luu, he said, replied that he 'guaranteed it' and when Mr Chan asked what was meant by that, Mr Luu told him that if he did not get that amount he could 'curse him' and said the net weekly figure was probably closer to $12,000 but he was saying $10,000 just to be safe (ts 27 - 28).
71 Mr Chan said he told Mr Luu that he needed something more concrete than a curse and Mr Luu replied that 'if the business doesn't get you that amount' he would give Mr Chan his money back and would take the shop back (ts 27). Mr Luu told him that he would sign a contract containing a clause to that effect and cl 11 was thereby included in the contract. These remarks and cl 11 constitute the future earning representation.
72 Mr Chan said that on 30 November 2012, as a result of discussions he had with Mr Luu (ts 28), he emailed Mr Luu's settlement agent as follows:
Andrew and I have also agreed that we need to put a time limit on condition 11 of our contract (to do with the takings minus wages and rent being at least $10,000/week). This will be considered fulfilled three months after the settlement date (exhibit 1.427).
73 Subsequently the three-month timeframe was inserted into cl 11 by the variation of 6 December 2012 (exhibit 1.431 - 1.432).
74 As to the current earning representation, I accept Mr Chan's evidence that Mr Luu said he put $10,000 into his pocket after wages and rent. This is clearly a representation as to the current earnings of the business. Mr Luu's subsequent conduct in verbally guaranteeing and signing cl 11 is consistent with representing that past earnings were and future earnings would be $10,000 net.
75 Further, Mrs Chan's evidence was that Mr Luu told her that after paying everything there would be $10,000 effectively in the purchaser's pocket (ts 89). Although Mr Chan was not a party to that conversation, it is evidence which provides some support for Mr Chan's evidence that a similar remark was made to him.
76 Mr Chan's evidence that the future earnings representation was made is supported by the insertion of cl 11 into the contract of 2 November 2012 and the variation referred to. I accept that the future earnings representation was made by Mr Luu. I accept Mr Chan's evidence in this regard supported, as it is, by cl 11. It is inconceivable that such a clause was inserted and then varied without Mr Luu discussing those matters with Mr Chan.
Did Mr Chan rely upon the representations when entering the contract?
77 Mr Chan must prove that the representations were relied upon by him when he entered the contract.
78 There have been cases where a party has been so negligent in their failure to protect their own interest that the proper finding is that the misleading or deceptive representation was not the real inducement to the party entering into the contract. In assessing whether the conduct was a real inducement to enter the contract the parties' respective conduct can be considered: Argy v Blunts & Lane Cove Real Estate Pty Ltd (1990) 26 FCR 112.
79 It is not necessary for the reliance on the misleading or deceptive representation to be reasonable conduct on Mr Chan's behalf or that Mr Chan not be careless or otherwise at fault unless the conduct is such that it destroys the causal link between the contravention of the act and the loss or damage: Henville v Walker, Newmarket Corp Pty Ltd v Kee-Vee Properties Pty Ltd [2003] WASC 157 (McClure J).
80 It is not necessary that reliance on the representations be established by direct evidence. It is open to infer the effect the representation is taken to have had: Gould v Vaggelas (1985) 157 CLR 215.
81 The evidence establishes that Mr Chan made inquiries in relation to the business before he proceeded with the purchase. He agreed he spoke to his own accountant and lawyers and made enquiries about the industry. He spoke to Mr Luu's accountant and examined some of the businesses records. He asked his son to keep an eye out to see if he could gather knowledge on how much cash was going through the business (ts 64, 51).
82 Mr Chan made these inquires, however, he also sought assurances as to the earning capacity of the business. Naturally one of the first matters he raised with Mr Luu was the earnings. Mr Luu gave verbal assurances in respect of the current and future earnings of the business. In addition the 'guarantee' and the protection of cl 11 effectively allowing Mr Chan to give the business back and obtain a refund if the business did not live up to the representations were provided by Mr Luu.
83 I am satisfied Mr Chan relied on the verbal representations and those representations induced Mr Chan to act to his detriment in entering into the contract.
84 Mr Chan's post-settlement conduct, as evidenced by his solicitor's correspondence to Mr Luu (exhibit 1.708 - 1.711 and exhibit 1.712 - 715), is consistent with relying on these representations, although I place little weight on this point.
85 I find no evidence of any carelessness or fault on Mr Chan's behalf such that it could be said that Mr Luu's representations were not a real inducement to Mr Chan entering into the contract.
86 I find that Mr Chan relied on the representations when he entered into the contract and proceeded to settle on it.
Were the representations misleading or deceptive?
87 Pursuant to s 18 of the Australian Consumer Law (sch 2) Competition Consumer Act2010 (Cth) (ACL) and s 10 of the Fair Trading Act1987 (WA), misleading or deceptive conduct by a person in trade or commerce is unlawful. Mr Luu's conduct in making the representation was in trade and commerce and it was not submitted to the contrary.
88 Whether a representation is misleading or deceptive is a question of fact to be determined objectively by the court in light of all the surrounding facts and circumstances: Owston Nominees No 2 Pty Ltd v Clambake Pty Ltd (2011) 248 FLR 193; [2011] WASCA 76 [220].
89 It does not matter whether the misleading or deceptive misrepresentation was deliberately made or not, nor does it matter whether a person intended to mislead or deceive or acted honestly and reasonably: Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd [1982] HCA 44; (1982) 149 CLR 191 [197].
90 Conduct is misleading or deceptive if, viewed as a whole, it has a tendency to lead a person into error: Global Sportsman Pty Ltd v Mirror Newspapers Ltd (1984) 2 FCR 82, 87.
91 The first question to address in this regard is whether it is more probable than not that the business was earning an income of $10,000 per week after the payment of rent and wages on or prior to 12 December 2012. It is not readily apparent the exact date that the current earning representation was made, however, it was a continuous representation applicable up to and including settlement.
92 To establish the falsity of this representation Mr Chan relied on his own evidence and the evidence of Mr Smit.
93 In Mr Smit's first report (exhibit 1.802 - 1 .835) he said that the average net proceeds generated by the business per week pre-settlement after deduction for wages and rent was approximately $8,513.
94 He reached this conclusion by the following process.
95 Post-settlement from January 2013 through to November 2013, based on records provided by Mr Chan, 33% of the total business income received was cash and 67% was from EFTPOS; a ratio of 1:2.
96 Pre-settlement, based on records maintained by Mr Luu, of the total business income, 56% was cash and 44% from EFTPOS.
97 In each case the EFTPOS takings could be verified, however, the extent of cash takings could not. Mr Smit noted that the pricing lists pre and post-settlement were similar.
98 As only EFTPOS takings could be independently verified, Mr Smit applied the 1:2 ratio of cash to EFTPOS post-settlement to pre-settlement EFTPOS takings to ascertain the notional pre-settlement total business income. As there was $405,910 in EFTPOS takings ($369,009 excluding GST) from 2 April to 12 December 2012, a 1:2 ratio gave notional cash takings of $198,123 cash ($180,111 excluding GST) or total business income of $604,033 ($549,121 excluding GST). The notional average weekly income therefore excluding GST was $14,840 from 2 April to 12 December 2012.
99 Deducting the average rent over that period of $1,827 per week and average wages as per Mr Luu wage book of $3,537 per week, the notional average net proceeds was $9,476.
100 Mr Smit said the $9,476 needed to be adjusted because the wage to income benchmark figures from the ATO website, which Mr Smit assumed was representative of average business performances of similar salons, listed wages as between 28% and 37% of income, yet his examination established that, based on Mr Luu's cash book (exhibit 2) for April 2012 to September 2012, the ratio for this business was 16%. Mr Smit pointed out that these benchmarks were used by the ATO to protect honest businesses by identifying businesses that may not be reporting some or all of their income.
101 Mr Smit then applied a ratio of 30% of wages to his calculated notional income which gave notional wage expenditure of $164,700 or an average weekly wage expenditure of $4,500.
102 Accordingly, Mr Smit calculated the average net proceeds generated by the business was $8,513 and concluded that it was unlikely that the business would have derived income of $10,000 per week for the period 1 April 2012 to 12 December 2012.
103 Mr Smit agreed when he prepared his first report he had not been told by his instructing solicitors that the BAS statements lodged by Mr Chan were false and understated the income and wage expenses. However, Mr Smit said this would not have affected the validity of his conclusions because he did not rely on the figures Mr Chan provided to the ATO but rather on the figures Mr Chan provided to him for cash takings and EFTPOS takings. These were the figures Mr Chan said in his evidence were the true figures (ts 238).
104 In Mr Smit's second report (exhibit 1.858 - 1.866), Mr Smit revised the average net proceeds generated by the business upwards from $8,513 - $8,863 (inclusive of GST) whilst acknowledging in his evidence that with GST adjustment (ts 234) the figure would be reduced to approximately $8,680. Mr Jacobs also agreed that a GST adjustment would need to be made (ts 266).
105 For reasons which will be shortly explained, I find that Mr Smit's conclusion in his second report, which relies on the assumptions made by Mr Jacob's in his report, cannot be relied upon.
106 In Mr Smit's opinion the cash book (exhibit 2) possessed by Mr Luu was not an accurate representation of actual cash received and likely overstated the amount of cash received. He based this finding on the following facts.
107 For the period from 1 July 2012 through to 12 December 2012 Mr Luu's reported income for the business pursuant to the profit and loss statement and taxation returns was $291,505, however the cash book (exhibit 2), provided pursuant to Mr Luu's discovery of documents (exhibit 4, described as a ledger, document 2, pt 1A in the list of documents), indicated income totalling $566,229.
108 EFTPOS sales pre and post-settlement varied by about $1,300 per week, cash sales by $7,900 per week. The total average weekly business income pre-settlement from the cash book was $24,943 and post-settlement $18,384.
109 Pre-settlement cash was 56% of Mr Luu's takings and EFTPOS 44%, according to the pre-settlement cash book (exhibit 2) possessed by Mr Luu. According to records maintained by Mr Chan, post-settlement, cash was 33% and EFTPOS 67%. Mr Smit said research from the Reserve Bank in broad terms indicated that 47% of transactions between $25 and $50 were paid in cash and less than 30% for transactions between $51 and $100. He noted the price for most services in this business ranged from $40 to $75. In those circumstances Mr Smit considered the level of cash transactions for the business should be between 30% and 47%.
110 Pre-settlement 97% of the totals for cash received ended in denominations of five or zero. Post-settlement it was 27%. For EFTPOS receipts those figures were constant at 22% pre and post-settlement. Exhibit 3, the price lists pre and post-settlement, shows that the price of every service provided, except one, ended in a five or zero.
111 The cash book (exhibit 2) for April 2012 to September 2012 showed a wage/income ratio of 16% as opposed to the industry benchmark of 28% to 37%.
112 Having considered the cumulative effect of these factors, Mr Smit concluded that Mr Luu had overstated the cash the business received and understated the expenditure in the cash book and not declared all his income to the ATO.
113 Mr Smit's analysis of Mr Chan's wage expenditure and business income post-settlement from 1 January to 30 November 2013 showed a ratio of 50% of wages to expenditure which exceeded the industry benchmark ratio of 28% to 37%. Mr Smit noted that Mr Chan did not perform a productive role within the business, that is, he did not serve clientele whereas Mr Luu had and, accordingly, the wage to income relationship post-settlement would be higher because the benchmarks excluded payments to owner/operators.
114 Mr Jacobs', called by Mr Luu, report is exhibit 1.836 - 1.857. Mr Jacobs disputed Mr Smit's conclusion.
115 Mr Jacobs was asked to comment on Mr Smit's report and said two matters stood out, being the assumption made by Mr Smit as to wages and the cash component of the business.
116 In relation to the cash component, Mr Jacobs said the reference to cash in a cash book was of little assistance because cash cannot be verified. He pointed out that people often do not record all of the cash they have taken and said that you could assume that the cash book figures were correct; however you could also assume they were not. Mr Jacobs said the cash book figures could not be verified.
117 Mr Jacobs said that the ATO benchmarks used by Mr Smit in his first report were likely to be inconsistent because it is common practice for smaller retailers not to report all of their cash earnings or all of the cash wages they pay. He noted a 2012 review of the ATO practices by stakeholders had expressed concern as to how the benchmarks were determined and noted that Mr Luu had only reported EFTPOS transactions in his tax returns and minimal cash transactions, therefore the businesses activities were inconsistent with the ATO benchmarks.
118 Mr Jacobs noted that most salons do not have the same trading hours, number of staff or geographical location. He said that given the unique operations of this business, which involved significant cash transactions and higher than average numbers of staff than most competitors, it was wrong to compare this business to industry averages.
119 Mr Jacobs criticised Mr Smit's conclusion that the wage to income relationship for the business when operated by Mr Luu was inconsistent with industry averages.
120 Mr Jacobs performed his own analysis and concluded that the wage to income relationship was consistent with the business activities of Mr Luu and consistent with his estimate of the notional wage expenditure of Mr Luu.
121 Mr Jacobs arrived at his notional wage expenditure by assuming that six staff worked each hour the business operated (58.8 hours per week) and multiplying that by $20 per hour. This created a notional wage expenditure of $7,020.
122 Accepting that the business hours can be established by exhibit 6, there is no evidence showing the total staff hours worked per week was 352 hours.
123 Mr Jacobs then selected 12 dates from the cash book at random and obtained the total cash takings for that day.
124 Mr Jacobs then applied the percentage provided by Mr Luu for the payment of wages and drawings from the total cash received. Mr Luu had instructed Mr Jacobs that 20% of the cash received on a weekly basis was taken by Mr Luu as drawings and 50% of the cash received was used to pay wages.
125 Mr Jacobs found that the notional wage expenditure of $7,020 was broadly consistent with the calculation achieved by taking the total cash received, as recorded by Mr Luu on the 12 random dates, and saying that 50% of that cash was paid in wages and 20% in drawings.
126 The very basis of the analysis was the assumption that 20% of the cash received on a weekly basis was taken by Mr Luu as drawings and 50% of the cash received was used to pay wages. Critically this assumption is not supported by any evidence. Mr Luu did not give evidence at the trial. No other witness gave any evidence to support that assumption. The very basis of Mr Jacobs' analysis on this issue is hearsay. Insofar as an expert's opinion is based on 'assumed' or 'accepted' facts, those facts must be proved in evidence: Makita (Aust) Pty Ltd v Sprowles (2001) 52 NSWLR 705. There must be evidence given at the trial capable of supporting factual assumption on which the opinion is based: Paric v John Holland (Constructions) Pty Ltd (1985) 62 ALR 85 [87] - [88].
127 Mr Jacobs' analysis that the wage to income relationship of the business pre-settlement was consistent with the business activities of Mr Luu and consistent with Mr Jacobs' estimate of the notional wage expenditure of Mr Luu is, in my opinion, inadmissible or, at the very best for Mr Luu, of so little weight to be of no value.
128 In response to Mr Jacobs' report, Mr Smit prepared a second report (exhibit 1.858 - 1.866). Mr Smit said that even accepting Mr Jacobs' notional wages of $7,020 per week, an examination had to be made to establish how much of that $7,020 was paid by cheque. Having ascertained the amount of wages recorded as paid by cheque for each of the weeks to which Mr Jacobs' random 12 days relate, Mr Smit then deducted those amounts to ascertain what was paid in cash. Having obtained that figure, he used Mr Jacobs' assumption that 50% of the cash takings went to pay the wages, and doubled the figure that had been arrived at as payments of wages in cash to ascertain the exact amount of cash that had been received by the business.
129 Mr Jacobs said in his evidence that Mr Smit was wrong to take the approach because the figure of $7,020 he used was the total of wages paid by cash and cheque. Mr Jacobs' evidence in this regard is completely contrary to his report (exhibit 1.836 - 1.857 at 1.840) which states:
I determine from the information provided that based on the hours of operation and number of staff worked during those hours that cash wages paid per week should average around $7,020 per week.
at exhibit 1.852.
Based on the information provided the weekly wage paid to staff in cash is approximately $7020 per week … (emphasis added)
130 Even if the figure of $7,020 obtained by Mr Jacobs was used, Mr Smit's calculations are still valid. If, for example, in a week $7,020 of wages were paid and we know that X amount were paid by cheque, then the balance must have been paid by cash and using Mr Jacobs' assumption that 50% of the cash received was used to pay the wages, then whatever amount of cash was used to pay wages must be doubled to ascertain the total amount of cash the business received. I reject Mr Jacobs' criticism of Mr Smit's rebuttal of Mr Jacobs' report.
131 Mr Jacobs also criticised Mr Smit's final report because when Mr Smit calculated how much cash the business actually took he used Mr Jacobs' figure of $7,020 as total weekly wages but failed to add the $2,000 drawings which Mr Luu had instructed were taken.
132 Mr Jacobs said it was necessary to add the drawings because the business was funding both wages and drawings from its takings. Consequently he said that if you allow an extra $2,000 per week for those drawings, as instructed by Mr Luu, it affects Mr Smit's figures by increasing the total takings to $19,710 and increased Mr Smit's calculated average net weekly takings of the business from $8,863 to $10,863.
133 As I have stated, the flaw in Mr Jacobs' analysis is that there is no evidence to support his assumption that 50% of cash taken was paid in wages and 20% paid as drawings. The conclusions Mr Jacobs drew based on the instructions he received from Mr Luu as to drawings and the percentage of cash takings used to pay wages, cannot properly be taken into account by me.
134 Similarly, Mr Smit's re-calculations in his second report, based on accepting in part Mr Jacobs' conclusions based on assumptions unsupported by evidence, cannot be taken into account.
135 I am satisfied that Mr Smit's first report ought be accepted and that the average net proceedings generated by the business was $8,513 for the period 1 April 2012 to 12 December 2012.
136 Mr Smit's analysis was persuasive and detailed, whilst I note Mr Jacobs' criticism of the ATO's benchmarks and use of industry averages and I accept that businesses will vary with their size, their location and the like, it is appropriate to use the ATO's benchmarks and industry averages and research by the Reserve Bank, as tools to assist an analysis of the like conducted by Mr Smit.
137 Mr Jacobs' evidence that the total wages paid on a weekly basis was $7,020 per week is open to two objections.
138 Firstly, his assumption that there was 351 staff hours worked per week is not supported by any evidence. The wages book (exhibit 1.338 - 1.370) provides no support. There is no evidence as to who prepared it or that it included all the hours worked by the employees or that all the employees were recorded in the book. That aside, it lists eight workers. Even if you take the most number of hours worked in any week by all the employers and hypothesise that they all worked the maximum hours recorded in the same week, you have 267 staff hours worked. If you add another 58.5 hours for Mr Luu, and again there is no evidence to support this, the total is 325.5 hours. Mr Jacobs' assumption that 351 staff hours were worked each week is not supported by any evidence. The accuracy of the wages book is not accepted by me.
139 Secondly, his assumption that each staff member was paid $20 per hour is unsupported by the evidence. We do not know how much the manager Henry, or the other staff, were paid. The wages book cannot be relied upon.
140 Thirdly, his evidence that the $7,020 figure was the total wages paid by both cash and cheque is contradicted by his own report in two places: see [129] above.
141 The finding that I accept the conclusions reached by Mr Smit in his first report can only be made by me if I reject the accuracy of the cash book (exhibit 2) possessed by Mr Luu and accept Mr Chan's evidence that the spreadsheets maintained by him pre and post-settlement were accurate. I make both findings and set out the reasons for those findings below.
The cash book (exhibit 2)
142 The only evidence that could possibly support Mr Luu's pleaded case that pre-settlement the business earnt $10,000 per week after wages and rent are the figures provided in the cash book (exhibit 2) possessed by Mr Luu when he operated the business.
143 Mr Smoothy's evidence was that the cash book could not be taken into account in preparing a business valuation because the cash had not been declared and could not be verified on a due diligence process (ts 123).
144 Mr Smit's evidence was that the cash recorded in the book was understated and I accept his reasons for reaching that conclusion.
145 Mr Jacobs' evidence was that the reference to cash in a cash book was of little assistance because cash cannot be verified.
146 Mr Curwood says Mr Luu's failure to give evidence when the cash book was a central issue at the trial is something that I can take into account in concluding with greater confidence that any evidence Mr Luu would have given about the cash book would not have assisted his case: Jones v Dunkel (1959) 101 CLR 298.
147 Jones v Dunkel refers to the unexplained failure by a party to either call the witness or give evidence. There is no unexplained failure. Mr Luu, in view of the overwhelming evidence that the cash book referred to cash which had not been declared to the ATO, had a very good reason for not giving evidence.
148 I do not draw any inference against Mr Luu as a result of his failure to give evidence, nor do I come to the conclusion that the evidence would not have assisted him. I decide the case based on the evidence that has been called.
149 Mr Curwood also urged me to consider that in Mr Luu's affidavit of discovery (exhibit 4) he stated he had, but does not now have, the till rolls and swears they were disposed of or around about the time the business was transferred to Mr Chan. I would not draw any inference adverse to Mr Luu as a result of the failure to keep these documents. I decide the case based on the evidence called and do not speculate or draw inferences based on what evidence was not called.
150 The cash recorded in the cash book for the period from 3 December 2013 to 12 December 2013 (exhibit 2) is approximately $10,000 lower than the amount recorded by Mr Chan in his pre-settlement spreadsheet (exhibit 1.428). Mr Chan records cash takings of $10,075 and Mr Luu records cash takings of $26,225.
151 There is no evidence explaining how the cash book possessed by Mr Luu (exhibit 2) was maintained or who maintained it. Mr Chan's evidence was that Mr Luu showed it to him but did not let him have access to it (ts 59). We know it was discovered by Mr Luu (exhibit 4). Other than that, nothing else is known.
152 The evidence relating to Mr Chan's pre-settlement spreadsheet came from Mr Chan. He said he attended the business virtually every day in the two weeks before settlement to verify the cash takings as he needed to be confident of the cash levels. Mr Chan said he would sit at the front counter and at the end of each business day Henry would calculate the totals of the EFTPOS takings and then count the cash in front of him and Mr Chan would write down the cash figure either on a piece of paper or record it on his phone and then enter it onto a spreadsheet on his computer when he got home (ts 29 - 30). The spreadsheet containing those entries became exhibit 1.428.
153 Mr Curwood refers to Mr Chan's contemporaneous SMS text of 10 December 2012 (exhibit 1.433) sent to Mr Luu, wherein Mr Chan says:
… I've been trying to make the figures work all night, but I can't see how the business would be viable for us. When we worked out the figures last night to calculate the income minus the wages and rent we ended up with $9,550. The GST on the sales would be $2,000 last week which would leave us very short. Like I said I am still very uncomfortable with not declaring the income because 1 It is illegal; 2 I need to show service ability when I refinance; and 3 when I sell the business in future it would be worth a lot more with the income properly declared …
154 Mr Chan's monitoring of the till left him so concerned that (ts 31) he sent emails to finance companies (exhibit 1.439) and the property manager (exhibit 1.435) essentially saying he would not proceed with the deal. Mr Chan said he then received urgent phone calls from Mr Luu who told him that he was just panicking and not to worry because Henry (the salon manager) would show him how to run the business and they were prepared to be flexible on the vendor finance. Mr Luu also said he would show him how to run the business (ts 33) and, accordingly, Mr Chan said he notified the property manager that he was proceeding with the deal (exhibit 1.434).
155 Mr Curwood says the reference to' income minus the wages and rent of $9,550' and GST 'on the sales of 2,000 for the last week' in the SMS (exhibit 1.433) is significant. Mr Curwood says that if you count the cash verified by Mr Chan on his spreadsheet for the week from Monday 3 December to Sunday 9 December (being the night before he sent that text, exhibit 1.428), it totals approximately $7,265, EFTPOS totals approximately $14,188 equally $21,453 meaning the GST would be approximately $1,950. Whereas if Mr Luu's figures are used (exhibit 1.239), a total of approximately $47,000 is obtained and Mr Chan's reference to 2,000 GST makes no sense. The text of 10 December 2012 (exhibit 1.433) does not, in my view, add any additional credibility to exhibit 1.428.
156 I do not doubt Mr Curwood's maths; however his reasoning, with respect, is flawed. Exhibit 1.428 was created by Mr Chan. It has both independently confirmable EFTPOS figures and cash figures which are verified only by Mr Chan, the very witness whose evidence is sought to be supported. It is sought to do this by the 10 December text (exhibit 1.433) which is authored by Mr Chan and contains figures only verified by Mr Chan. It is an effort to support the credibility of a witness by pulling the witness up by his own bootstraps. The evidence might rebut an allegation of recent fabrication but it provides no independent support.
157 However, the evidence from the three experts shows that the cash book (exhibit 2) cannot be relied upon and I do not accept it is accurate. Mr Smit's evidence, which I accept, gave comprehensive reasons as to why it cannot be relied upon.
Why I accept Mr Chan's evidence
158 Mr Smit's reports could only be accepted if I find that the evidence given by Mr Chan in relation to the pre-settlement spreadsheet containing takings details (exhibit 1.428) and post-settlement spreadsheets containing takings details and wage records(exhibit 1.644 - 1.658) compiled by him, and relied upon by Mr Smit, are honest, accurate, truthful and reliable.
159 Mr Papamihail accepts that a witness' evidence can be accepted, or rejected, in whole or part but submits that any evidence from Mr Chan, be it documentary or oral, cannot be relied upon because, on Mr Chan's own admission, he is a self-confessed liar who:
(a) filed false BAS statements and a false income tax return. That is, he filed the returns knowing that the contents therein were false;
(b) filed those returns deliberately to obtain a financial benefit; Mr Chan did not dispute that he lodged two BAS statements which he knew were false. Those statements were lodged on 28 February 2013 and 13 May 2013. He deliberately lodged them with the ATO to reduce his overall tax liability. In addition, Mr Chan acknowledged that his 2013 tax return understated the income and expense (exhibit 1.746 - 1.758), although he later filed an amended tax return (exhibit 1.888 - 1.899) containing the true income and expense details.
Mr Chan said both the tax returns and business activity statements were lodged by him knowing that they understated the income of the business because not all cash was declared and in addition not all expenditure was declared because the amount of cash wages paid to staff was not declared as an expense;
(c) lied to his accountant in the preparation of the false BAS and tax statements; Mr Chan accepted that this occurred;
(d) lied to his financier, solicitor and his expert by originally failing to disclose to them that he had filed false BAS and tax returns. Mr Chan accepted that this occurred;
(e) those actions meant that, inter alia, Mr Chan did not pay superannuation levies or PAYG tax on the cash/wages he paid to staff. Mr Chan accepted that this occurred.
160 Mr Curwood says that Mr Chan's conduct must be seen in the overall context in that irrespective of the figures submitted to the ATO, the financial records used by Mr Chan when he first complained to Mr Luu that the $10,000 milestone was not reached, were figures from the spreadsheet prepared by him and not the understated BAS or taxation figures. This does not, in my view, support Mr Chan's credibility. If the figures in the spreadsheet are not correct referring to them when he first complained does not remedy that defect. It is self-serving. It takes the matter nowhere.
161 Mr Curwood also suggested that the letter rescinding the contract 'corroborates Mr Chan's figures' (exhibit 1.708 - 1.711). Again, I reject this contention; the letter provides no corroboration, it is self-serving.
162 Whilst I find that Mr Chan engaged in the conduct referred to above, I accept the truthfulness of his assertion that the two BAS statements and the income tax return were false because they understated the income by the amount of cash wages paid to staff and that all of the cash that was not disclosed was used to pay staff (ts 43, 46, 81).
163 Mr Curwood says that the fact that Mr Chan filed false BAS statements and tax returns after his first complaint to Mr Luu about the business takings not reaching the $10,000 milestone is relevant, the argument being that the figures provided by Mr Chan to Mr Luu show the cash takings of the business at a higher rate than those filed in the BAS statement and tax returns and that if Mr Chan was behaving dishonestly towards Mr Luu he would have provided lower figures. I do not find that conclusion more inherently probable than not and the fact that the false and misleading business statements and tax returns were filed after the first complaint to Mr Luu does not assist Mr Chan.
164 Mr Chan's contemporaneous records, such as the post and pre-settlement spreadsheets and his emails and SMS, provide no independent support for Mr Chan's evidence. As contemporaneous records, at most they show consistency of conduct which adds nothing to the assessment of Mr Chan's evidence.
165 There is some support for Mr Chan's evidence in Mr Smit's evidence. Mr Smit said that considering the figures from the Reserve Bank relating to cash transactions he would have expected the level of cash transactions for this business to be around 30% - 47% of the total income. If we combine the total of the cash verified by Mr Chan in exhibit 1.428 for 3 to 12 December 2012 with the EFTPOS takings, the cash equates to about 33%. Yet the cash in Mr Luu's cash book (exhibit 1.230) is approximately 58% of the total. That provides some support independently as to the accuracy of the figures provided by Mr Chan.
166 Ultimately it is a question of whether I accept Mr Chan's sworn evidence. It is not disputed that Mr Chan engaged in the disreputable and illegal conduct referred to above and that causes me to scrutinise his evidence with care. Having done so, I accept Mr Chan's evidence.
167 I accept the truthfulness of his assertion that the two business activity statements and the income tax return were false because they understated the income by the amount of cash wages paid to staff and that all of the cash that was not disclosed was used to pay staff (ts 43, 46, 81).
168 Mr Chan said he was trying to clean things up (ts 67) but was asked by staff to pay wages in cash (ts 68, 70) and he did so as he needed workers and wanted to survive (ts 70). Some workers, Henry for example, threatened to leave when he tried to regularise their tax affairs (ts 74). Mr Chan said he was trying to regularise the business (ts 74). He was aware that the way Mr Luu ran the business was not to declare all of the cash takings. This goes some way to explain the environment within which his actions occurred.
169 I find that Mr Chan gave his evidence in a frank manner. He admitted his inappropriate conduct and filed an amended tax return. He conceded matters that were arguably contrary to his interest, including but not limited to, seeking independent accounting and legal advice about the business, seeing Mr Luu's accountant, acknowledging that Mr Luu did not have the same understanding as he had of the English language, not having verified exhibit 1.867 the download of the SMS messages(ts 53), employing overseas student and not checking to see if they had qualifications, acknowledging that Mr Luu had told him that he should not change the way the business operated (ts 56,73,74) and that he understood that if he did not operate the business in the same way as Mr Luu he may not be able to earn the amount referred to (ts 56), that he was shown the cash book by Mr Luu (ts 59) and that he had not replaced Ms Wright when she left or replaced the services she offered (ts 72). I accept that some of the matters conceded by Mr Chan would have been able to be established by other evidence others would not have.
170 On the date of handover, Mr Chan said he created the post-spreadsheet (exhibit 1.644 - 1.658) and at the end of every day he would update the spreadsheet with the cash and the EFTPOS takings. He would count up the cash by either writing it on his phone or on a piece of paper and put the figures into his spreadsheet when he got home (ts 34). Mr Chan said that everything, including cash not declared to the ATO and wages not declared, was contained on that spreadsheet (ts 44).
171 The circumstances leading to the creation of the pre-settlement spreadsheet have been dealt with previously. I accept Mr Chan's evidence in respect of the accuracy of the pre (exhibit 1.428.) and post-settlement (exhibit 1.644 - 1.658) spreadsheets and his evidence generally.
172 I accept Mr Chan's evidence that his post-settlement spreadsheet accurately records the takings and wage expenses of the business (exhibit 1.644 - 1.681) (exhibit 1.916 - 1.920 is an extract, re-arranged and re-grouped, of the wages appearing at exhibit 1.647 - 1.655).
173 Mr Chan's post-settlement spreadsheet shows that in the three-month period after settlement, $10,000 per week net was achieved only once, that being the Christmas week. That calculation is achieved at by using the spreadsheet prepared by Mr Chan (exhibit 1.644 - 1.658 for the relevant period) to ascertain the total takings, deduct the rent less marketing fees (exhibit 1.942A - 1.946) and wages paid (exhibit 1.647 - 1.655, re-arranged and re-grouped in exhibit 1.916 - 1.920) (ts 36). The following table, from Mr Chan's written closing submissions, shows the average over the full 13 weeks from settlement (excluding the three days of the settlement week) was $8,863.97 (after wages and rent). I accept the accuracy of the table and the primary information leading to its calculation.
Ending |
|
|
Takings |
|
|
|
| 5,536.00 | 7,044.26 | 12,580.26 | 902.33 | 3,882.19 | 7,795.74 |
| 12,914.00 | 17,676.00 | 30,590.00 | 2,009.62 | 9,395.74 | 19,184.64 |
| 6,076.00 | 11,729.00 | 17,805.00 | 2,009.62 | 6,790.76 | 9,004.62 |
| 6,919.00 | 11,236.00 | 17,427.00 | 2,009.62 | 7,511.06 | 7,906.32 |
| 6,672.00 | 13,133.00 | 19,805.00 | 2,009.62 | 8,146.14 | 9,649.26 |
| 7,170.00 | 12,564.00 | 19,734.00 | 2,009.62 | 8,630.14 | 9,094.24 |
| 5,688.00 | 14,241.00 | 19,929.00 | 2,009.62 | 8,511.74 | 9,407.64 |
| 6,533.00 | 13,048.00 | 19,581.00 | 2,009.62 | 8,255.54 | 9,315.84 |
| 6,914.00 | 11,691.00 | 18,605.00 | 2,009.62 | 8,496.40 | 8,098.98 |
| 7,046.00 | 12,815.00 | 19,861.00 | 2,009.62 | 8,357.40 | 9,493.98 |
| 4,902.00 | 13,664.00 | 18,566.00 | 2,009.62 | 8,367.00 | 8,189.38 |
| 5,528.00 | 7,146.00 | 12,674.00 | 2,009.62 | 6,919.00 | 3,745.38 |
| 5,005.00 | 11,203.00 | 16,208.00 | 2,009.62 | 7,897.04 | 6,301.34 |
| 5,444.00 | 11,438.00 | 16,882.00 | 2,148.38 | 7,825.33 | 6,908.29 |
174 As I accept Mr Chan's evidence, I am satisfied on the balance of probabilities that the average post-settlement weekly takings were $8,863.97.
Conclusions as to the current earning representation
175 I am satisfied that Mr Luu represented that as at the date of settlement the business earned a net income of at least $10,000 per week after the payment of wages and rent (current earning representation).
176 I accept the evidence of Mr Smit contained in his first report that the average net proceedings generated by the business pre-settlement was $8,513 and it was therefore unlikely that the business would have derived an income of $10,000 per week (net) for the period 1 April 2012 to 12 December 2012.
177 I accept Mr Smit's methodology and his conclusions. Insofar as Mr Smit's report relies on the accuracy of pre and post-settlement spreadsheets kept by Mr Chan, I accept Mr Chan's evidence that those spreadsheets were accurate.
178 I accept the evidence of Mr Smit, Mr Smoothy and Mr Jacobs that Mr Luu's cash book could not be relied upon and find that it was not accurate.
179 I am satisfied that the current earning representation was false and misleading.
Conclusions as to the future earning representation
180 I am satisfied that Mr Luu represented that if Mr Chan purchased the business it would earn $10,000 per week after the payment of wages and rent (future earning representation).
181 I find this was a representation with respect to a future matter and, accordingly, the CCA, sch 2 Australian Consumer Law provides that the representation is taken to be misleading if Mr Luu did not have reasonable grounds for making the representation.
182 Section 4(2) provides that the person that makes the representation is taken not to have reasonable grounds unless evidence is adduced to the contrary. This creates an evidentiary burden on Mr Luu. Mr Luu elected not to give evidence. Neither the two witnesses called by Mr Luu, Mr Jacobs and Ms Wright, nor any of the five witnesses called by Mr Chan gave any evidence that could constitute reasonable grounds for Mr Luu to have made that representation. Mr Luu has not satisfied the evidentiary burden of adducing some evidence that he had reasonable grounds for making the representation.
183 In any event irrespective of s 4(2) and s 4(4), the legal burden of establishing on the balance of probabilities that there were no reasonable grounds for Mr Luu to have made that representation rests on Mr Chan. He has discharged that burden.
184 At the very highest for Mr Luu, the evidence establishes that Mr Luu made the representation as to the future matter and allowed Mr Chan access to a cash book which supported his representation. I accept Mr Smit's evidence that Mr Luu's cash book is not accurate and overstates the cash takings. There can be no reasonable grounds for Mr Luu relying on a cash book maintained by his business which overstated the cash takings.
185 I am satisfied that the future earning representation was misleading as I accept Mr Chan's evidence of the accuracy of the post-settlement spreadsheet maintained by him and which shows the average earnings over the full 13 weeks post-settlement (excluding the three days of the settlement week) was $8,863.97 (after wages and rent).
186 Further, I am satisfied that this falls significantly short of the $10,000 net a week future earning representation, that is, it fell short of $10,000 in a manner which is important or of consequence: Macquarie Dictionary.
187 I am satisfied that the future earning representation was misleading and deceptive within the CCA.
Was the contractual warranty breached?
188 The contractual warranty in cl 11 essentially provides that Mr Luu warrants the businesses earnings will be not less than $10,000 per week for the period of three months following settlement' and that '… if they don't reach that level' and, in Mr Chan's opinion, fall significantly short of this level Mr Luu will return the full purchase price to Mr Chan and Mr Chan will return the business to Mr Luu.
189 My finding as to Mr Chan's credibility and the accuracy of the post-settlement spreadsheet compiled by him necessitate the conclusion that the contractual warranty was breached.
190 Mr Curwood contended both in opening (ts 14) and closing that cl 11 required a degree of objectivity. Clearly, the only inference from Mr Chan's evidence and conduct is that in his subjective opinion the takings fell significantly short of that level.
191 I find there are objectively reasonable grounds upon which he formed that opinion, those being that he had accurately and honestly recorded the takings (cash and EFTPOS), wages and rent and that the business was not taking $10,000 per week net over the three month period.
192 In this context, to fall significant short of $10,000 means to fall short of $10,000 in a manner which is important or of consequence: Macquarie Dictionary.
193 I am satisfied that the business earnings fell significantly short of the $10,000 net a week figure referred to in the future earning representation and contractual warranty and that Mr Chan held the opinion that they did and there were objectively reasonable grounds upon which Mr Chan formed that opinion.
194 Mr Chan has abandoned any claim for specific performance of the contract pursuant to that clause and seeks damages only.
195 Any damages assessed are more fairly assessed under the CCA.
Was there an implied term in the contract?
196 Mr Luu, by his defence to the counterclaim, seeks to imply into the contract a term that the 'warranty is only valid if the purchaser continues to operate the business in the same manner and does not change the operation of the business'.
197 A term can only be implied if it is:
(a) reasonable and equitable;
(b) necessary to give business efficacy to the contract so that no term will be implied if the contract is effective without it;
(c) so obvious that it 'goes without saying';
(d) capable of clear expression;
(e) not contradictory of any expressed term of the contract.
(BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 226; Servcorp WA Pty Ltd v Perron Investments Pty Ltd [2016] WASCA 79).
198 These conditions are applied cumulatively in determining whether the implication should be made.
199 A term may not be implied merely because a court might think the term is a desirable improvement of the contract or that it is reasonable in the circumstances to make the implication: Servcorp WA Pty Ltd v Perron Investments Pty Ltd [74].
200 In considering whether the term is reasonable and equitable, it is not sufficient that the term is reasonable from the viewpoint of one party or reasonable in relation to the specific contract. The term must operate reasonably and equitable as between the parties.
201 In determining whether the implied term is necessary to give business efficacy to the agreement, the word 'business' emphasises that whether the alleged term is to be implied must be evaluated objectively by reference to the commercial purpose of the contract as revealed by the objective framework of facts within which the contract came into existence including the nature and character of the subject matter of the contract and the market in which the parties are operating: Servcorp WA Pty Ltd [136(a)] (citation omitted).
202 The desire is to give such business efficacy to the transaction as must have been intended by both parties who are businessmen: Servcorp WA Pty Ltd [136(b)].
203 If a term is not necessary to make the contract work it will not be implied. In Con-Stan Industries the High Court held that the alleged implied terms were not necessary for the business efficacy of the contract because 'a contract is capable of a sensible operation in the absence of the implied term'.
204 The term must be obvious in accordance with the officious bystander test. It is not necessary that the implied term should be obvious in the sense of being immediately apparent even upon a superficial consideration of the express terms of the contract and the objective framework of facts from within which it came into existence: Servcorp WA Pty Ltd [159]. If it is not possible to choose between several competing formulations (Servcorp WA Pty Ltd [158] (citations omitted)) it cannot be so obvious that it goes without saying.
205 A term is not incapable of clear expression merely because it operates by reference to standards such as 'reasonableness' or because one of the parties in the context of litigation disagrees on its formulation: Servcorp WA Pty Ltd [164] - [166].
206 An implied term will not necessarily contradict an express term merely because it modifies the effect of the express term since every implied term will invariably have that effect: Servcorp WA Pty Ltd [146]. However an implied term must not contradict an express term, either directly or where it is apparent from the face of the document that the parties averted to the point in question and either deliberately rejected it or deliberately refrained from dealing with it. If an express terms was intended to cover the field that would otherwise be occupied, at least in part, by the implied terms there would be no room for the implied term: Serve Corp WA Pty Ltd [145] (citations omitted).
207 The five criteria are not met in this case and the term ought not be implied.
208 I am not persuaded that the asserted implied term is so obvious that it goes without saying or is capable of being clearly expressed as is evidenced by the various formulations used by Mr Luu at the trial.
209 Paragraph 5 of Mr Luu's amended reply and defence to counterclaim seeks an implied term 'that the defendant will take all reasonable and proper steps to conduct the business in a business-like manner'.
210 Paragraph 6 pleads an alternative implied term, 'that the defendant will conduct the business in a manner similar to the way in which the plaintiff had conducted the business'.
211 In Mr Luu's closing submissions he sought to imply a term that 'the purchaser continues to operate the business in the same manner and does not change the operation of the business'.
212 Other than noting the various formulations of the implied term, I shall treat the closing submissions as identifying the term sought to be implied.
213 It is clear from Mr Luu submissions in respect of Mr Chan's alleged breach of the implied term that Mr Luu considers that 'operating the business in the same manner' and not changing the way the' business operates' encompasses not changing the staff.
214 Mr Papamihail took me to Mr Chan's evidence where Mr Chan agreed Mr Luu said that if he wanted to achieve the $10,000 net per week figure he should not change the way the business operated (ts 56, 73, 75) and said he understood it was important that the business continue to operate in the same way after he took ownership (ts 56).
215 In circumstances where it can be inferred that Mr Chan contemplated the employment of, at least, some of his son, wife and daughter, it is not so obvious that it goes without saying that he would have agreed to a term imposing restrictions on the employment of staff or requiring him to maintain the pre-settlement staff.
216 In addition, the phrase is not capable of clear expression because of the breadth of the expressions 'operate the business in the same manner' and 'not change the operation of the business'.
217 Further, I do not consider those words are necessary to give business efficacy to the contract.
Was there a breach of the implied term?
218 In the event that I am in error in failing to imply the term referred to in Mr Luu's written closing submissions, Mr Luu has not satisfied me that the implied term has been breached.
219 The words to 'operating the business in the same manner' and 'not change the operation' of the business must be given there ordinary meaning in the commercial context within which they appear.
220 The 'manner' in which a business operates refers to the way in which something is done and the operations of the business refer to the activities of the business or the functions of the business.
221 Pre and post-settlement the business was a nail salon, the business' price list are almost identical, the services provided are for all intents and purposes are almost identical, the premises are identical. Customers were free to choose whichever nail technician they wished. The way in which the business operates has not changed. The activities or functions of the business are the same.
222 I reject Mr Papamihail's submission that the changes in staff post-settlement show that Mr Chan breached the implied term. The implied term does not extend to a requirement that the staff remain the same. Clearly, in a business of this nature, staff come and go. To imply that the 'manner' or 'organisation' of the business requires that the staff remain the same is to give those words an extended and artificial meaning.
223 In any event Mr Chan's evidence was that in the first week of the business there were two new staff members, being his son and daughter. His son left shortly after the first week. Mr Chan said he dismissed one employee one week after settlement on the recommendation of Mr Luu (ts 67, 69). Another staff member resigned after Christmas. By the third week over a third of the staff had changed. Mr Chan agreed that Henry left on 8 March 2013 and until then he had been managing the staff and looking after the shop, the same as when Mr Luu ran the business. Mr Chan agreed that Henry was an important staff member who knew many of the clients and knew how to run the business. Mr Chan said Henry left as he was unhappy when Mr Chan tried to regularise the way wages and tax was treated (ts 74, 85) and told Mr Chan to go back to the irregular tax arrangement otherwise he would leave. By the weekend of 10 March 2013, Mr Chan said seven of Mr Luu's staff was still employed in the business and there were five new staff members.
224 Irrespective of the staff changes, I find the 'manner' and 'organisation' of the business remained the same.
225 Mr Chan's admission that he employed overseas students and did not check to see if they were qualified nail technicians does not assist Mr Luu's case. Mr Chan's evidence was that those students were experienced (ts 73) nail technicians. There is no evidence showing that such staff were less experienced that those whom they replaced or that the staff employed by Mr Luu were qualified nail technicians.
226 Mr Papamihail's submission that Mr Chan breached the implied term by increasing the number of employees and altered the wages structure is also rejected. The evidence as to the number of employees working during settlement week is exhibits 1.942 and 1.943. Each list shows that there were nine persons employed.
227 Exhibits 1.916 – 1.920 (an extract prepared for this trial containing the same information but in a different format as exhibits 1.647 - 1.654) shows that from settlement to 17 March 2013 the number of workers employed by Mr Chan varied between10 and 12. However that is of little assistance as it is not the number of employees which is of significance but the total number of staff hours worked per week.
228 The wages book (exhibit 1.338 - 1.370) maintained when Mr Luu ran the business has a total of eight employees listed as working at various times from 7 January 2012 to 17 November 2012, however there is no evidence establishing that this wages book records all the employees or records all their hours or was made contemporaneously. There is no evidence as to who compiled it and in what circumstances. Although it is a business record within s 7(C)(2a) of the Evidence Act1906 (WA), I have found other records kept by Mr Luu are inaccurate (exhibit 2, his cash book) and I do not place any weight on exhibit 1.338 - 1.370.
229 Accordingly, there is no reliable evidence from which I can establish the total number of staff hours worked has changed pre to post-settlement.
230 General evidence was given by Ms Wright that Mr Chan was inexperienced in the industry and was overwhelmed by it and stopped promoting 'her' business and that things were 'just different'. Ms Wright's evidence was demonstrably inaccurate because she estimated that by flicking through her invoices (exhibit 7) her average takings pre-settlement was $500 per week and post-settlement was just under $300 per week, a difference of $200 per week (ts 244). Mr Curwood's quick calculation after examining Ms Wright's invoices (exhibit 7) was that the average weekly invoices to Mr Luu was $341 and to Mr Chan $288, a difference of $53 per week. Ms Wright did not dispute these figures (ts 248). A closer inspection of the exhibit reveals the average for the 34 complete weeks under Mr Luu was $318 and for the seven complete weeks under Mr Chan $247, a difference of $71.
231 Ms Wright's evidence was that she continued to work in the business until 1 February 2013 (ts 243), about seven weeks after Mr Chan took over the business. Mr Chan agreed that when Ms Wright left the business he did not replace her and, accordingly, the waxing and beauty treatments she provided were no longer provided by the business (ts 72). Mr Chan accepted that there would be some flow-on benefits from customers resorting to the salon to use Ms Wright's services and then using some of the salon's nail services; however that effect was never quantified. Mr Aaron Chan said Ms Wright did not have many customers.
232 In the context of a business taking between $12,674 - $30,590 per week, the drop at its highest on average of $71 per week for seven weeks and $318 per week for six weeks is insignificant. Any flow-on effect would have been marginal.
233 Ms Wright struck me as an honest witness but clearly she is inaccurate and her evidence falls short of persuading me that the nature of business had changed or that the business was not being operated in the same manner as previously.
234 Mr Luu pleaded that the implied term was breached by Mr Chan, inter alia, terminating the services of key staff members causing the business to lose clientele, accusing staff members of stealing money, treated the existing staff poorly thus causing staff to be discontent and to resign, not allowing staff to keep tips or gifts brought by the clients and causing clients to cease patronising the business due to his conduct.
235 With the exception of terminating the services of staff, none of the other particulars have been established by the evidence in any shape or form.
236 Mr Luu has failed to satisfy me on the balance of probabilities that Mr Chan did not operated the business in the same manner as Mr Luu and/or changed the 'operation of the business'.
237 Therefore I am not satisfied there have been any breach of the implied term.
Consequences of a breach of implied term
238 I have found that there was no implied term and that, even if there was, there was no breach of the implied term.
239 I now consider what the position would be if there was a breach of the implied term.
240 In this regard it is of significance that Mr Luu does not seek to terminate or rescind the contract or recover damages for the breach of implied term but rather pleads that if the contractual warranty as to future earnings was made and if, in Mr Chan's opinion, the earnings fell significantly short of that level over the three month period, that shortfall is due to Mr Chan's breach of the implied term in changing the way the business operates.
241 This really is a plea as to causation, that is, that any losses suffered by Mr Chan were as a result of him changing the business and not as a result of any misrepresentations from Mr Luu.
Causation
242 Mr Chan must prove that the loss or damage claimed to have been suffered was because of the misrepresentations. The misrepresentations must cause the loss.
243 The misrepresentations do not need to be the sole cause of the loss; they do, however, have to be a cause of the loss: Henville v Walker [2001] HCA 52; (2001) 206 CLR 459. It is sufficient if they have a causal connection with the loss and damage suffered as a matter of common sense and experience. Whether causation is established is a question of fact.
244 Mr Papamihail suggests that changes to the business under Mr Chan's management break the chain of causation. In particular, he said that consideration must be given to Mr Chan's admissions that he changed the staff, employed some overseas students, altered the wage structure and failed to replace Ms Wright's services when she left.
245 I reject these submissions. It is clear that there were a number of staff changes. The evidence establishes that Henry left when Mr Chan tried to regularise the wage and tax structure. Other staff resigned. As I have previously indicated, it is not the number of staff that is relevant but the staff hours being worked and there is no reliable evidence from which that I could form a conclusion that the number of staff hours is different post to pre-settlement or that the rates of pay were different.
246 Insofar as the employment of overseas students is concerned, there is no evidence establishing that those overseas students were less experienced than those whom they replaced. Nor is there evidence to establish that those who were replaced were qualified nail technicians nor that the employment of overseas staff affected the takings of the business.
247 As far as Ms Wright's evidence is concerned, I accept that she was not replaced and I accept there may have been some flow-on effect for the business, however, as previously stated, the effect of not replacing her and thereby losing approximately $71 per week for seven weeks and $318 per week for six weeks is insignificant where the total takings of the business are between $12,674 and $30,590 per week.
248 Ms Wright's evidence that Mr Chan did not promote 'her business' does not establish that Mr Chan was not promoting his own business and her generalised description that things were 'just different' and that Mr Chan lacked experience in the industry and was overwhelmed by it falls short of breaking the chain of causation.
249 I reject the proposition that any real, essential, substantial, direct, appreciable or effective cause for the business failing to achieve the $10,000 a week net earnings was because of any changes to the business instituted by Mr Chan: Elders Trustee & Executor Co Ltd v EG Reeves Pty Ltd (1987) 78 ALR 193; Adelaide Petroleum NL v Poseidon Ltd (1990) 98 ALR 431.
250 I am satisfied that as a matter of common sense and experience that the misrepresentations have a causal connection with the loss and damage suffered by Mr Chan and reject the submission that any changes to the business post settlement broke the chain of causation.
Contributory negligence
251 Section 137B of the CCA enables the court to reduce damages if Mr Chan had contributed to the loss by failing to take reasonable care: Merost Pty Ltd v CPT Custodian Pty Ltd [2014] FCA 97.
252 This question of contributory negligence involves arriving at a 'just and equitable' but proportionate distribution as between the parties of the 'responsibility for the damages'.
253 It involves a consideration of the degree of the departure from the standard of care of the reasonable man, the relevant importance of the acts of the parties causing the damage and examination of the whole conduct of the parties: Pennington v Norris (1956) 96 CLR 10; Podrebersek v Australian Iron & Steel Pty Ltd (1985) 59 ALR 529.
254 The degree of departure from the standard of care of a reasonable vendor exhibited by Mr Luu was considerable. He controlled the business he was aware of Mr and Mrs Chan's interest in how much the business would clear at the end of each week. Mr Luu made the misrepresentations and agreed that the misrepresentation as to the future takings would be included in the contract.
255 I find that there was no departure from the standard of a reasonable purchaser exhibited by Mr Chan.
256 I reject the submission that there is any contributory negligence by Mr Chan or that damages ought be reduced to reflect any contributory negligence on his behalf.
Assessment of damages
257 Mr Chan seeks damages pursuant to s 18 of ACL or for breach of contract. Although contractual damages may result in a slightly different figure, it is appropriate in the circumstances to assess damages under ACL.
258 In this regard Mr Chan claims:
(a) The difference between the true value of the business as at date of settlement and the price he is contractually liable to pay, $650,000;
(b) The difference in stamp duty on the price payable.
259 The usual approach in assessing damages is to assess the difference between the price paid for the asset and its true value at the time of acquisition: Professional Services of Australia Pty Ltd v Computer Accounting and Tax Pty Ltd [No 2] [2009] WASCA 183 (Martin CJ).
260 In valuing the business it is appropriate to use the same cash component assumed by Mr Smit, and relied upon by Mr Chan, to establishing the pre-settlement earnings of the business. Mr Smit's evidence, which I have accepted, is that the cash component of the business at that time was approximately 33% of the businesses income. It is not appropriate to value the business on an 'asset ' replacement basis which ignores the cash component of the business.
261 In my view, the appropriate assessment of the true value of the business as at the date of settlement is to use the return on investment method of valuation. Mr Smoothy's evidence was that using this method the business' value including plant, equipment, stock and goodwill as at 13 December 2012 was $315,754.
262 I accept that this is the proper method to value the business. Accordingly, the difference between the true value of the business at the date of settlement and the contract price is $334,246.
263 It is appropriate to allow damages for the excess in stamp duty paid of $19,090.60.
264 Interest is payable on $275,336 ($334,246 less the $78,000 owed to Mr Luu plus $19,090.60) at the rate of 6% per annum from 14 December 2012 until judgment.
265 The orders I propose are:
1. The defendant pay the plaintiff the sum of $78,000 together with interest to be agreed by the parties or determined by the court.
2. The plaintiff pay to the defendant the sum of $353,336.
3. The damages awarded to the defendant of $353,336 be set off against the damages awarded against it of $78,000 plus interest and the plaintiff pay to the defendant the balance together with interest at the rate 6% per annum from 14 December 2012 until judgment.
266 I shall hear counsel as to the precise terms of the order and costs.
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