Markou, v and Anor v Hugo Investments Pty Ltd and Ors Rogala, A v Markou, v and Anor Rogala, A v Titmuss

Re: VICTOR MARKOU and LUBICA MARKOU
And: HUGO INVESTMENTS PTY LTD First Respondent; TERENCE TITMUSS Second
Respondent; ANDRE ROGALA Third Respondent; HUGO INVESTMENTS PTY LTD and
TERENCE TITMUSS Cross Claimants; ANDRE ROGALA Cross Respondent; ANDRE ROGALA
Second Cross Claimant; VICTOR MARKOU & LUBICA MARKOU Second Cross Respondents
No. 52 of 1983
Trade Practices
(1985) ATPR para 40 - 602

COURT

IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
Forster J.

CATCHWORDS

Trade Practices - misleading and deceptive conduct - alleged statements as to turnover membership stock and profitability of Video business.

HEARING

PERTH
#DATE 24:7:1985

ORDER

The applicants' claim against the first and second respondents be dismissed.
The applicants pay to the first and second respondents their costs of this application.
There be judgment for the applicants against the third respondent for the sum of $300.
There be judgment on the cross-claim in favour of the second cross-claimant against the second cross-respondents for the sum of $3,263-66.
The applicants pay to the third respondent 90% of his costs of the whole proceedings.

JUDGE1

The third respondent (Rogala) wishing to sell his video library business Oz Video employed the first respondent (Hugo) as a broker for this purpose. The second respondent (Titmuss) a director of Hugo acted on its behalf in the matter. The applicants purchased the business for $38,000, the first applicant (Markou) being the active participant, the second applicant, his wife, being a sleeping partner in the enterprise and playing no part in negotiations or indeed the operation of the business. The applicants entered into possession of the business on 20th August 1983 and quite quickly became disenchanted with their bargain and abandoned possession of the business on 7th October 1983. The application in these proceedings was made and filed on 19th October 1983.

In their statement of claim as finally reamended the applicants advance a number of claims upon a number of different bases. Before setting these out it will be useful to give a brief history of the matter. Rogala wished to sell his video library business and instructed Hugo through Titmuss to seek a buyer. Hugo inserted an advertisement in the West Australian newspaper advertising the business for sale at $38,000. This advertisement included an assertion that the business "nets $500 per week". Markou after reading the advertisement, telephoned Hugo and spoke to Titmuss' son. Two days later on 16th July 1983, Markou went with Titmuss to the premises where the business was being carried on, namely shop 15, Crossways Shopping Centre, Subiaco, where Titmuss introduced Markou to Rogala and conversation took place between them in which Titmuss took no part and during which Rogala told Markou that the turnover of the business since he had operated it, that is from 18th April 198 , had averaged $1,645 per week and that the business had returned a net profit of at least $500 per week. Markou said in evidence that Rogala guaranteed to him that the business would return to him a net profit of $500 per week in the future should he purchase it. It is pleaded that Titmuss took part in the conversation between Rogala and Markou, but I find that he did not. It is pleaded that at this first meeting at the premises of Oz Video Rogala represented to Markou that the membership of the video library was 213 members plus nearly 100 casual customers. It is also pleaded that in answer to a specific question Rogala told Markou that the video tapes and films forming part of the stock of the business were genuine and that none were "pirated", meaning that none were copies of tapes illegally made in breach of copyright.
On 19th July 1983 the applicants made an offer in writing to purchase the business for $35,500 subject to certain provisions, some printed on the form of offer and some added in handwiting. This offer was not accepted by Rogala who made a counter offer to accept $38,000. The Markous accepted this. Their offer was amended accordingly and accepted by Rogala. Notwithstanding the date pleaded the evidence strongly suggests that the cntract was concluded on 19th July 1983.
Statements said to have been made by Titmuss on behalf of Hugo and which are said to constitute misleading or deceptive conduct or conduct which was likely to mislead or deceive and which alternatively, were said to amount to negligent misstatement with the intention of inducing the applicants to enter into the contract and in the further alternative, were said to have been made fraudulently were,

(1) that the business returned $500 per week profit,

(2) that the gross turnover of the business averaged $1,645 per week,

(3) that the business would return the applicant a

guaranteed $500 per week net profit.

Statements said to have been made by Rogala which are said to be negligent statements and alternatively, fraudulent misstatements, are first those set out above with respect to Hugo and Titmuss and in addition the statement that there were 213 members of the video library. Finally it is said that Rogala's statement that there were no pirated tapes in the video library was false and fraudulent and the fact that there were pirated tapes in the video library when the applicants took over the business was a breach of the contract. It is necessary to deal with each of these areas separately.
Before doing so, since on some issues much depends upon the credibility of the witnesses, I should state in general terms my impression of them. Markou has become emotionally upset by what has been for him a financial disaster. His evidence was, I think, coloured by this and his early enthusiasm for a venture for which he was ill-equipped by personality, background, knowledge and experience. He has tended to blame others for his misfortune and at times was untruthful and evasive. Rogala is an effervescent man, full of confidence in his own ability as a salesman and businessman, unmethodical in the extreme in business details and record keeping, but not, I think, consciously dishonest in his evidence. Where the evidence of Rogala and Markou is in conflict I prefer generally that of Rogala. Titmuss impressed me very favourably as a witness and I think that he is a careful, methodical and honest man. I prefer his evidence to that of Markou where they conflict.
Rogala admits that he told Markou that the average weekly takings during the period in which he ran the business were approximately $1,645 per week and that the net profit was $500 per week. His record keeping was elementary but he said in evidence that every day he entered in a hard- covered foolscap- sized book the total of his daily takings. Exhibit 22, being four pages taken from this book, sets out the daily takings of the business from 18th April 1983 to 18th August 1983 and shows that at the 16th July 1983 the average of the weekly takings was $1,655. If exhibit 22 is genuine and accurate so also was the representation made to Markou by Rogala and assented to or at least not dissented from by Titmuss. As I have said Rogala was careless generally in his record keeping, but I believe him when he says that he entered his gross takings each day in exhibit 22. Criticism was made of the accuracy of the figures on the footing that the accountant Parry was unable to reconcile these figures with the record of moneys banked. This is answered in my view by Rogala's evidence which I accept that he operated a lot in cash for purchases for the business and that when he wanted money for any personal expenditures he simply took it from the cash box which he kept in the shop. He kept each day's takings in the top of the box and if he took any money from the top he replaced it with a note on a piece of paper so that his amount of daily takings would be accurate. At the end of the day he transferred the remaining cash to a bag in the bottom of the box from which bag he took money for his personal requirements. Haphazard this method undoubtedly was, but it is not dishonest or misleading.
Criticism was also made by Parry on the basis that the sales of video films, blank tapes, library memberships and accessories, and rental of films were unlikely to generate the revenue claimed in exhibit 22 and he suspected therefore that there was some other source of revenue. There was no evidence as to what this other source might have been, nor was any suggestion of it put to Rogala in cross-examination. I do not accept the validity of this criticism.
Parry in a report was critical of the accuracy of exhibit 22 and its lack of consistency with the other records kept by Rogala consisting of bank statements, bank deposit book, receipt books and membership record cards. His report however, was based on a number of assumptions and calculations which were shown to be themselves inaccurate to such an extent that I find it difficult to place any substantial reliance upon his report. The report of the accountant Smith and the balance sheets and profit and loss accounts prepared by him reveal average net profits over the whole time Rogala ran the business of close to $600 per week and the performance is much better during the latter part of the period.
The only evidence that suggests that the representations as to turnover and profit may be misleading or deceptive is the results apparently achieved by Markou in the period during which he ran the business. He concedes that he only ran it seriously for some four and a half weeks. The business remained open for six weeks but during the last one and a half weeks he was not giving it his full time and attention. Parry reported that the Markous had made a loss of $1,430 during that period but there are a number of factors which make this conclusion unacceptable. In the first place Markou says he destroyed or threw away approximately seventy video tapes which he said were worthless, but he failed to keep a record of this and failed to inform Parry of it or indeed any one else until he was giving evidence. In addition it must be borne in mind that Markou did not wish to sell video cassettes and did not do so. His revenue came from sales of blank tapes, library memberships and accessories and from video cassette rentals. In his trading statement Parry has included in the cost of sales a figure of $5,654 for the cost of movies purchased which, since none were sold, should not be taken into account in calculating the cost of goods sold. In addition Parry miscalculated the cost of blank tapes and accessories sold at $1,776 and the figure should have been $920. Making adjustments for these errors the gross profit on trading should be seen to be $4,835.
In arriving at a net loss Parry has deducted as an expense $290 being legal fees paid in connection with the assignment of the lease from Rogala to Markou. He concedes that this should have been spread over the period of the lease and a lesser sum deducted for the accounting period covered. On 20th August 1983 the date of the assignment, the lease had approximately two years and thirty two weeks of its term of three years to run. Arithmetical calculation produces a figure of approximately $13 as the proportion of $290 applicable to the period of six weeks during which the Markous ran the shop. The expenses properly to be deducted from the gross profit amount to $1,361 which deducted from the gross profit gives a net profit of $3,474. As I have said, Markou admitted that he had only run the business seriously for some four and a half weeks, but dividing this net profit by six the number of weeks he was actually occupying the business gives a weekly net profit of $579 a little in excess of what was represented.
It is perfectly true that in order for the business to prosper it would have been necessary to purchase video cassettes for rental purposes and it is also true that the Markous' gross turnover was quite considerably below the figure of $1,645 represented as being Rogala's weekly takings. There are a number of factors which may account for this. In the first place there was evidence that the financial performance of a business frequently drops at least temporarily on a change of proprietorship. In the second place the Markous hardly gave the business a chance to prove itself, operating it seriously for only about four and a half weeks. In the third place there is the way in which Markou ran the business as compared with Rogala. Markou advertised markedly less than Rogala had done. As I have said, he discouraged the sale of films and of the $75 memberships which were a lucrative source of revenue for Rogala. Rogala was a much better salesman than Markou and had an entirely different personality and style. The evidence of Thomas and Walton satisfies me that Rogala was a cheerful, ebullient person who went out of his way to greet customers and took the initiative in selling memberships and suggesting to them video cassettes which they might hire. Markou on the other hand is a quiet withdrawn sort of man who spent a lot of time behind the counter and did not aggressively confront customers who came into the shop. The evidence also suggests that Markou left the shop shut and unattended more frequently than Rogala did.
A further and general factor which must have affected the performance of the business is the general downturn of the video library business which became manifest at or shortly after the time the Markous took over from Rogala. I was impressed with the evidence of Mrs Reddin, a co-proprietor of a video library situated some two miles away from the subject library. She seemed to me to be an intelligent business-like woman and her evidence carried conviction. She said that almost imperceptibly and without warning the revenue generated by her business fell off starting in about mid-September or a little earlier. She said that her business got into some difficulty which was only overcome by aggressive marketing and a considerable change in method. She said that a lot of libraries went "down the tube" to use her phrase in September and October. This general trend must have affected the Markous and Markou was considerably less well-equipped than Mrs Reddin to deal with it.
Considering the case as a whole and taking all the above matters into account I am unable to be satisfied that the representations as to profit and takings were false, misleading or deceptive. Rather, I think, they were a true account of Rogala's conduct of the business.
So far as the allegation that a weekly profit of $500 was guaranteed to Markou I say simply that I am not satisfied that such a guarantee was given or anything really resembling it. Rogala was no doubt enthusiastic about his business and admits saying that his profit was at least $500 per week, but denies giving any sort of guarantee of future performance. With a business of this type, depending a great deal on salesmanship, it would be surprising if he did give such a guarantee. Further, it is my view, that with a business of this sort there is no guarantee or representation as to the future to be implied from the statements about past performance which incidentally I have found to be true in substance. It is pleaded that both Rogala and Titmuss gave a guarantee of future performance, but in an answer to an interrogatory Markou said that Rogala gave the guarantee. Titmuss denies that such a guarantee was given in his presence and I believe him. I also believe Rogala when he says he gave no such guarantee.
The application so far as it is based on the representations as to past performance and the guarantee as to future profit therefore fails and is dismissed. This disposes of the claim against the first and second respondents and I therefore find it unnecessary to decide whether or not if the representations had been misleading and deceptive the Markous would have succeeded against the first and second respondents. I incline to the view that they would not. Titmuss passed on to Markou the representations about past turnover and profit and made it perfectly clear that he was simply passing on what Rogala had said. Markou admitted that he quite understood this and that he knew that Titmuss had made no independent examination of the business. Furthermore, Titmuss advised Markou strongly to have the business checked and Markou told him that he was going to consult an accountant friend which in fact he never did. In my tentative view the first respondent engaged in no conduct which was misleading or deceptive to the applicants or was likely to mislead or deceive them and furthermore the applicants did not rely on any such conduct even if it occurred. Markou said that when he asked Titmuss whether or not he could believe Rogala's figures Titmuss said "it's got to be true, he said it in front of witnesses". Titmuss denies that he ever said this and I accept his denial.
There remain two claims against Rogala alone, that on 16th July before the contract was entered into, Rogala represented to Markou that all the tapes in the business were genuine and none was a pirated tape and that at the same time Rogala represented that there were 213 members of the video library, plus nearly 100 casual customers. It is necessary to deal with each of these two matters. It is said that each of these two representations was false and was said to have been made fraudulently and alternatively, was said to amount to a negligent misstatement and damages are claimed in each case.
The pirated tapes
I find that Rogala did represent to Markou that there were no tapes in the stock of the library which were pirated and I also find that he honestly believed this to be so. Some seven or eight weeks before the contract was entered into Federal Police had attended the premises and examined all the video cassettes and had taken away approximately sixty as being suspected pirate tapes. Rogala, not unreasonably, thought that thereafter the stock was free of pirate tapes. However, Rogala was in the habit of purchasing second-hand tapes through advertisements in the newspaper and no doubt he continued to do so after the police raid. He says that he checked these second-hand tapes by playing them but the evidence is that far more sophisticated techniques are required to ascertain whether or not a particular video tape is genuine. I find that when the Markous took the stock over there were present among the video cassettes some pirated tapes. The evidence is quite inadequate to establish precisely how many. At worst for Rogala there may have been fourteen out of a total stock of 520. Some suspect tapes were taken away from the shop by a representative of a wholesaler and some were taken away by Federal Police who attended the shop at Markou's invitation. Some tapes were examined by a laboratory in Sydney and found not to be genuine, at most fourteen, but the evidence does not establish which tapes were taken by whom and how they found their way to the laboratory. It is also quite uncertain which of the tapes found to be not genuine were in the stock taken over by the Markous. One tape at least among those found not to be genuine was proved to have been taken from the shop in the earlier police raid during Rogala's proprietorship. A box of tapes of uncertain provenance was tendered and Markou said that they all came from Rogala's stock taken over by him. In the case of one tape Markou was obviously mistaken and I have no confidence in his sweeping assertion that all came from the stock taken over by him. There is also the fact that Markou purchased a quantity of second-hand tapes himself and I think it is possible, if not probable, that some of the tapes in the box had been purchased by him. I think it more probable than not that the Markous took over some pirated tapes but I am unable to say precisely how many or what was their value. The Markous are entitled to some damages with respect to the pirated tapes but because of the many uncertainties both as to number and value I must assess these damages conservatively. I assess damages under this head at $300.
The number of members

Under Rogala's management the library had members in four different categories. Exhibit 5 is a list partly printed and partly handwritten which sets out the categories. Copies of this list were displayed in the library. The four categories which for this purpose need not be explained in any detail were $100 members, $75 members, casual memberships and $35 memberships. Members in each category had different hiring rights and paid different rentals. These need not be particularised. The casual hirers, to use a neutral word, paid a refundable bond deposit either in cash or by cheque or by bankcard and were then entitled to hire films paying a rental each time. Rogala regarded these as members and indeed exhibit 5 lists them under the heading "membership details and methods". He says that he told Markou that there were 213 members which included 78 active casuals. Exhibit 4 is a list in Rogala's hand-writing setting out the number of members in each category and which accords with this statement to Markou. He says he gave this list to Markou but does not know exactly when. Markou denies that he ever saw or received the list. I believe Rogala in preference to Markou who has either forgotten or is untruthful. Rogala also says that prior to preparing the list from the membership cards he told Markou that there were about 200 members and that Markou did not seem very interested in the number of members. Markou denies this and says that he did not regard casuals as members because they had paid nothing. This is somewhat curious because the casuals paid a refundable bond deposit and paid a rental for each film hired. Markou is unable to explain why the casuals were listed in exhibit 5 under the heading "membership details and methods". I find that the casuals were regarded by Rogala as being in a category of membership and that Markou understood this. I also find that in the first instance Rogala told Markou that there were about 200 members and that some time later he told him that there were 213 members which of course included the casuals. I find that Rogala never said that there were 213 members plus 100 casuals. Indeed in the statement of claim delivered on 19th October 1983 and in the first amended statement of claim delivered some time in December 1983 it is pleaded simply that Rogala represented that there were 213 members. It was not until the reamended statement of claim delivered pursuant to an order made on 7th March 1984 that the allegation was made of representation of 213 members and 100 casuals. Of course mistakes can be made and people can overlook things, but I find significant this early failure to plead the representation as finally alleged. I find that when the Markous took over the video library there were, including casuals who should be included, 213 members. This disposes of the question of the number of members.
There remains the question of Rogala's cross claim. The Markous claim to rescind the contract in equity or alternatively to terminate it at law because of the representations said to be false and because of the deceptive and misleading conduct. I have found that the only false representation made was that there were no pirate tapes in the stock. This alone would not in my view entitle the Markous either to rescind or to terminate the contract. The letter from the Markous' solicitors to the respondents dated 28th September 1983 states the Markous' intention to quit the premises forthwith. In fact Markou locked the premises and handed the keys to the landlord on 7th October 1983 having given no further notice to Rogala. The stock and fittings were left in the premises and no effort was made to recover video cassettes in the hands of members. The assignment of the lease from Rogala to the Markous had never been consumated and the landlord not unnaturally looked to Rogala for the loss and damage it had suffered as a result of the abandonment by the Markous of the tenancy. The landlord claimed its loss and damage from Rogala who eventually paid $2,763-66 to the landlord for rent from the period prior to reletting and various other charges. Rogala paid his solicitors $200 for their costs in the matter of the landlord's claim. The items in the landlord's claim appear to be reasonable and no evidence was led nor argument presented by the Markous on this topic. Since the Markous abandoned the tenancy contract without justification I consider that Rogala is entitled to recover $2,963-66 from the Markous on this costs claim. There is also the matter of an advertising contract which Rogala had with Val Morgan & Co. (Aust.) Pty Ltd, (Val Morgan). This had over a year to run when the Markous took over the business. I find that Markou agreed orally with Rogala to take over this contract. After the Markous abandoned the business they made no payments to Val Morgan which took proceedings against Rogala. The claim was compromised for $300 which Rogala paid to Val Morgan. He is entitled to recover this from the Markous. In the result Rogala is entitled to recover $3,263-66 from the Markous on the cross claim.
In this whole matter the Markous have been partially successful with respect to a relatively small part of their claim which should be reflected in the order for costs.
The claim against the first and second respondents is dismissed with costs. On the claim against the third respondent there will be judgment for the applicants for $300. On the cross claim of the third respondent against the applicants there will be judgment for the third respondent for $3,263-66 and as between the applicants and the third respondent the applicants will pay 90% of the third respondent's costs of the whole proceedings.
There being no finding against the first and second respondents it is not necessary to deal with the cross claim against the third respondent.

[1985] FCA 344

24 JULY 1985