Mahmut, C. v Poyala Pty Ltd

[1987] FCA 352

IN THE FED= COURT OF AUSTRALIA ) )

NEW SOUTH WALES DISTRICT REGISTRY	)	No. G 12 of 1985
)
GENERAL DIVISION	)

BEmEEN: CAVIT MAHMUT and AYSE MAHMUT

Applicants

AND: POYALA FTY. LIMITED

First Respondent

GEORGE KOVARI	and JUDITH
KOVARI

Second Respondents

MINUTE OF ORDER

JUDGE MAKING ORDER	: Neaves J.
DATE OF ORDER	: 10 July 1987
WHERE MADE	: Canberra
THE COURT ORDERS THAT:

1.	There be judgment for the applicants	against the
respondents in the sum of $10,000.

2. The respondents pay the applicants' costs of the

proceeding.

Note:	Settlement and entry	of orders 1s deal
of the	Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA

) )

M SOUTH WALES DISTRICT REZISTRY

) No. G 12 of 1985

)

GENERAL DIVISION

)

BETWEEN: CAVIT M A H M U T and AYSE MAHMUT

Applicants

AND :	POYALA	PTY.	LIMITED
First Respondent

GEORGE KOVARI and JUDITH

KOVARI

Second Respondents

m: Neaves J.

m: < >

REASONS FOR JUDGMENT

This proceeding arises out of the purchase by Cavit Mahmut and Ayse Mahmut ( "the applicants" 1 of a take-away food

business, called Judy's Food Bar, pursuant to a contract dated

12 October 1983 between the applicants and Poyala Pty. Limited

("the first respondent") of which George Kovari and Judith

Kovari ("the second respondents") were, and are, the sole

shareholders and directors. The applicants clalm damages under

the Trade Practices Act 1974	(Cth) ("the Act")	for alleged
breaches of s.52 thereof.

Backsround

By their amended statement of clalm the appllcants

allege that the flrst respondent engaged In conduct that was mlsleading or deceptlve In the sale of the busmess to the

applicants. Particulars of the conduct relied upon are -

The flrst respondent, by its agent

Philllp Charles Mil r, orally

represented to the appllcants that the

busmess was maklng a profit of $1,500

to $1,800 per week to a husband and

wife both working in the business;

Each of the second respondents orally

made representations	to the applicants
to the same effect;

Mr Kovari orally represented to the

applicants that the lessor of the premlses had stated that it would

provlde the applicants	with a new lease
upon application;

Mr Kovari orally represented to the

applicants that the leased premises were

part of building a subject to a

preservation order and, therefore, would

not be developed.

It is alleged that the representations (a) and (b) were

false to the knowledge of each of the second respondents and that the representations (c) and (d) were	false	to	the
knowledge of Mr Kovari.

The applicants allege that they suffered loss and

damage as a consequence of relying upon the misleading and deceptive conduct of the first and second respondents. Relief is sought against the second respondents on the basis

that they were involved in the contraventions of s.52 of the

Act by the first respondent (see 5 5 . 8 2 and 75B of the Act).

3 .

The business was conducted from shop premises at

the corner of Little Hunter Street and Curtin Place, Sydney.

Little Hunter Street is a narrow street leading from the

northern side of Australia Square. The building in which Hunter Street to the complex known as

the shop was

situate had a frontage to Hunter Street and was known as

10-14 Hunter Street, Sydney. In that building were the

premises occupied by the New South Wales Sports Club

Limited ("the Club"). The shop premises, which consisted of a ground floor and basement, were held under lease from the

Club, Mr and Mrs Kovari being the assignees under a deed

dated 31 August 1979 of a lease which had been granted in

1972 for a term of 15 years from 1 April 1972. The rent reserved in respect of the last 5 years of the term was $12,000 per annum. There was no provision in the lease for the extension of the term granted.

The representations relied on by the applicants are said to have been made either in conversations between the

applicants and Mr Phillip Charles Miller, a business broker

engaged by the second respondents to sell the business, or

in conversations between the applicants and the second

respondents at some of which Mr Miller was said to be

present. At the relevant time Mr Miller carried on business

under the firm name P. Miller & Co. at 45 Market Street,

Sydney.

4 .

It is common ground that the first meeting between

the applicants and the second respondents took place early

in August 1983, that a contract (which did not proceed) was

signed on 23 September 1983, that a further contract was

signed on 12 October 1983 and that settlement of the sale

took place on 14 October 1983. I do not think it is an

exaggeratlon to say that those basic facts are almost the

only facts as to which the parties are agreed. There is

almost no consensus as to when particular events occurred,

or as to what meetings between the participants. took place, or as to what was said at any

Dr Mahmut, who to Australia in May 1983. He is by profession a geologist, came

was unable to btain

employment in his chosen profession and began to make

enquiries with a view to purchasing a small business. As a

result of consulting the classified advertisements published

in the "Sydney Morning Herald" newspaper on 23 July 1983, he

and his wife went to see Mr Miller. The first meeting with

Mr Miller, which took place on 26 July 1983, was concerned

with a business	other	than	that	the subject of this
proceeding.

Instructions to sell

Prior to Dr and Mrs Mahmut seeing Mr Miller on 26

July 1983, Kovari to put the Mr Miller had received instructions from Mr

business on the market. There is a

dispute as to when those instructions were given. There is

5 .

also a dispute as business was given to to what information concerning the

Mr Miller by Mr Kovari.

Mr Hiller, whose evidence was taken some time

before the commencement of the main hearing, gave evidence

that he received those instructions about 17 May 1983. He

had no independent recollection of the date and relied

heavily on a document (Exhibit 1) bearing that date which he

completed setting out some of the details of the business. It may be noted that a formal agency agreement authorising

Mr Miller to sell the business was signed by Mr Miller and

Mr Kovari on 1 August 1983 but that circumstance throws no

light on the question when Mr Miller first received

instructions to put the business on the market. Mr Kovari

said that he had previously signed an agency agreement

authorising Mr Miller to sell the business but that document

is not in evidence.

It was suggested to Mr Miller in cross-examination that the conversation which he had with Mr Kovari took place

some time earlier - as early as February or March 1983. It

was put to him that the conversation had taken place at a

time when food shops in a new complex in the vicinity known

as the Hunter Connection were commencing to open and that

that was earlier than May 1983. However, when Mr and Mrs

Kovari gave evidence, they denied that any conversation

giving instructions to sell the business took place until

some time in July 1983. They both said that there had been a conversation with Mr Miller in June 1982 but that they had

6.

not spoken to Mr Miller again until July 1983. The version

of events whlch was subsequently given by Mr and Mrs Kovari

was not put to Mr Miller in cross-examination.

In the light of Mr and Mrs Kovari's evidence that

the meeting with Mr Miller took place in July 1983, counsel

respondents, attentlon to the informatlon in hls final submissions, drew

for the

recorded on the document that

the lease of the premises had "Approximately three and a

half years to go". It was said, and correctly, that in May 1983 the unexpired term of the lease was three years and ten months. The question was asked: What reason could there be, if the document was prepared in May 1983, for recording the unexpired term of the lease as less than it, in fact,

was? Did not the language used suggest that the document

was prepared at a much later date?

The evidence does not enable a finding to be made

whether Mr Kovari, in giving information to Mr Miller, used

the precise words recorded as to the unexpired term of the

lease or whether Mr Miller made an approximation from what

he had been told. The entry is but one of the curious features of this matter. If one were postulating complete

accuracy, one would have to conclude that the document was

prepared much closer which it would have been true to to 30 September 1983, the date upon

say that the unexpired term

of the lease was three and a half years. But so to conclude

makes it almost impossible to fix a timetable for the maklng

7 .

of the alterations and additions to the document to which	I
will refer.

There is no orlginally recorded on the document dated 17 doubt that some of the details

May 1983 were

subsequently varied. Some additlonal information was added.

Mr Mlller said that this was in accordance with the practice

which he followed. As a vendor informed him of changed

circumstances or provided additional information about a

business, he made further notations on the sheet recording the original particulars. He said that he had kept in touch with Mr Kovarl over the course of some months and had been given additional material concerning the business from tlme

to time.

The document dated 17 May 1983 records the asking

price of $120,000, the address and nature and the owner's name and telephone of the business

number. Although there

are some Inconsistencies in Mr Miller's evidence, I am satisfied that, when originally completed, the document also recorded the following details:

Rent : $1,000 per month, approximately

$250 per week

Lease : Approximately three and a half

years to go

Turnover : $4,500 - 5 , 0 0 0 +

Profit	: $2,000
Trial	: Yes

Wages and staff : $1,000

Trading hours : Monday - Friday 6.00 a.m. - 5.00

p.m.

8.

Mr Miller said that, at or shortly after the

details were first given to him, he made certain

calculations, in the nature of a crude profit and loss

statement, on original calculation was as follows: the reverse side of the document. The

Turnover $4,500

Rent $ 250

Wages	1,000
Purchases	1,300

150 Expenses approx. 2,700

$1,800

There is also a notation "Vendor says $2,000 nett".

The following additions or alterations to the

document were document the figure shown against the subsequently made. On the front of the

item "Wages and staff"

was altered to read which shows the turnover of the business for "Approx. $900". A notation was made

the week ending

1 July 1983 as $5,285. A further notation "Vendor 4 yrs"

was made. Mr Miller thought the latter notation meant that

the vendor had been in the business for approximately that period of time. The figures on the back of the document

were also altered. The turnover figure was increased to

$5,000, the wages were reduced to $900 and the purchases

increased to $1,500. Total expenses were then shown as

$2,800 and mathematically accurately, as $1,800 - $2,000. the resulting profit figure shown, ot

Mr Miller

said that the amended figures for wages and staff and for purchases were given to him by Mr Kovari.

9.

Mr Kovari, in Miller the details recorded on his evidence, denied having given Mr

Exhibit 1. Accordlng to Mr

Kovari, he had become acquainted with Mr Miller when Mr

Miller sold a business in whlch he had been Interested some

time earlier. He said he talked to Mr Miller in June 1982

about selling Judy's Food Bar. He dld not again speak to Mr

Miller until July 1983 when he had a conversatlon with him

in Little Hunter Street outside the shop. Mr Miller asked

whether he was interested in selling the business. Mr

Kovari said he had not considered selling but would sell if

the price were right. Mr Miller asked him what was the

turnover of the business. Mr Kovari replied that the

turnover was $4,500 to $4,600. In response to ther

questions Mr Kovari said the rent was $230 per week and that the lease had three years eight months to run. At the end of the conversation Mr Kovarl told Mr Miller to put the business on the market.

In his evidence in chief, had a second conversation with Mr Miller a Mr Kovari said that he

few days later.

In that conversation, in response to questions from Mr Miller, Mr Kovari said that the wages were $760 - $960, and electricity, telephone and other expenses $170. Mr Kovari

also said he told Mr Miller that he had not calculated what

was the cost of the raw materials used in the buslness. He

said he had agreed with Mr Miller's suggestlon that the cost

of raw materials in a sandwich bar business was about 40 per

centum of turnover. He said that it was Mr Miller who

. 10.

mentioned the figure of	$120,000 as the amount he	would get
for the business.

In cross-examination, Mr Kovari said that,

immediately following this discussion with Mr Miller, he

noted certain figures on a piece of paper. It 1s of

interest to note that, in disclosing the existence of the

paper to the solicitors for the applicants, the solicitors

for the respondents in a letter dated 3 February 1986

described the paper as “notes made by Mr George Kovari at a

meeting with Mr Phillip Miller on Csicl late May/early June

1983”. The document includes the following notations:

Rent $ 230 Turnover $4,500

Wages 760 - 960

Other expenses 170

Materials 1,800 - 1,900

Each of those figures was said to be an estimate. Mr Kovari

agreed that he had given to Mr Miller the figures for rent,

wages, other expenses and turnover. He denied that he had

given to Mr Miller a figure for materials. He said the

figure of $1,800 for materials was determined by Mr Miller as being 40 per centum of the estimated turnover.	On the
document, a figure of $2,960 appears under the figure	$1,800

as representing the total of the expenses but it is not

clear when the items were totalled	or when the figure	$2,960
was written on the document.

The document also contains, under the turnover

figure, the following notation: “Prf 1200 - 1400”. Mr

11.

Kovari agreed that “Prf” was an abbreviation for profit. He said that Mr Miller worked out a proflt figure of $1,400 - $1,500 based on the figures already dlscussed but that he,

Mr Kovari, wrote down $1,200 - $1,400 as being more

realistic. He denled that he had ever quoted to Mr Miller a

flgure for proflt.

The document also contalns a notation showing

turnover $4,800 - $5,200 followed by a Hungarian word said

by t4r Kovari to mean “under” and the figure 5000. Mr Kovari

said he had made those notations following a telephone

conversation with Mr Miller towards the end of September

1983.

Mr Miller agreed that he had discussions with Mr

Kovari at the shop premises concerning the figures relating to the business and that on more than one occasion Mr Kovari

gave him up to date information. He could not recall any

occasion on which Mr Kovari made notes of the figures

discussed. He did not agree that Mr KOVaKi had told him

that wages varied between $760 and $960 per week. He said

he could recall that the the figure for wages on his document (Exhibit reason given for the decrease of

1) from $1,000

to $900 was that one of the staff had left to go on holidays

and Mr Kovari was doubtful whether he would replace her. Mr Miller did not agree that Mr Kovari had told him that the cost of purchases uas between $1,800 and $1,900 a week. He did not recall being told that the net profit was $1,200 to $1,400 per week. Mr Miller said he did not remember any

12.

occas1on on which he and Mr Kovari worked out together

figures for the week y net profit of the business.

It was put to Mr Miller in cross-examination that

he said to Mr Kovari at what Mr Kovari had described as the

second meeting wlth hlm in July 1983, that the usual figure for purchases as a percentage of turnover was 40 per centum.

Mr Miller dld not recall any such conversation. He sald

that, in any event, he would not have referred to a percentage as high as 40. He sald the correct figure at

that time for a sandwich bar business was about one thlrd.

Mr Miller said he recalled discussing with Mr

Kovarl the effect which the openlng of food shops in the Hunter Connection complex would have by way of decreasing

the turnover of his business. He thought Mr Kovari had told

him that the turnover did decrease following the opening of

those shops. Mr Kovari's evidence was that the turnover

decreased in March 1983 due to the opening of food shops in that complex. He also said that the turnover had "returned to normal" in about June 1983.

I am satisfied that the details which I have found

were recorded on the document when it was originally prepared were given to Mr Miller by Mr Kovari on or about the date the document bears. I do not accept Mr Kovari's evidence that no information about the business was given to

Mr Miller prior to July 1983. The notation on the document

recording the turnover of the business for the week ending 1

13.

July 1983, a notation which was clearly made some time after

the document was originally prepared, makes acceptance of Mr

Kovari's version of events improbable. There is no doubt on

the evidence that Mr Miller had had other prospective buyers

interested in the business, their involvement probably

extending, according to the evidence, over a period of a

couple of months. That circumstance also makes Mr Kovari's

version improbable. In so far as there is a conflict

between what Mr Miller says he was told by Mr Kovari and Mr Kovari's evidence in that regard, I prefer the evidence of Mr Miller.

The nesotiations and the purchase

According to Dr Mahmut, he and his wife again saw

Mr Miller at his offlce on a date between 8 and 11 August

1983 and had a conversation with him concerning the

business. Mr Miller told him that the takings of the

business were $4,500 - $5,000 per week, the net profit was $1,800 per week, wages $900 per week, purchases $1,500 per week, miscellaneous items $150 per week and that the vendor guaranteed a turnover during a proposed trial week of

$4,500. Mr Miller also said, reading from a book, that the

rent was $1,000 per month and that the lease was for three

and a half years plus three years' option. However, Mr

Miller was, Dr Mahmut said, uncertain at that stage whether

the business was available for sale as another purchaser was

interested. Mrs Mahmut's evidence as to what Mr Miller said

concerning the business was to the same effect.

14.

In cross-examination it was put to DK Mahmut that

MK Miller had told him that the business “was doing between

$1,500 and $1,800 profit”. DK Mahmut denied that any statement to that effect had been made by Mr Miller at that stage but added that the figure of $1,500 was mentioned at a meeting attended by MK Miller and Mr and MKS Kovari at the

beginning of September 1983. Reference will be made to this

meetlng later In these reasons.

MK Miller’s recollection was that, in a

conversation in his office prior to the first meeting

between DK and Mrs Mahmut and Mr and MKS Kovari, he would

have told DK Mahmut what had been recorded initially on

Exhibit 1 with this qualification quoted the figure for profit there recorded, namely $2,000, that he would not have

because “the business had depleted somewhat by reason of

opposition having opened in the area”. He said he quoted

$1,500 - $1,800 profit. In cross-examination he agreed that

what had led him Kovari was the expectation that food shops would commence to revise the figures downwards with Mr

trading in the Hunter Connection complex	with consequent
adverse effect on the business.

In cross-examination MK Miller agreed that he could have said to DK Mahmut that the profit had been as high as

$2,000 though he did not think he had mentioned that figure

to him. He added that the profits were down to $1,500 to

$1,800 because the turnover had dropped a little.

15.

MK Miller that the net profit of the business was $1,300 to $1,500 per was asked whether he had told Dr Mahmut

week. He sald he had not done so. He agreed that, at a

later date (probably some time in October 1984), he informed

DK Mahmut’s solicitor that he had quoted those figures to Dr

Mahmut. Mr Miller said that this Occurred because he had confused Judy’s Food Bar with another business. It was also

suggested to MK Miller that he mentioned those figures in a

conversation In April 1985 with the respondents‘ solicitors.

MK Miller was unable to confirm or deny that suggestion.

Dr place between himself and Mr Miller on 15 August 1983 when Mahmut said that a further conversation took

MK Miller said that, as he had not been able to contact the

other intending purchaser, he regarded the business as belng

available for purchase. According to Dr Mahmut, Mr Miller

again quoted purchases, miscellaneous expenses and the figures for takings, profit, wages,

rent which had been

quoted at the meeting between 8 and 11 August 1983 and

stated that the lease was for three and a half years with an

option for a further three years. He also said that the

business hours were from	6.00 a.m. to 5.00 p.m.	Monday to
Friday.

In cross-examination Dr Mahmut said that, during

the meeting on 15 August 1983, Mr Miller told him that the

business was making $1,800 profit, the purchases were $1,500

. - .I

and the takings $4,500 to $5,000. He said that he asked MK Miller why the food cost expressed as a percentage of

16.

takings was Mahmut, Mr Miller replied as low as 30 per centum. According to Dr

that 30 -35 per centum was normal

for take-away shops, the percentage for coffee lounges being

20 - 25 per centum. He sald that Mr Mlller added: "But	you
can ask the owners about it".

Mr Miller said that, based on lnformatlon conveyed

to hlm by Mr Kovarl. he informed Dr and Mrs Mahmut that the

building "was under some preservation order and would not be

able to be pulled down". He also said that he informed Dr Mahmut that there was an existing lease of the premises and that Mr Kovari had said that he, or the purchaser of the busmess, "could get a longer lease but the rent would go up". According to Mr Miller, Mr Kovari had also said that

he did not know by how much the rent would increase. Mr

Miller did not identify when these statements were made and

in this regard the comment should be made that Mr Miller was

quite indefinite in his recollection	of	the dates on which
specific events occurred.

At the meeting on 15 August 1983 arrangements were

made for Dr and Mrs Mahmut to inspect the business the

following day at 3.30 p.m.

Dr Mahmut Mr Miller to the premises on 16 August 1983. said that he and Mrs Mahmut accompanied

Mr Miller

agreed that this occurred but was unable to recollect the

date. According to both Dr and Mrs Mahmut, Mr Miller

introduced Mr and Mrs Kovari but no conversation concerning

17.

the business took place on that occaslon. Mr and Mrs Kovarl

agreed that the meeting took place and	that the business was
not then discussed.

Dr Hahmut sald that on more than one occaslon

prlor to a converatlon whlch took place on 23 or 26 August

1983 wlth Mr and Mrs Kovarl he went to Australla Square and

from the mezzanine floor of the buildlng on that slte

observed the number of people frequentlng the shop. He sald

that he was alone on those occasions. According to Mrs

Mahmut there was an occaslon on which she and the children

accompanied Dr Mahmut on such a visit.

According to Mr and Mrs Kovari, Dr and Mrs Mahmut

came to the shop a couple of days after 16 August 1983 with

their two	children. A dlscussion took place about family
and other	general topics. There was, again, no discussion

of the business. In the course of conversation, Dr Mahmut said that he had had some experience in operating a small

business, in England. Dr Mahmut in his evidence did not

mention this conversation concerning visit to the shop. According to him, a

his business experience in England

took place at a later meeting and, again, during the trial

period. Mrs Mahmut referred in her evidence to a vlsit to unclear as to when it took place. the shop by Dr Mahmut and herself and the children but was

According to Dr Mahmut, Mr Miller telephoned him

some days after 16 August 1983 to confirm that the business

18.

was avallable for sale and to Inquire whether he was

interested in purchaslng It.	Dr Mahmut said he expressed
interest.

Dr Mahmut sald that, on the followlng day (which

was either 23 or 26 August 1983), he and his wife returned

to the premises with Mr Mlller and saw Mr and Mrs Kovari.

Dr Mahmut asked what was the net profit of the buslness. Mr

Kovari replied: "Net proflt to husband and wife is $1,800

per week". He also said, according to Dr Mahmut, that the

takings of the business were $5,000 average per week, that

the rent was $1,000 per month and that he had a three and a

half year lease plus a three years' option. Mr Kovari also

said that they had six casual employees and they pald $900 per week wages. In response to a question from Dr Mahmut,

Mr Kovari said: "We open 6 o'clock in the morning and we

close 5 o'clock in the afternoon". Mrs Mahmut asked: "How much business you do early morning and late afternoon?" Mrs Kovari replied: "We come early to do the preparations and

to avoid the traffic because we come by car and in the

afternoon we do not rush to go home. We do the cleaning.

Therefore, we leave the shop open but we only take between $10 and $20 after half past three". Mr Kovari also said that the building was classified by the National Trust and

could not be demolished. Dr Mahmut asked if he could have

the busmess accounts as he would need to arrange a small

loan from his bank. Mr Kovari said he would talk to his

accountant and obtain a copy.

19.

In cross-examination as to what conversatlon took

place on thls occasion, Dr Mahmut denied that Mr Miller asked Mr and Mrs Kovarl If they would introduce Dr Mahmut to the landlord. He also denied that on that occasion he said that he wished to open the business at 7.00 a.m. and close

it at 3.00 p.m. He said he dld not ask Mr Kovari about the

buildlng being an old bullding. He also denled that either he or Mr Miller sald that the lease was very short. Asked whether Mr Kovari had said that he could go to the landlord and ask for an extension of the lease for three years, Dr Mahmut replied that that had not been said In his hearlng. He said there was no dlscusslon about including something m the contract for the sale of the buslness to make it sub~ect

to the extension for three years belng granted.

Mrs Mahmut's evidence as to what conversatlon

occurred at the meeting on 23 or 26 August 1983 was

substantially in accord with what Dr Mahmut had said. There

were, however, some differences. In addition to the

Information which Dr Mahmut had said Mr Kovari gave at the

meeting, Mrs Mahmut said that Mr Kovari had said that the

purchases were $1,500 per week. She also said that, in response to a request, Mrs Kovari gave Dr Mahmut a piece of

paper on which he wrote the name of the bank where the first

respondent had its business account.

Both Mr and Mrs Kovari denied that any conversation

such as deposed to by Dr and Mrs Mahmut took place except

that Mrs Kovari agreed that there had been a request by Dr

20.

Mahmut to be informed of the bank where the business account

was kept. Mrs Kovari said, however, that that request was

made some time In September 1983. In particular, Mr

Kovari denied that on that occasion he had given Dr Mahmut any figures for net profit of the business, or for turnover, wages, number of staff, purchases or rent or as to the

period remaining of the term of the lease or as to the buildlng being protected from demolition. He said a

conversatlon as to the hours of business took place on a

later occasion when Dr Mahmut said that he would like to open at 7.00 a.m. and close at 3.00 p.m. In relation to Mrs

Kovari's participation in any business	conversation, he
said :

"My wife presents her own conversation and never

ever business conversation - not ever Mr Mahmut: not ever Mr Miller. I have a conversation with

them.... My wlfe never ever have a conversation in business matter whatsoever".

According to Mr Kovari, Dr and Mrs Mahmut came to

the shop with Mr Miller some days after the initial meeting

but still in August 1983. This, he said, was in the

afternoon after 3 o'clock. Mr Kovari said that he

following conversation took place. Mr Miller stated that Dr and Mrs Mahmut wished to buy the busmess. Mr Miller or Dr Mahmut said that the building was very old to which Mr

Kovari replied that some renovations had been made and that

the building was registered under the National Trust. Dr

Mahmut referred to the lease as being very short. Mr Kovari

said that three years eight months remained. Mr Miller said

21.

that the lease was stlll very short to which Mr Kovari

replied: "I know the manager, Mr Harry Sly, in the Club and

I can go up and ask for three years' extension for my

lease". Mr Kovari asked Mr Miller to send a draft contract

to his sollcitor. Mr Mlller said the draft would include a

provision that, If the three years' extension was not granted, the deal would not proceed. Mrs Kovari's evidence

as to what took place was substantially to the same effect.

Mr Kovari said above conversation, he saw Mr Webster of the New South Wales that, in late August, after the

Sports Club Limited, Mr Sly having retlred. Mr Kovarl asked

for a three years' extension of his lease at the same rental

as was payable under the existing lease. According to Mr

Kovari, Mr Webster said he would put the request to the

house committee of the Club which met every four weeks and, if the house committee approved, the matter would go to the board of directors. Mr Webster asked that the request be

put in writing. It was not, however, until 6 September 1983

that Mr Kovari wrote to the Club. The letter refers to the

grant of an option for renewal and reads as follows:

"We refer to the lease dated 2nd May, 1972 between the club and Vlahos which was subsequently assigned to us. The lease expires

on 31st March, 1987 and we would like to now

obtain from the club an option to renew the l ase

for a further three years to 31st March, 1990.

We would be most appreciative If you would give

this request your favourable consideration and

let us have your decision as soon as possible."

22.

Mr Kovari also said that, a few days after the

meeting with Mr Webster in late August 1983, he again saw Dr

Mahmut who was alone. Dr Mahmut asked what was the

turnover. Mr Kovarl said it was $4,000 - $4,500 and added

that Dr Mahmut would see what it was In the trial period.

Mrs Kovari also gave evidence of thls conversation. She

said that Dr Mahmut asked what were the takings and her

husband replied: "I guarantee $4,500 for the trlal and you

will see how much we take".

On 1 September 1983 Dr and Mrs Mahmut paid $5,000

by way of part deposit to Mr Miller at his office. Dr

Mahmut said that Mr Miller read to him the salient

provlsions of a draft contract which he, Mr Miller, had prepared for another prospective purchaser of the buslness.

The draft included a provision placing a value of $10,000 on

the equipment and a figure of $110,000 for goodwill. Dr

Mahmut objected to this and Mr Miller said he would value

the equipment and amend the draft contract to include the

equipment at its current value. Dr Mahmut said, in

cross-examinatlon, that he did not have any conversation

with Mr Miller to the effect that the contract should be expressed to be conditional upon the granting of an option

f o r a further lease.	Mr Miller made an appointment with Mr
Morck of Messrs Morck	& Hill, Solicitors, for the following

day. On that day he introduced Dr Mahmut to Mr Morck and Dr Mahmut instructed the solicitors to ack for him in connectlon wlth the purchase. Mr Hill of that firm

subsequently acted for Dr Mahmut.

c

23.

Dr Mahmut sald that early In September 1983 he received the 1981 and 1982 accounts of the business. In his evldence in chlef he said he obtalned the documents from Mr Miller but in cross-examlnatlon he sald he was not sure who gave him the documents. The documents which Dr Mahmut sald

he received were not tendered In evldence. They were also

not disclosed in the affidavits of discovery sworn by Dr

Mahmut. Dr Mahmut said that at about the time he recelved

the 1981 and 1982 accounts he asked Mr Miller whether he

could obtaln the 1983 accounts. According to Dr Mahmut he

subsequently went to the shop with Mrs Mahmut and Mr Miller

and asked Mr and M r s Kovari whether he could have the 1983

accounts. Mr Kovari said that the 1983 accounts were not

ready and added: "Since actual $1,800 per week". 30 June 1982 we are making our

Dr Mahmut commented that the 1981

and 1982 accounts did not show $1,800 per week profit and Mr

Kovari replied: "Nobody in this business shows their actual takings, otherwise we pay too much tax". Dr Mahmut also

commented that according to Mr Kovari's estimation the

purchases were only 30 per cent. but on the accounts they were very high. Mrs Kovarl said: "We take some home as well. We do not make separate shopping. This is why they are high".

In cross-examination,

on what was said concerning the weekly net profit of the

business. He said:

Dr Mahmut expanded somewhat

c

24.

"Mr Miller first told me $1800 profit and when we

went and saw MC and Mrs Kovari at the shop In early September and when Mrs Kovari told me, 'The mmimum proflt per week is $1500 but we averaged $1800 per week and the profit is between $1500 and $2000 per week', then MC Miller told me that

1 s $1500 minlmum, $1800 average per week."

Mrs Hahmut also gave evldence of thls conversatlon. She confirmed the conversatlon as recounted by Dr Mahmut. She also sald that she had sald: "How can you be sure you

are maklng $1,800 net profit to husband and wife?" to which

Mrs Kovari replied: "Oh, this is a nice shop. You will see

when you buy the shop. It is really good. We are maklng

net profit to husband and wlfe $1,800". Mrs Mahmut said

that Mrs Kovari also	stated that the mlnlmum net profit was
$1,500.

Mr and Mrs Kovarl both denled that any such

conversation took place. In particular, they denled that

there was any discussion about the takings or the net profit

and they denied that	any request had been made for the
business accounts.

MC Miller prepared a draft form of contract and

sent copies thereof to the solicitors for the respective

parties. This was done between 1 and 5 September 1983.

Dr Mahmut's evidence was that, during the first

half of September - it was suggested to Dr Mahmut it was 5

September 1983 but he thought it more likely to have been 10

September 1983 - Mr Hill explalned to hlm the terms of the

b

2 5 .

draft contract which had been prepared	by Mr Miller.	In
that draft, clause 28 read as follows:

"28. This agreement is made conditional on the Lessor granting the Purchaser an option to take a further lease of the premises of not less than 3 years following the expiration of the present

lease. "

Dr Mahmut said that Mr Hill suggested that it be amended by the addition of the following:

"The rental in each year of such further lease to

be that agreed upon by the Lessor to Csicl the Purchaser and failing agreement market rent

determined by the Valuer appointed by the

President of the Real Estate Institute of New

South Wales or his Deputy the determined rent not

to be less than the rent in the year immediately grant such an option or any option in other terms preceding. Should the Lessor fail to agree to

acceptable to the Purchaser within twenty one

(21) days of the date of this agreement either

party may terminate thls agreement by notice in

writing to the other In which event all monles paid will be refunded wlthout deduction."

Mr Hill said vendor's solicltors and this he apparently he would negotlate the amendment with the

did.

Dr Mahmut said 15 September 1983, he had the terms that subsequently, he thought about

of the existing lease

explained to him by Mr Hill. He said he then became aware for the first time that the lease did not contain an option for renewal. He said he was not concerned, however, because of the assurance given to Mr Miller by Mr Kovari that there

was no doubt that he (Mr Kovari) could obtain the three

years' option. That lnformation had been glven to him, so

c

26.

Dr Mahmut said, in a telephone conversation he had with Mr

Miller. Mr Miller had said that he had been informed by Mr

Kovari that he was certain he could get the three years’

option and that the matter had gone to the house committee

of the Club for formal approval.

There 1s in evldence a note, apparently prepared by

Mr Morck, Solicitor, on 6 September 1983 recording that

instructions had been received to act for Dr and Mrs Mahmut

on 5 September 1983. The document also records that Mr

Morck Interviewed Dr and Mrs Mahmut on that date followlng

which spoke amendments to the draft e to the vendor’s olicltor concerning

contract includlng a requirement

that there be an addition to clause 28. The note also

records that Mr Morck explained the lease	to Dr and Mrs
Mahmu t .

According to Mr Kovari, Dr and Mrs Mahmut and Mr

Miller came to the shop on approximately 20 September 1983.

Mr Miller asked whether Mr Kovarl had seen the manager of

the Club. Mr Kovari said he had seen Mr Webster. He gave

the substance of the conversation he had had with Mr Webster

and which is referred to above. According to Mr Kovari, Mr Miller said that Mr Kovari could sign the contract because it would contain a provision that the deal was off if the extension of the lease were not granted.

Mr Kovari said he again time before 27 September 1983. went to see Mr Webster some

A Mr Cobley was present. Mr

27.

Kovari said he was told it was unlikely an extension of the lease at the exlstlng rental would be granted but that a

lease for seven years might be granted at a market rental.

On sale of the busmess were exchanged. 23 September 1983 contract documents for the

The conslderatlon was

shorn as $120,000 plus stock at valuation. This contract

was subsequently replaced by a contract dated 12 October

1983 for a smaller consideration.

According to Dr Mahmut, Mr Kovari introduced him to

Mr Webster on 27 September 1983. Mr Kovari, he sald, left immediately after the introduction. There is no evidence as to what was said at that conversation. If Dr Mahmut's

evidence is accepted, the meeting took place before a

decision had been made by the board of dlrectors of the Club

upon Mr Kovari's request dated 6 September 1983. Mr

Kovari's evidence was that It was not until 6 October 1983

that he introduced Dr Mahmut to Mr Webster.

On 28 September 1983 Dr and Mrs Mahmut paid to Mr

Miller the sum of $7,000, being the balance payable under the contract made on 23 of the deposit

September 1983.

Dr Mahmut's evidence was that on 28 September 1983, Mr Miller telephoned him and informed hlm that Mr Kovari had told him (Mr Miller) that the three years' option had not been granted but that a new "three by three year lease" had been offered by the landlord. Dr Mahmut told Mr Miller that

. 2 8 .

they would wait until the new lease had been granted before

purchasing the buslness and they would adjust the contract

price accordlngly. There was, Dr Mahmut said, no

conversation about suggested new lease. Counsel did not ask Mr Miller any questlons concernlng the information said to have been given to him by Mr Kovari. he amount of the rent under the

Dr Mahmut said that on the same day Mr Miller told him that Mr and Mrs Kovari wished to have a discussion about the purchase of the business. According to Dr Mahmut,

a meeting was arranged for the following day at the shop. Dr Mahut said that at the meeting, attended by Mrs Mahmut and himself, Mr and Mrs Kovari and Mr Miller, the following conversation took place:

"Mr Kovari told us that the owners offered a new

three by three lease with their higher rent but he said we can take up the new lease any time we want. I replied, 'We would like you to take the

new lease and we wlll deduct the difference

between the new rent, and then we will buy the

business'. Mr Kovari said, 'The owners asked

Raine and Horne to give a value of the premises

and until they give a value of the premises and a

new lease is drawn, it will take some time. They

Csicl want to sell the shop as soon as possible'.

Mr Kovari said, 'Because I am not very well, I

got a knee trouble, my knee is swollen, I would

like to go overseas for treatment'. My wife

said, 'I am sorry to hear you got an illness but

we will be better off to have the new lease and this way we will know how much rent we wlll be paying and it will cost us less to buy the shop'. Mr Kovari replied, 'You should not have any problem of gettmg the lease any time you want and why should you not pay the lower rent for

another three and a half years before you can

take up the new lease?' I said to him, 'We are

not intending staying in this business for the

three and a half years period' .... Mr Kovari sald

that the owners are the best owners he had during

29.

his 26 years business time and we should not have

any difficulty of gettlng the new rent and since

the building is protected as well, we will be

better off to buy the shop with the existing

lease. "

Mrs Mahmut confirmed the substance of Dr Mahmut's evidence

of this conversatlon. Mr and Mrs Kovari both denled that

any such conversation took place.

Dr Mahmut sald called on Mr Webster. Accordlng to his evidence, that on 30 September 1983 he again

Mr Webster

said that "a new four by four lease is being offered to Mr

and Mrs Kovari" and that he (Dr Mahmut) would have to wait

until the new lease was granted before he could purchase the

business and be accepted as the new tenant. Mr Webster had

said that Raine and Horne were to value the shop for the

purposes of the new lease to Mr and Mrs Kovari. In

cross-examinatlon, he denied that Mr Webster had sald that a similar lease was being offered in respect of an adjoining shop but said that Mr Kovari had so informed him. He said

that it was not until July or August 1984 that Mr Webster

had told him that a new lease had in September 1983 been

granted to the adjoining shop. He denled that Mr Webster

told him that he (Dr Mahmut) could, after purchasing the

business, get a new lease	at market rent if he applied for
one.

Dr Mahmut said that, after hls conversation with Webster, he had a conversation with Mr

Mr Kovarl. At Mr

Kovarl's suggestion they returned to Mr Webster's office and

30.

had a conversation wlth Mr Webster concerning the proposed

new lease. According to Dr Mahmut, Mr Kovari stated that he

wlshed to sell the business with the existing lease. Mr Webster said that a new lease was being offered to which Mr

Kovari responded that he had talked to his solicitor who

informed him that he could sell the business wlth the existing lease and Dr Mahmut could take up the new lease any

time he wanted. Mr Webster said he would have to consult

the Club's solicitors.

According to Mr Kovari, no such conversation took

place. What is more, according to Mr Kovari, no such

meetmg took place was on 6 October 1983 when he introduced Dr Mahmut to Mr Webster and then left. between himself, Dr Mahmut and Mr

Webster. He said that the only time the three were together

According and told him that Mr Kovari had informed him that the to Dr Mahmut, Mr Miller telephoned him

Club's

manager had agreed that Dr and Mrs Mahmut could take the

present lease and get a new lease any time they wished. Dr

Mahmut said he asked Mr Miller to arrange another meeting

with Mr and Mrs Kovari.

Dr Mahmut said Tuesday, 4 October 1983. He said that Mr Kovarl confirmed that that meeting took place on

that Mr Webster had agreed that Dr and Mrs Mahmut could take

up the existing lease and get a new lease any time they

wished. There was some discussion as to why Mr and Mrs

31.

Kovarl would not take up the new lease before the sale took

place. Mr Kovari said that they did not new lease because they were not sure that wish to take up the

Dr and Mrs Mahmut

were going to buy the business.

Mr and conversation took place. In partlcular, Mrs Kovari denied that any such meeting or

Mr Kovari denled

that he had ever told Dr Mahmut that Mr Webster had agreed

that Dr and Mrs Mahmut could take up	a new lease at any time
they wanted.

Dr Mahmut said that on the following day, 5 October

1983, he had a conversation with Mr Miller discussing, in particular, what the increase in the rent would be likely to

be under the proposed new lease. Mr Miller said, accordlng

to Dr Mahmut, that the rent would probably Increase to $350

per week. Dr Mahmut said that he would want to reduce the purchase price by between $18,000 and $20,000 if the new

lease were to be taken up. According to Dr Mahmut, Mr

Miller said he did not think Mr and Mrs Kovari would agree

to such a large reduction in the sale price. Dr Mahmut said

that later that evening he telephoned Mr Miller and told him

to offer Mr and Mrs Kovari $100,000 for the shop.

According to 1983 to go ahead with the purchase of the business. He did Dr Mahmut, he decided on 6 October

not explaln whether at that time the consideration of

$104,000 shown in the contract subsequently entered into had

32.

been agreed or, if so, by what steps agreement had been

reached.

According to Mr Kovari, the events which took place

were quite different. Accordlng to his evidence, he saw Mr

Webster on 28 September 1983 and was informed that the

extension of the lease would not be granted. Mr Xovari said he telephoned Mr Miller and informed him of what Mr Webster had said. Mr Miller said that, in those circumstances, he

did not think Dr Mahmut would be interested in purchasing

the business but he would find out. Mr Miller telephoned a

short time	later and	confirmed that Dr Mahmut was not
interested.

Mr Kovari said Dr Mahmut came to the shop alone at about 4.00 p.m. and that, on Friday, 30 September 1983,

said : "I offer you $104,000 for the business but not one

cent more". Mr Kovari said he would need to speak to his wife and to Mr Miller about the offer. Mr Kovari said he telephoned Mr Miller the same day. He said Mr Miller told

him he knew nothing of the offer but said he would speak to

Dr Mahmut. Mr Miller telephoned later to say Dr Mahmut

wanted to take over the business as soon as possible. Mr

Kovari said he told Mr Miller be was prepared to sell at

that price. Arrangements were made for a new draft contract

to be sent to Mr Kovari's solicitor.

Mr Kovari said that it was on Thursday, 6 October

1983 that Dr Mahmut came to the shop before lunch and asked

3 3 .

to be introduced to the manager of the Club. Mr Kovarl sald he did thls but that, having introduced Dr Mahmut to Mr Webster, he left Mr Webster's office and returned to the

shop.

Mr Webster, the SecretaryfManager of New South

Wales Sports Club Llmited, was called as a witness by the

applicants. He dld not have a very clear recollectlon of

what had occurred. Taking his evidence as a whole, his

recollection was that Mr Kovari came to see him in September 1983 and used words to the effect that he had come to ask for a favour, namely an extension of three years on hls lease at the current rental. In his evidence in chlef, Mr Webster said that he told Mr Kovari that the request would have to be referred to the board of dlrectors of the Club. In cross-examinatlon, he agreed that he would have said to Mr Kovari somethmg to the effect that the house committee was meeting on the following Tuesday, that he would put the request to that committee and that Mr Kovari should put his

request in writing. According to Mr Webster, the house

committee met once a month usually on the third Monday of

the month. The third Monday in September 1983 was the

nineteenth. As the request was subsequently made in writing

by a latter dated 6 September 1983, Mr Webster's evidence that It was to go to the house committee on the Tuesday

following hls meetlng with Mr Kovari cannot be correct. The

evidence does not, I think, establish that the matter ever

went before the house committee. It was, however, put to a

meeting of the board of directors of the Club on 27

34.

September 1983. I have already set out the text of the letter dated 6 September 1983. That letter did not request

an extension of the term of the lease but requested the

grant of an option to renew the lease for a period of three

years from 31 March 1987.

Mr Webster said Mr Kovari at whlch Mr Cobley, a director of the Club, was that he had a further meeting with

present but he had no clear recollection of what was said. This meeting, Mr Webster thought, took place between 19 and 27 September 1983.

The only relevant record in the minutes of the

meeting of the board of directors on 27 September 1983 reads

as follows:

“Re: Lease Mr and Mrs G. Kovari:

Subsequent to much discussion the

following was moved.

Motion: That advice be sought from the

Club’s Legal Advisers regarding the

lease and furthermore request Raine and

Horne for a rental valuation.

Proposed - N. Cobley

Seconded - I. Boyce

Carried. “

Mr Webster said that he was present at the board meeting.

He said that the board was not prepared to agree to the

lease being extended at the same rent. He said that there was a discussion whether the Club could insist upon Mr and Mrs Kovari taking a new lease at an increased rental to be determined by Raine and Horne. He said that the board

35.

instructed him to consult the Club's solicitor on this

proposal. MK Webster denied that the board had decided that

they would grant a new lease to Mr and Mrs Kovari if that

could legally be done. What the board required was legal advice on the question before making a decision. In the event, the advice given to the board was that the board

could not insist on Hr and Mrs Kovari taking a new lease at

an increased rent.

Mr Webster said that after the board meeting he

spoke to Mr Kovarl and told him what had happened. He said

he told Mr Kovari that the board was seeklng legal advice. In hls evidence in chief, he said that he told Mr Kovari

that the terms of the lease would have to continue as they

were until April 1987 and that under no circumstances would

the lease be changed. In cross-examination he said he did

not think he had told Mr Kovari that the board had decided

not to extend the lease at the existing rental.

Mr Mahmut to his office and introduced him. Webster agreed that Mr Kovari had brought Dr

In his evidence in

chief, Mr Webster said that Dr Mahmut accompanied Mr Kovari

when MK Kovari made the request for an extension of the

lease. In cross-examination he said that he thought Mr

Kovari had introduced Dr Mahmut to him some time in October

1983, certainly after the board meeting on 27 September

1983, and that that was the first occasion on which he had

met Dr Mahmut.

36.

On 12 October 1983 a new contract was entered into

for the purchase of the business, the consideration being shown as $104,000 plus stock at valuation. There was no

provision In that contract corresponding to clause	28 of the
contract dated 23 September 1983.

Dr and Mrs Mahmut attended the shop during the perlod 10 to 14 October 1983, a perlod described as the

trial week. Five cash tills were operating. Each morning Mr and Mrs Kovari placed change totalling $50 in each of two

cash registers and $30 in each of the other three. Neither

Dr Mahmut nor his wlfe counted the change put into the cash registers. At the end of each day Dr Mahmut and Mr Kovari

counted the money in three cash reglsters while Mrs Mahmut and Mrs Kovari counted the remainlng two. Agreement was

reached as to how much was in the tills at the end of the

day less the amount introduced in the morning for change and

Dr Mahmut and Mr Kovari signed a paper recording the takings

for each day. The total of the amounts so recorded was

$4,902 for the week.

At the end of that week settlement under the

contract took place and Dr and Mrs Mahmut commenced to run

the business from 17 October 1986, Mr and Mrs Kovari staying

on for one week to assist. The taklngs of the first week of

the business under the new management were $4,406.

According to Mr Kovari, at the end of the first week after

Dr and Mrs Mahmut took over the business, he asked Dr Mahmut

how were the takings to which Dr Mahmut replied: "It is

37.

very good, George". Dr Mahmut did not	agree that any such
conversatlon took place.
The main wltnesses

Dr Mahmut was an lmpresslve wltness. He displayed

obvlous care In considering each question asked of hlm and m formulatlng his answer. For the most part, hls answers

were responsive to what he had been asked and were expressed

with an economy of words. I have no doubt that he was

sincere in giving his best recollection of the events as

they occurred and of the conversations he had with Mr

Miller, Mr and Mrs Kovari and Mr Webster. There are,

however, some inconsistencies m , and some unsatisfactory features of, his evidence. There are also inconsistencles between his evldence and that of other witnesses. I am

satisfied that, in some respects, hls recollection is at fault. While, therefore, I accept him as basically a

witness of truth, I am	unable to accept his evidence	in its
entirety.

In marked contrast to the demeanour of Dr Mahmut

was the demeanour of Mr Kovari. Even allowing for

difficulties communication, n K vari Mr was an

unsatisfactory witness. Far too frequently his answers were

unresponsive to the questions put to him, even those put by his own counsel. I have grave reservations about accepting much of hls evidence.

38.

Mrs mirrored the evidence given by Mahmut respectively. There are, however, some differences between the evidence given by husband and wife concerning the same and Mrs Kovari for the most part

Dr Mahmut and Mr Kovari

events . I did not find Mrs assistance as her recollection of events was selective. Mahmut’s evidence of much

She

recalled those aspects of the conversations with Mr Miller

and with Mr and Mrs Kovari that were essential to the

applicant’s case but she had little or no recollection of

other events. Equally, I did not find Mrs Kovari’s evidence

of much assistance in endeavouring to determine where the

truth lay.

The first representation

The that the first respondent, by its agent Phillip Charles first of the representations, as pleaded, is

Miller, orally business was making represented to the applicants that the

a profit of $1,500 to $1,800 per week to

a husband and wife both worklng in the business.

Mr Miller’s evidence, if accepted, supports a

finding that he made a representation in the above terms.

Counsel for the respondents submitted that I should reject his evidence as unconvincing on the ground that he had no clear recollection of the details of the conversations he

had wlth Dr and Mrs Mahmut and on the further ground that he __ - __ . . . ..

had, in October 1984 to the applicants’ solicitor and in

April 1985 to the respondents’ solicitor, said that his

recollection then was that what he had told Dr and Mrs

39.

Mahmut was that the buslness had earned a net	profit of
$1,300 to $1,500 a week.

It must be accepted, I think, that Mr Miller did

make such a statement to the applicants’ solicitor though he

insisted that, when he received a statement in written form

of what he had sald, he realised he had made an error and

corrected it to read $1,500 to $1,800. So far as his

conversation with the respondents’ solicltor is concerned,

he was not prepared to deny that he had made the statement attributed to him though I think it is fair to say he had no real recollection of it.

A difficulty arises because both Dr and Mrs Mahmut

do not agree that, at the initial meetings with Mr Miller

when the representation is said to have been made, he quoted

to them a range of net profit figures. Both Dr and Mrs

Mahmut did say in evidence that Mr Miller, during the course

of a conversation in September 1983 at which Mr and Mrs

Kovari were present, did comment upon a net profit figure of

$1,500 mentioned by Mrs Kovari. However, they were both

adamant that, during the conversations with Mr Miller prior

to the first visit to the shop, Mr Miller had quoted

$1,800, neither more nor less.

Some assistance can, I think, be gained from the

._-. -

document (Exhibit 1) which Mr Miller prepared, as I have found, at or about the time that figures relating to the

business were given to him by Mr Kovari. Mr Miller’s

40.

evidence was that he relied on what was recorded on that

document when speaking to Dr and Mrs Mahmut. Dr Mahmut's

evidence was that Mr Miller read the figures he quoted from

a book. Mrs Mahmut referred to a file. I have no doubt

that it was from Exhibit 1 that Mr Miller was reading.

That document clearly supports the view that Mr

Miller quoted $1,800 as the figure for net profit. The

document does not refer to $1,500 and no combination of the

figures recorded produces that result.

Counsel for the respondents relied upon the answers

given by Mr Miller to certain questions put to him in

cross-examination suggesting that the correct profit figure derived from Exhibit 1 after the alterations had been made to the figures for wages and purchases was $1,700 and that he, Mr Miller, would not have quoted to Dr Mahmut any figure for profit in excess of that. The final question on this

aspect and	Mr Miller's response were:
"Q. So may we take it that you would not

have said to Mr Mahmut that the true

profitability of the business exceeded

that figure of $1,700 a week?

A. No. I would not have done that."

I am unable to say whether that answer reflects some

misunderstanding of the question being put to himbut,.. -.. .

whatever the inconsistent with the rest of Mr Miller's evidence that he informed Dr Mahmut that the profit was $1,500 to $1,800 per explanation, the answer is entirely

41.

week. He reiterated that statement almost immediately after his answer that he would not have told Dr Mahmut a figure in excess of $1,700 per week. In the light of the whole of Mr

Miller's evidence, the answer as	to $1,700 cannot, I think,
be given any welght.

Taking into account the whole of the evidence, I am

satisfied, and I so find, that Mr Miller represented to the

applicants that the business was making a net profit of

$1.800 per week to a husband and wife both working in the

business.

I am also satisfied, and I so find, that Mr Miller made that representation on the basis of figures supplied to

him by Mr Kovari for the very purpose of informing

prospective purchasers of the business of its financial

position. Mr Miller, in passlng on that material to Dr and

Mrs Mahmut was acting on behalf of the first respondent.

The second representatlon

I turn now to the second of the representations as

pleaded, namely that each of the second respondents orally

represented to the applicants that the business was making a

profit of $1,500 to $1,800 per week to a husband and wife

both working in the business. It would probably be a more

accurate way of stating the matter to attribute the

. - ..- . . .

representatlon to the first respondent, it being alleged that it was made by each of the second respondents on behalf of the first respondent.

42.

In relation to this representation, there is,

again, an inconsistency between the representation as

pleaded and the evidence given by the applicants. There is also a conflict of evidence between Dr and Mrs Mahmut on the one hand and Mr and Mrs Kovari on the other. Dr and Mrs Mahmut's evidence supports a finding that at the meeting on

23 or 26 August 1983 Mr Kovari represented that the business

was returning a net profit of $1,800 per week to husband and

wife. Neither Dr Mahmut nor Mrs Mahmut, in recounting what was said at that meeting, referred to any statement to the effect that the net profit was $1,500 to $1,800 per week. Mr Kovari 1s said to have again quoted the flgure of $1,800

in a conversation in September 1983. Mrs Mahmut's evidence

was that Mrs Kovari had referred to the net profit as being $1,800 with a minimum of $1,500. In cross-examination, Dr Mahmut attributed to Mrs Kovari statements to the effect

that the minimum profit per week was $1,500 that the net

profit was between $1,500 and $2,000, the average being

$1,800.

Counsel for the light of the inconsistencies in the evidence given on behalf respondents submitted that, in the

of the applicants, I could not be satisfied that any

representation as to the net profit of the business was made

by Mr or Mrs Kovari. He also drew attention to the evidence

of Mr and Mrs Kovari denying the conversations alleged by Dr

and Mrs Mahmut to have taken place in relation to the

financial history of the business. In this regard, it is to

43 .

be noted that, according to Mr and Mrs Kovari, the only

question asked of them by Dr or Mrs Mahmut in relation to

the financial position of the business was a request to be told the turnover - a request sald to have been made in late August or early September 1983. Accordlng to Mr Kovari, he then told Dr Mahmut the turnover was $4,000 - $4,500 per

week. According to Mrs Kovari, Dr Mahmut was only told that the figure of $4,500 was guaranteed for the trial week.

Counsel for the respondents, in submitting that the

evidence of Dr and Mrs Mahmut should be rejected, referred

to the evidence glven by them that they had received the

basic information concerning the business from Mr Miller.

Counsel asked, rhetorically, why would they ask questions of

Mr and Mrs Kovari designed to elicit the same information

without saying what they had been told by Mr Miller. He

also referred to the evidence given by Dr and Mrs Mahmut

that they had been told both by Mr Miller and by Mr Kovari

that the lease of the premises contained an option for a

further three year term, evidence which was not supported by

Mr Miller and was submitted that Dr Mahmut's evidence concerning the	denied	by Mr Kovari.	It was	also
request

for the accounts of the business and the subsequent

provision of the accounts for 1981 and 1982 was not to be

believed because of the contrary evidence given by Mr and

Mrs Kovari and	the circumstance that the documents which Dr
Mahmut said he	received were not produced either on

discovery or during the hearlng.

44.

I observed Dr Mahmut over the period of the hearing both in and out of the witness box. He is clearly a careful

and cautious man and I do not flnd it surprising that he

should approach Mr and Mrs Kovari concerning the financial

details of the business even though he had already been

given details by Mr Miller. Clearly there are difficulties in accepting the whole of the evidence of Dr and Mrs Mahmut

but I am confronted

regard the alternative version of what took place, that

given by Mr and Mrs Kovari, as highly improbable. It is not

with a situation in which I can only

a case where differences which can be explained simply by deficiencies in there are differences in emphasis or

recollection. To accept the version of events deposed to by

Mr and Mrs Kovari requires the conclusion that Dr and Mrs

Mahmut determined to purchase the business virtually on the

basis of the details given to them by Mr Miller, details

which, incidentally, differ, according to Mr Kovari, from

the figures which he quoted to Mr Miller, and from casual

observations which Dr Mahmut made on a few occasions from

Australia Square of the number of persons frequenting the

premises. To accept that Dr Mahmut acted in that way would

be completely out of character. It would deny the careful

and cautious approach which he exhibited during the hearing.

In the melange of assertion, counter-assertion and

denial with which the Court is faced, the truth is not easy

to discover. One would have hoped that the evidence of the

only independent witness to the conversations, Mr Miller,

would have been of considerable assistance in resolving the

45.

conflict. Mr Miller’s evidence was, however, of no assistance as to what was said at any of the conversations between Dr and Mrs Mahmut and Mr and Mrs Kovari which may

have taken place after the initial meeting between them on

16 August 1983. He did say, as I have already mentioned, that Mr Kovari informed him that a purchaser of the business

could get a longer lease but the context in which that was said is not clear from his evidence. He could recall no

conversation between Dr	Mahmut and Mr Kovari concerning the
accounts of the business.

Acknowledging that the matter is not clear cut, I

prefer the evidence of Dr and Mrs Mahmut. I find that Mr

and Mrs Kovari, acting on behalf of the first respondent,

did represent to the applicants that the business was making

a net profit of $1.800 per week to a husband and wife both

working in the business.

The third representation

The third epresentation relied upon is a

representation that Mr Kovari orally represented to the

applicants that the lessor of the premises had stated that

It would provide	the applicants with a new	lease upon
application.

Dr and Mrs Mahmut say that they were told by Mr

Miller that the existing lease was for three and a half

years m t h an option for a further three years. Mr Miller

was not asked specifically whether he had used words to that

46.

effect but the evidence given concerning subsequent events, the circumstance that the lease contalned no option clause and the fact that the document prepared by Mr Miller and

dated 17 May 1983 (Exhlbit 1) contains no reference to an optlon lead me to think that he dld not in the inltial conversations with Dr and Mrs Mahmut refer to an optlon for

three years or for any other term. It is of partlcular

signlficance that, when Mr Miller prepared the draft

contract early in September 1983, he included a provision

(clause 2 8 ) making the contract conditional upon the lessor grantmg to the applicants "an option to take a further lease of the premlses of not less than 3 years followlng the

expiration of the present lease". I am satisfied that Dr

and Mrs Mahmut are mistaken statement that the lease contained an option clause. in attrlbuting to Mr Miller a

Dr and Mrs Mahmut attribute a similar statement to Mr Kovari at the meeting on 23 or 26 August 1983. Mr and Mrs Kovari say that, at a meeting which they say occurred in

August 1983 but some days after the initial meeting on 16

August 1983, there was a discussion about the lease.

According to their evidence, Dr Mahmut and Mr Miller both

expressed the view that the unexpired term was short.

According to Mr and Mrs Kovari, Mr Kovari said he would

approach the landlord "and ask for three years' extension of

my lease". Dr Mahmut does not agree that a conversation in

these terms took place.

47.

There I s a good deal of confusion In the evidence

whether what was spoken of was an extension of the term of the existing lease, presumably at the same low rent, or the

granting of an option permitting the tenant to extend the

term. Mr Kovari says he requested of Mr Webster an extension of the term of the lease yet the letter dated 6 September 1983 refers to the grant of an option. Presumably

what was sought was an option at the rent reserved in the

lease, not at a market rental, though, curiously, that was

not made clear. It was also not made clear in the draft of

clause 28 of the contract prepared by Mr Miller.

There is no doubt that, at some time prior to 23 September 1983 when the first contract was signed, Dr Mahmut became aware that the lease contained no option clause. He insisted that it was not until about the middle of September 1983 that he became aware of that fact. However, in this he

I s , In my view, also mistaken. Mr Morck's note dated 6

September 1983 makes it clear that the lease was explained

to Dr and Hrs Mahmut on the preceding day. Although there

is no direct evidence on the point, one cannot imagine that

the absence of an option clause would not have been

discussed.

There is also no doubt that security of tenure for

a period longer than three and a half years was a matter of

concern to Dr Mahmut in whatever terms that topic was

dlscussed. Dr Mahmut said in evidence that he was

particularly concerned about getting a longer lease because

48.

he only intended obtain employment	to operate the business until he could
as a geologist and it would be difficult

to sell the business if it only had a short term lease. It

can also be accepted that Mr Kovari made an approach to the landlord for a variation of the lease, either to extend the term or to grant an option for renewal, and that the Club, as landlord, was not prepared to extend the lease at the same low rental. It was however, according to Mr Webster. concerned to seek legal advice on the question whether, as a

condition of agreeing to an assignment of the lease from Mr and Mrs Kovari to Dr and Mrs Mahmut, it could insist on an increase in the rental.

Mr Webster‘s evidence as to the conversations he

had with Mr Kovari is not entirely satisfactory. I have already referred to his evidence and to the conflicting

evidence of Dr Mahmut and	Mr Kovari in relation to this
aspect of the matter.

Taking the whole of that evidence into account, I

am not satisfied that Mr Kovari made a representation in the terms alleged or that, if he did so, Dr Mahmut relied upon it. Although Mr Webster denled that the board of directors of the Club had decided that they were prepared to grant a

new lease to Mr and Mrs Kovari, surrender of the existing lease and the grant of a new lease it may be accepted that a

at a market rental would have achieved the Club’s objective.

In these circumstances one may accept Wr Kovari’s evidence

that Mr Webster had said that a new lease would be granted.

49.

Indeed Dr Mahmut's evidence is to the effect that he was

told by Mr Webster that such an offer, though in dlfferent terms to those mentioned by Mr Kovari, had been offered. I

have no doubt that there was a discussion between Mr Kovari and Dr Mahmut about a new lease but I am not satisfied that Mr Kovari used words which are to be read as an assurance that the Club had committed Itself to grantlng a new lease which could be taken up by Dr and Mrs Mahmut at any t m e .

The fourth representation

The fourth representation as pleaded is that Mr

Kovari orally represented to the applicants that the leased

premlses were part of a building subject to a preservation

order and, therefore, could not be developed.

In this representation and I need say nothing further about the result, the applicants did not rely upon

it.

Liability

I have found that the first respondent, by its

agent Mr Miller, orally represented to the applicants that

the business was making a net profit of $1,800 per week to a

husband and wife both working in the business and that that

representation was based on figures supplied by Mr Kovari.

I have through the agency of both Mr and Mrs Kovari, made a also found that the first respondent,

representatlon to the applicants to the same effect.

50.

There representation in those terms was false. It clearly stated is no dispute between the parties that a

a figure substantially In excess of the net profit whlch the

business had returned. The conduct of the first respondent

in maklng the representatlon was, therefore, conduct which

was misleading or deceptlve OK likely to mlslead or decelve

and so In contraventlon of s.52 of the Act.

Mr and Mrs Kovarl were clearly involved in the

sense mentioned in s.75B of the Act in the contravention by

the first respondent of s.52 in that they, as directors of

the first respondent made, and were parties to the maklng

of, the representation referred to. The statement of claim in the circumstances econdly

is, perhaps, defective

in that it does not allege that knowingly concerned Mr or Mrs Kovari were

in, or party to, the making of the

representation by Mr Miller. On the evidence, one could not

conclude that Mrs Kovari was so involved. Mr KOVaKi’S

position is by no means so clear. An application was made

on the last day of the hearing to allow yet another

amendment of the statement of claim to remedy the defect. I

am not prepared to allow that amendment. It ceases to be of

much slgnificance in view of the conclusion	which	I have
reached In relation to representation (b).

Dr Mahmut‘s evidence was that he believed from what

he had been told that the net profit of the business had

averaged $1,800 per week dur-lng the whole of 1983. He

further said that in entering into the contract to purchase

51.

the business he relied on, and was influenced by, that

statement. I am satisfied induced the applicants to enter into the agreement dated 12 that one of the factors that

October 1983 was the representation made as to the net

proflt of the busmess.

Damaqes

Sectlon 82(1) of the Act refers to loss or damage

suffered by the conduct of another person that was done in contravention of a provision of Part V, whlch includes s . 5 2 .

It looks to the loss or damage flowing from the offending

conduct: Gates v. City Mutual Life Assurance Societv Ltd. (1986) 63 A.L.R. 600. In the present case that loss or

damage is to be measured by the difference between the prlce

paid for the business ($104,000) and its true value at the date of the contract for its purchase.

Evidence relevant to the method of valuation which

should be adopted and the value of the property at the date

of purchase was given, on behalf of the applicants, by Heinz Ludwig Mottek, a retired real estate agent and auctioneer,

and Gregory George McLeay, Chartered Accountant in the

employ of Deloitte Haskins and Sells and, on behalf of the respondents, by John Henry Banks, a partner of Touche Ross

and Co., Management Consultants and George Lazarls, a

licensed real estate agent. It should come as no surprise

to the reader of these reasons that there was no consensus

between these witnesses either as to the value of the

L

5 2 .

business at the date of purchase or even as to the correct

approach to be taken in determining that value.

Mr Mottek's approach was to rely simply on the

vendor's net profit figures. He said that under normal

clrcumstances he would allow a take away food business

twelve months of net profit to which was to be added the

written down value of plant, fittings and fixtures.

Although he did say that there were other factors, such as the terms of the lease, the prices being charged by the

vendor for goods sold in the business and the profit margin

on which the vendor was operating, he did not indicate what, if any, allowance he would make in that regard when valuing the business in question.

Mr Mottek was, in truth, advocating a generallsed

rule-of-thumb approach which is hardly an appropriate way

for the Court to assess the damages. None of the other

witnesses agreed that his approach was appropriate. The

comments made by Mr Banks in this regard both in his report and in his oral evidence are, I think, well founded. I am not prepared to accept Mr Mottek's approach.

Mr McLeay prepared a lengthy report dated 28

January 1986 (Exhibit 11) analysing the earnings of the

business from 31 August 1979 to 30 June 1985 including an

analysis of gross sales, cost of goods sold, gross profit, net profit and owner's earnings. As a result of this analysis Mr McLeay concluded this report in these terms:

.

53.

“With respect to the value of the business at the time of purchase, on the basis that the lease had only three and one half (3-1/2) years left to

run, and that it would not be renewed, we are of the opinion that the earnings of the business

were insufficient to give rise to any goodwlll

and that the maximum a prospective purchaser

would be prepared to pay would have been

dependent upon his valuation of existing plant,

equipment and stock.

In summary, we consider the maximum an informed purchaser would pay for the busmess would have been his valuation of stock and fixed assets of the business.

I cannot accept that conclusion. It is contrary to

the conclusions reached by each of the other witnesses as to

value. For the purpose of reaching his conclusion Mr McLeay assumed that the lease of the premises would not be renewed when the existing term expired on 31 March 1987. There is no evidence before me to support that assumption as at the date of purchase.

Mr Lazaris expressed the opinion that a fair price

for the business as at October 1983 would have been

$120,000. He was, however, unable to articulate how he had

arrived at that figure. It is fair to say, I think, that it

was no more than an intuitive figure derived from his

experience. In the absence of some evidence to support the

figure I am not prepared to accept it.

Mr Banks prepared a report dated 7 May 1986

(Exhibit K). He followed the earning capacity or income

capitalization method as to which his report said:

54.

"The earning capacity method is applied in many dlfferent ways. For substantial businesses It is usual to determme after tax earnings by

exammation of historical results to establish

future maintainable proflts. A capitalisation

rate or multiplier is applled to the future

malntalnable profits to calculate the value of the business. Slmllar approaches are used in small businesses u s m q turnover, net proflt or

other measures of	earnings to determine the base
for valuatlon."

The report continued:

"In all business valuations the establishment of the capitalisation rate or multiplier is usually based on the subjectlve judgment of the valuer. Because of the high number of similar businesses being sold we have been able to utilise procedures that are scientifically based, thereby eliminating the main areas of judgment used in

many valuations. We have developed a multiplier

using a linear regression model that is derived

from advertised sales of simllar businesses."

Mr earnings for the type and size Banks adopted, as the appropriate measure of

of business being valued, the

weekly turnover of the business and he set out the factors

which led him to that conclusion. He extracted data

regarding sales of 116 businesses which were thought to be

sirnllar from advertisements in the Saturday issue of the

"Sydney Morning Herald" newspaper during the eight weeks

prior to 14 October 1983 and the four weeks followlng that

date. U s m g a concluded that, in the case of those businesses, there was a computer based mathematlcal model, he

linear relationship between the asking price and the

turnover as advertised. The report continues:

5 5 .

"The linear regresslon produced a correlation co-efficient of 0.89 which strongly indicates

that price 1s dependent on the turnover. ( A

correlation co-efficient of zero Indicates no

linear relatlonshlp and 1.0 lndlcates a total

linear relationship). The standard error of

estmate in the regresslon was $15,231. This sum represents the expected values either side of the regresslon line of one standard deviation for a normal dlstrlbutlon.

Usmg the formula produced by the regresslon

model the predlcted price for Judy's Food Bar

uslng the turnover of $4,902, as tested by the

purchaser, produces a predicted prlce of $86,031.

The predlcted range wlthln	one standard devlatlon
is $70,800 - $101,262.

We have renewed the turnover for the previous

year and on the information examined consider

that the trial week's turnover of $4,902 fairly

represented the turnover of the business. An indication of this is that the average weekly turnover for ten weeks prlor to the sale date was

$4,915 and that ten	week period includes one
public holiday.

Of the business reviewed seven were city

businesses. The relative prlce of the clty

businesses were Csic3 on average hlgher than

other similar busmesses. One of the main

factors that allow city food bars to demand a

marginally higher price is that the city businesses generally operate on a five day basis which demands a premium over six and seven day working weeks.

Based on the above data we are of the opinion

that the fair value of Judy's Food Bar is

marginally in excess of the predicted price of

$86,031. Accordingly we have valued the business

at $90,000. 'I

The comment can, of course, be made that the method

adopted uses advertised or asking prices not the figures at

which the businesses were, in fact, sold. Mr Banks sought

to justify this approach on the basis that comparable sales figures are not available and on the basis that, In his experience, it is common for vendors to inflate the asking

prlce by a percentage to provide a margin for negotiation

56.

and to quote the most favourable figure for turnover or net

profit. He dld not consider that adopting the advertised

figures for turnover and price would significantly distort

the result. It is, however, a factor to be borne in mlnd.

I am of opinion that Mr Banks’ approach provides

guidance as to the value of the buslness at the date of

purchase but, of course, one must bear steadlly in mind that

it would be unwise to approach the task on the basis of a

merely mechanical adherence to calculations. In this regard

it is of signlficance that the range of values is very wide

- a difference between the maximum and minimum of the range

of $30,462

in perhaps, merely relfects that relation to the mean of $86,031. This,

a statistical tool has been

used with all Its imperfections.

I am also of opinion that it would be appropriate

to make the prediction as to value not from a weekly

turnover of $4,902 per week but on a somewhat smaller

figure. Mr Banks chose that figure as the figure for the

week of the trial when the takings were verified by Dr and

Mrs Mahmut. It may be noted that the takings for the next week when Mr and Mrs Kovari were still in attendance had

dropped to $4,406.	He also referred to the average for the
fifteen weeks from	1 July to 14 October 1983 though he seems

to have slightly overstated that figure. The correct figure

seems to be $4,007. That is a comparatively short period

and an exammation of the books of the first respondent

suggests that the figures seem generally hlgher in the

57.

period from July to October than for other fifteen week

periods. One cannot, of course, generalise too much for

there were lndlvidual weeks in May and June 1982 when the

recorded figures exceeded $4,900. The average weekly figure

during the financial year ended 30 June 1986 was $4,319. To

take a figure closer to $4,500 would, I think, have been

more approprlate. Thls would reduce the relevant range of

figures by a significant amount.

It was pressed upon me that, If I adopted Mr Banks' approach as a guideline, I should not adopt hls median

figure of $86,031 (adlusted by sub~ective factors to

$90,000) but I should find that the true value was a figure

closer to the maximum of the range to which he referred. I

think there is some merit best I can with the material before me and on a turnover of In this approach and, doing the

$4,500 per week, I find that the true value of the business at the date of purchase was $94,000. There will, therefore,

be judgment for the applicants against the respondents in the sum of $10,000. The respondents must pay the applicants' costs.

I certify that this and

the preceding 56 pages are

a true copy of the Reasons

for Judgment herein of the

Honourable	Mr Justice
Neaves .

Associate

Dated: 10 July 1987

58.

I

Counsel for the appllcants : Mr P. Menzies and Mr K. Eassle

Solicitors for the applicants : Raves, Marsh, Morck & Hill

Counsel for the respondents : Mr P. Taylor

Solicitors for the respondents : Priddle Gosling

Dates of hearing : 12, 13, 14 May, 4, 5, 6, 7, 8

August and 13, 14, 15 October

1986