Myers v Neis & Others No. DCCIV-97-901

SUSAN KAYE MYERS & SUSAN MYERS PTY LTD v EVELYN NEIS AND OTHERS

[2000] SADC 111

Judge Lunn

Civil

The persons involved

The 1st defendant, Evelyn Neis, was born in 1944 in Germany and migrated to Australia in 1972. In 1973 she commenced a career in designing women’s clothing. In 1992 she entered into a defacto relationship with Bill Tzavarin and acquired a farm at Milang. From about 1992 to 1994 she carried on business in the manufacture and sale of women’s clothing from her premises at 301 North Terrace, Adelaide. In October 1995, at the age of 51, she had twin daughters who were born prematurely. In early 1996 her defacto husband was diagnosed with cancer and he died on 12 October 1996. In her business she used the “shoe box” method of accounting and described herself as the worst bookkeeper there is.
The 2nd defendant has been a public accountant in practice in Adelaide since 1983. During the events in issue in this action he used the surname Popowski, but late in 1997, for legitimate reasons, he changed it to Bartley. He carried on his practice through the company which is the 3rd defendant. No distinction was sought to be drawn between the 2nd and 3rd defendants. In these reasons I will only refer to the 2nd defendant, but, where appropriate, that also encompasses the 3rd defendant. In about 1989 the 2nd defendant became the accountant for the 1st defendant. He visited her business premises regularly. He was continually encouraging her to improve her bookkeeping practices. He developed a close relationship of accountant and client with her. Part of the fees due to the 2nd defendant from the 1st defendant were offset against purchases from the 1st defendant’s business by the 2nd defendant’s wife.
Mrs Carmel Vozzo is an experienced and capable business woman. In the later 1980s, while the manager of a Goodwill Clothing Store at Torrensville, she met the 1st defendant who was a customer at that store for old materials and bric-a-brac for her dress creations. The 1st defendant understood her to be a capable in business and a good salesperson. Mrs Vozzo was divorced and had a substantial mortgage commitment on her home. She needed substantial employment to earn sufficient to service this loan. In the early 1990s the 1st defendant had requested Mrs Vozzo to work for her, but Mrs Vozzo had declined this offer as she considered, with some justification, that the 1st defendant was domineering and overbearing. In early 1997 she was working part time for about 25 hours per week in Katies women’s clothing store in Rundle Mall.
The 1st plaintiff, Susan Myers (“the plaintiff”), was born in 1949. Her father owned and ran the Enfield Hotel for many years. She was employed in that business, but it was a very different business from a small women’s fashion boutique. From 1977 to 1981 she studied accounting part time and obtained a “Business Certificate of Accounting”. Her father died in 1981 and she then ran the Enfield Hotel as its managing director until 1983 when it was sold. She married in 1983 but was divorced in 1990. Since about 1981 she has suffered episodes of severely debilitating migraine headaches. After 1983 she had a few periods of casual part time employment, which included selling clothing on a party plan between 1993 and 1995, but otherwise she lived off her investment income. In 1996 she was living in a large expensive house which she owned at Auldana which had five bedrooms and five bathrooms. She lived there alone with five cats. Although the defendant attempted to portray her as an experienced and astute business woman who was familiar with business accounting, I do not wholly accept this. By 1996 she was somewhat out of touch with the commercial world and needed independent professional assistance to guide her in what was in her best interests. She is a reasonably intelligent and articulate person. From her previous business experience and accounting education she knew what type of assistance she needed, and where to find it, if she wanted to protect her financial interests.

The shop in Adelaide Arcade

In about March 1994 the 1st defendant took over a small shop in the Adelaide Arcade in which she conducted retail sales of garments which she had designed and had manufactured under the label of “Evelyn Neis Creations”. She took a lease of the shop No 28 for three years. That lease did not expire until May 1997, but she always mistakenly believed that it was to expire at the end of April 1997. In March 1996 she wrote to the Adelaide Arcade intimating that she intended to sell her shop business. She had a number of disputes with the Adelaide Arcade management and was on bad terms with them. Most of the garments marketed in the shop were very highly priced, individually designed items for weddings, formal occasions and the like. Their retail price was about twice their cost of manufacture to the 1st defendant. It was generally a niche market which was patronised by a small number of well-to-do women many of whom were regular customers. Even at best only a few sales were made each week. Many of the purchases were on layby arrangements. The 1st defendant did not impose any particular conditions on the laybys and generally allowed customers as long as they wanted to pay them off without imposing any fixed regime of periodic payments. After 1995 the purchases on layby were not brought into the annual accounts until the financial year in which the transaction was completed, even though some of the money may have been received in an earlier financial year. The 1st defendant worked as a salesperson in the shop but on occasions she had assistance from part time employees.
The 1st defendant’s rudimentary bookkeeping system in the shop consisted of keeping a single current docket book into which contemporaneous entries were made for all sales, laybys, cash expenses and other relevant expenditure. Although these docket books prior to the 1st defendant’s sale of the business were not tendered, they were in a similar form to those kept by the plaintiff after she acquired the business, and I have seen those docket books. A perusal of such docket books would give a ready indication of the level of trading in the shop during the periods to which they relate. The 1st defendant also prepared secondary financial records being handwritten daily, weekly and monthly reports of her turnover and takings in the shop. These were compiled from information in the docket books. Both the docket books and the daily, weekly and monthly reports were kept in the shop and were available for anyone working in the shop to look at.

The plaintiff’s early dealings with the 1st defendant

In 1995 the plaintiff became a regular customer at the shop. She bought a number of garments on layby and visited the shop about every six weeks. She became very friendly with the 1st defendant. As the 1st defendant said, “We became quite close friends and we sort of clicked” (627). When the 1st defendant’s defacto was in hospital shortly prior to his death the plaintiff looked after the shop for her on some occasions while she visited him in hospital. The plaintiff seemed to be a fairly lonely person who was looking for friendship. The reason that she had regular layby transactions was probably not because she could not have afforded to have bought the items outright, but because it gave her a pretext to visit the shop regularly and to interact socially with the 1st defendant.
By late in 1996 the plaintiff had started working for the 1st defendant on a part time casual basis as a salesperson in the shop. She worked on Mondays and Tuesdays and on various other occasions when the 1st defendant needed her. She so worked on about thirty eight occasions prior to her purchasing the shop. She was paid $75 a day, but some of this she received as credits on garments she was purchasing. On 17 February 1997 the 1st defendant went on a holiday to Queensland. She left another employee, Vivian Davis, and the plaintiff to run the shop in her absence. The plaintiff did not get on with Vivian Davis and there was trouble in the 1st defendant’s absence with missing stock and money. The plaintiff blamed Davis for it.
In early 1997 the 1st defendant became involved in a pyramid selling operation known as the “Concorde game”. She became highly distraught after a television broadcast on 15 March on “Today Tonight” showed film of her allegedly being involved in an illegal pyramid selling scheme. At about this time she was also involved in a major dispute with her neighbours at 301 North Terrace. At some time early in 1997 in the course of this dispute she was arrested, although charges were not pursued against her. Her friendship with the plaintiff was such by this time that it was the plaintiff whom she summoned to her aid in the City Watchhouse after her arrest. The 1st defendant was not in a good financial position and she knew that she would not be continuing in her business in the shop when the lease expired at what she believed was the end of April 1997. She decided to attempt to dispose of the business of the shop but within a time frame that would enable her to transfer the business to 301 North Terrace immediately upon the shop closing on 30 April if she could not sell it.

The sale of the shop to the plaintiff

On about Friday 21 March the 1st defendant rang the plaintiff and inquired whether she would be interested in buying the business of the shop. If the possibility had been mentioned previously, it had not been taken seriously by the plaintiff. The plaintiff was very enthusiastic about the idea and immediately contacted the ANZ Bank to inquire about raising a loan. On Saturday 22 March the plaintiff and the 1st defendant further discussed the proposed sale. Broadly the discussions were along the lines that the plaintiff would take up a new lease of the shop and would only sell garments supplied by the 1st defendant. The 1st and 2nd defendants had much earlier discussed in general terms the possibility of the 1st defendant granting franchises to various shops for the sale of the garments which she manufactured. She suggested that the plaintiff should take such a franchise which would give her an assured supply of “Evelyn Neis Creations” stock. However, neither of them then had any real understanding of the legal and accounting implications of what they were proposing. As the 1st defendant said, “We were very loose about what we wanted. We didn’t know what to do.” (671). The 1st defendant said that the plaintiff would have to buy the existing stock at half its retail price, which she estimated at $100,000, and take over the outstanding layby and similar transactions for what was owing on them, which she estimated at $25,000. The 1st defendant said that she would not want anything for goodwill. The 1st defendant was insistent that the sale had to be completed by 15 April. She claimed that this was because she would then be going to Melbourne to assist another similar franchised shop to be opened there, but it never occurred.
On Monday 24 March the plaintiff saw Mr Bartsch at the ANZ Bank about obtaining a loan for the purpose of buying the business. While the plaintiff had about $164,200 invested, that money was not readily available, and in any event she wanted the continued income from it for her living expenses. Mr Bartsch told her that she would need a Form 2 under the Land and Business (Sale and Conveyancing) Act 1994 (“the LBS Act”) and the financial statements for the business for the previous three years. On about 24 March she received a written quote from the ANZ Bank for the interest and repayments on various types of loans. She had not been given any assurance that she would get the loan, and she was only prepared to proceed with the purchase if she obtained it. Later on 24 March she telephoned Mr Wiadrowski, who had been her accountant for some years, and he also told her that she needed a Form 2. She relayed these requests for the Form 2 and the previous three years financial statements to the 1st defendant who in turn instructed the 2nd defendant to give to the plaintiff or her accountant whatever information or documents they needed. Although neither of them would admit it, I infer that there were some further communications between the 1st and 2nd defendants at about this time to the effect that the necessary financial statements for the business were not in existence, that they would need to be prepared quickly and that their contents may be adverse to any other accountant advising the 1st plaintiff that she proceed with the purchase. It is also likely that about this time there were discussions between the plaintiff and the 1st defendant along the lines that they would endeavour to keep their expenses to a minimum by using the same accountant and solicitor. Neither of them really appreciated the potential difficulties for the plaintiff in such a course. As a result of this the plaintiff decided not to continue with the services of Mr Wiadrowski and to use the 2nd defendant as her accountant. At some stage which is not clear, but which was certainly on or before 10 April, the 2nd defendant agreed to become the accountant for the plaintiff.
On 26 March the 1st defendant telephoned Mr Paul Wheeler of Complete Franchising, whose name she found in the yellow pages of the telephone book, seeking his assistance to set up the franchise arrangement. On that day there was a meeting between Mr Wheeler, the 1st defendant and the plaintiff. Neither the 1st defendant nor the plaintiff had any appreciation of what was involved in setting up a franchise or how much it was going to cost. The 1st defendant was surprised when Mr Wheeler quoted her a fee of $15,000 plus legal expenses. She was also surprised to find out that the necessary documents could not be done within a couple of days. She instructed Mr Wheeler to proceed to set up the franchise and he agreed to work over Easter on the documents. Mr Wheeler told the 1st defendant that he needed the previous financial statements for the business and she rang the 2nd defendant to arrange for him to supply them to Mr Wheeler. However, Mr Wheeler had considerable difficulty in contacting the 2nd defendant. When he did finally speak to him a few days later the 2nd defendant refused to supply the necessary documents. This was because some of them had not yet been produced and he realised that they were not likely to be acceptable.
In his telephone discussion with the 1st defendant resulting from her meeting with Mr Wheeler the 2nd defendant said he thought he could get the franchising arrangement set up for considerably less than Mr Wheeler had quoted. On 27 March he rang Phillip Winter, a solicitor with whom he had had a number of dealings, and got an estimate from him that he could set up the franchise arrangement for about $8,500-$9,500. An appointment was then made for the 1st defendant to see Mr Winter on Tuesday, 1 April. The Easter weekend was from 28 to 31 March. Over part of that weekend the plaintiff stayed with the 1st defendant at her farm at Milang. There were doubtless then further discussions between them about the sale of the shop.
On Tuesday, 1 April the 1st defendant met for the first time with Mr Winter at his office. The plaintiff was not present. He took basic instructions and was told the matter was urgent as it had to be completed by 15 April. On 2 April Mr Winter forwarded to the 1st defendant a letter and two copies of drafts of a Sale and Purchase Agreement (“the Sale Agreement”) and a Franchise Agreement which he had prepared. He asked that the 1st defendant and the plaintiff make an appointment to see him when they had considered the drafts. The plaintiff and the 1st defendant saw Mr Winter on Friday, 4 April. This was the first time that the plaintiff had seen him. They were both apparently intending to sign the draft agreements which had been enclosed with a letter of 2 April without having any understanding of them. Mr Winter told them this was not possible and arranged to meet them again on the evening of Sunday, 6 April apparently to give them an opportunity to go through the drafts properly. At either the meeting on 2 April or their next meeting the amount of the monthly franchise fee payable by the plaintiff to the 1st defendant was negotiated and was agreed at 10% of the wholesale price of the stock sold by the plaintiff.
The 2nd defendant had been constructing a trial balance for the 95/96 accounts of the 1st defendant. There is a printout of such a trial balance dated 3 and 4 April. On 4 April the plaintiff went to the 1st defendant’s premises at 301 North Terrace in the expectation of meeting the 2nd defendant there. The 2nd defendant did not attend, but a courier delivered some documents apparently from him to the 1st defendant while the plaintiff was there. The 2nd defendant did not show these documents to the plaintiff and said that they were of no consequence, but I infer that they were her trial balance for the 95/96 year.
The 1st defendant met with Mr Winter on the evening of 6 April, but the plaintiff did not attend as she was suffering from a migraine headache. Mr Winter went through the draft agreements with the 1st defendant. He told her that as only assets were being sold there was no legal need for her to produce her prior trading figures. Mr Winter had apparently reached that legal conclusion because as only assets were being sold he thought the transaction was not the sale of a small business under the LBS Act. Therefore, he advised that a Form 2 and previous years’ financial statements did not have to be supplied. It is likely there had been some discussion between Mr Winter and the 2nd defendant about this prior to 6 April. On either Monday, 7 April or Tuesday, 8 April, (a note on Mr Winter’s file incorrectly refers to “Monday, 8 April 1997”), there was a meeting between Mr Winter, the plaintiff and the 1st defendant, at which he went through the third draft of the two agreements. He expressed concern about the “haste” of the matter. He recommended to the plaintiff that she should obtain independent legal advice. She told him she would consult with her own lawyer, Peter Scragg. However, she did not ever consult Peter Scragg or any other lawyer about the matter. She did not afterwards tell Mr Winter she had not consulted another lawyer.
On either Wednesday 9 or Thursday 10 April the 1st defendant and the plaintiff again saw Mr Winter at his office where they each executed the final Sale Agreement which bears the date of 10 April. By clause 1 the 1st defendant agreed to sell to the plaintiff “the assets as more particularly described in item 1 of schedule 1 hereto for that price specified in item 2 of such schedule.” There was no schedule 1, but there was an annexure A which set out a list of 282 items of stock with their retail prices and an annexure B which set out a number of “debtors (pursuant to layby)” with the amount outstanding for each one. Although the total figures were not stated in this agreement, it was accepted by the parties that $90,000 was payable by the plaintiff for the stock and $35,000 for the layby debtors. The agreement provided that the purchase price was to be paid by a deposit of $10,000 on the signing of the agreement and the balance at settlement which was to take place on 15 April. The deposit was duly paid by the plaintiff. The agreement was subject to the plaintiff entering into a franchise agreement with the 2nd defendant substantially in the form of the franchise agreement in schedule 2 and to the plaintiff obtaining a loan of not less than $90,000 by 14 April and a lease of the shop for five years from the Adelaide Arcade. Significantly, the form of franchise agreement in schedule 2 stated that the franchise fee was to be 10% of the wholesale value of the stock sold by the plaintiff. The condition about obtaining the lease before settlement was apparently waived by the plaintiff, but there were ongoing negotiations with the Adelaide Arcade about it.

In order for the plaintiff to obtain the necessary loan from the ANZ Bank she had to have a further interview with Mr Bartsch, a lending officer of the bank, and to supply information which was required by the bank. There is a major dispute about when this meeting took place. A note from Mr Bartsch bears the date of 10 April, but that apparently indicates when his memorandum recommending the approval of the loan was written and not when the meeting occurred. There is a “loan repayment quotes option” document from the bank to the plaintiff dated 9 April which is likely to have emanated from what was discussed at the meeting with Mr Bartsch as it is based on a loan of $140,000 which is more than the amount which the plaintiff had sought on 24 March. The personal financial statement of the plaintiff, which was probably given to Mr Bartsch at the meeting, is also dated 9 April. Although the plaintiff has a note in her diary indicating that the meeting was on Monday, 7 April, it is more likely that the note of the 2nd defendant in his diary is correct that it was on 9 April at 4pm.
Prior to this meeting with the bank the 2nd defendant, who was reasonably experienced in such matters, expected that the bank would require some projection in writing about the likely turnover and profit of the shop under the proposed franchise. At some time shortly prior to the meeting the 2nd defendant prepared an undated document (“the Projection”), which was headed:
“EVELYN NEIS – PROJECTION FOR YEAR 1/5/97 TO 30/4/98 BASED ON CURRENT TRADING FIGURES FOR PURPOSE OF FRANCHISE”
In its body it stated there would be sales of $200,000 with the cost of garments sold being $80,000 resulting in a gross profit of $120,000. Expenses were then listed totalling $37,951 and showing a resultant nett profit of $82,049. These expenses, with some adjustments for the accounting fees, bank fees and telephone costs, were taken from the 1995/1996 trial balance, although that was not apparent from the face of the Projection. A cover sheet on the letterhead of the 3rd defendant was placed on this Projection, which stated, inter alia:
“The attached is an estimate only for budgetary purposes and has been obtained from the trading figures extracted from the complex accounting structure of Evelyn Neis and from information supplied to us. We believe that the details enclosed represents a true and fair view of the potential trading position of the shop in Adelaide Arcade, known as Evelyn Neis Creations.
No warranties or guarantees are given by this firm or any of its employees in relation to these figures as the actual performance will be dependent on the operators own skills an abilities in marketing the merchandise. This firm will accept no liability for the accuracy of the information supplied nor for the performance of the operation seeking to be franchised.”
The 2nd defendant did not give the Projection to either the plaintiff or the 1st defendant. Neither had any complete knowledge of its contents before the meeting with Mr Bartsch or at any relevant time afterwards. At the request of the 1st defendant the 2nd defendant accompanied the plaintiff to her meeting with Mr Bartsch. The purpose of the 2nd defendant attending the meeting was to provide any information which the bank might require about the existing business which would not be able to be given by the plaintiff and to assist in ensuring that the plaintiff got her loan approval quickly so that settlement could proceed on 15 April.
At the outset of the meeting with Mr Bartsch the 2nd defendant handed the Projection to him. There was some discussion about the figures disclosed in it. Mr Bartsch kept the document and it remained on the bank file. All the plaintiff saw of the document was only the sales figure of $200,000 which she was able to read upside down across the desk while the document was in front of Mr Bartsch. Apart from what she gleaned from the discussions between the 2nd defendant and Mr Bartsch about other figures in the document she did not know of its contents or make any attempt to ascertain them. From the memorandum of Mr Bartsch dated 10 April I find that the following matters were discussed at the meeting. Either the plaintiff or the 2nd defendant said that the plaintiff was purchasing the stock for $90,000 and the layby debtors for $30,000 and that she required $20,000 for working capital, thus making a total loan sought of $140,000. The plaintiff was to pay the wholesale price of the stock plus a 10% royalty. (This is consistent with the franchise fee being calculated on the wholesale, and not the retail price.) The plaintiff told Mr Bartsch that she had worked in the shop for six months and had managed it in the absence of the 1st defendant. The 2nd defendant said that the figures for the previous two years were not available as the 1st defendant had four other business interests whose figures were intertwined. He said that he was the accountant for the 1st defendant and was to become the plaintiff’s accountant. He said he had extracted figures “from historicals” to provide the projection for the next twelve months. The plaintiff said she intended to employ a full time person at $437 per week totalling $22,724 per annum. In answer to questions from Mr Bartsch the 2nd defendant said that the projected profit of $82,049 did not include wages and repayments to the bank, which Mr Bartsch apparently calculated at $34,050 per annum. Mr Bartsch made some calculations about an adjusted nett profit, but it is not clear whether he mentioned that in the meeting. The plaintiff advised that she would not being drawing wages but would continue to live from her investment income, although she thought there was scope remaining for drawings to be made. Mr Bartsch was aware that the plaintiff had $164,200 invested in various stocks and debentures. The plaintiff said that she was looking to run the business for five years until the debt to the bank was cleared and then to keep it for a further five years. It was stated by either the plaintiff or the 2nd defendant that settlement was due on Tuesday, 15 April.

It is likely that the 2nd defendant told Mr Bartsch that the 1st defendant was not paying any wages in running the shop. This, to the knowledge of the plaintiff, was false as she knew that she and Vivian Davis had received wages. It is likely that she did not seek to contradict what the 2nd defendant had said on this topic because she had no particular interest in how profitable the business had been or was likely to be. She was prepared to go along with whatever the 2nd defendant said and did to ensure that the bank approved her loan application quickly. Mr Bartsch was not in a position to approve the loan, but at sometime in the few days afterwards the plaintiff was advised that it had been approved.

Either shortly before, or shortly after, the bank meeting there was a meeting between the plaintiff and the 2nd defendant, and for at least some of the time the 1st defendant, at which the plaintiff raised with the 2nd defendant a number of queries about the provisions of the draft Franchise Agreement. At either this, or another meeting late on 9 April or early on 10 April, the plaintiff confirmed her instructions for the 2nd defendant to act as her accountant both in relation to the shop and generally. The 2nd defendant accepted these instructions and from at least 10 April onwards acted as the plaintiff’s accountant in relation to the shop and other matters. This was with either the express or implicit approval of the 1st defendant. The 2nd defendant also continued to act as the accountant for the 1st defendant. On 10 April he wrote to Mr Wiadrowski, the plaintiff’s previous accountant, advising that he was acting and to an insurance broker requesting a quote on insurance for the plaintiff. The 2nd defendant then knew that settlement had not taken place on the sale and that the Franchise Agreement had not been signed.
On Friday, 11 April the 1st defendant and the plaintiff received from Mr Winter a draft of the Operations Manual which he had prepared for the business and which was an integral part of the franchise arrangement. They both considered it to be inadequate and to contain substantial errors. The 2nd defendant thereupon had a heated telephone discussion with Mr Winter and terminated his instructions. She again contacted Mr Wheeler and re-engaged him to complete the necessary documents to set up the franchise to the plaintiff.
On Saturday, 12 April the plaintiff and the 1st defendant made out a handwritten agreement (“the Fit-out Agreement”) whereby the plaintiff agreed to pay $17,500 to the defendant on 16 April 1999 without interest for various specified items of plant and equipment in the shop. That night they went out to the Casino together.
In finalising the Franchise Agreement Mr Wheeler noted that the drafts prepared by Mr Winter had stipulated that the franchise fee was to be payable on 10% of the wholesale price of the goods, which he believed was unusual. He raised the point with the 1st defendant who decided that she wanted the fee assessed as 10% of the retail price. (This effectively doubled the fee.) Without reference to the plaintiff the Schedule in the version of the Franchise Agreement to be signed was altered by Mr Wheeler to provide for the monthly fee to be 10% of gross sales.
Settlement did not take place on Tuesday, 15 April because the plaintiff had a migraine headache and could not leave her home. The 1st defendant spoke to her by telephone and arranged for Mr Twelftree, a registered conveyancer, to represent her at the settlement which was re-scheduled to occur at 9.30am on Wednesday, 16 April. The 1st defendant organised another conveyancer to represent her at the settlement.
In the early evening of 15 April the 1st defendant and Mr Wheeler went to the plaintiff’s home at Auldana for the purpose of having the Franchise Agreement executed. Immediately prior to its execution Mr Wheeler pointed out to the plaintiff his alteration to the basis of assessment of the franchise fee and the plaintiff appeared to comprehend it. The Franchise Agreement was then executed by the plaintiff and the 1st defendant and their signatures were witnessed by Mr Wheeler who dated it 15 April 1997.
Settlement occurred on 16 April at Billy Baxter’s Coffee Lounge. Cheques totalling $140,000 from the ANZ Bank were distributed, and including one for $113,418 to the 1st defendant. The plaintiff thereafter ran the shop, but to outsiders there was no significant change in the appearance of the business or in the way in which it was being run. The plaintiff continued to use the name “Evelyn Neis Creations” for the shop.
Early in 1997 the 1st defendant had renewed her acquaintance with Mrs Vozzo who had called into the shop. The 1st defendant recommended to the plaintiff that Mrs Vozzo would be a good person for her to employ as a part time assistant in the shop after she took it over. Shortly before settlement the 1st defendant approached Mrs Vozzo about her working part time in the shop for the plaintiff. She took her to the shop and introduced her to the plaintiff. After the introduction, and in the absence of the plaintiff, the 1st defendant told Mrs Vozzo that the plaintiff was incapable of running the business on her own, that she would never make a success of it on her own and she needed someone there like Mrs Vozzo who knew what they were doing. This was not said by the 1st defendant because she knew that she was taking advantage of the plaintiff, but rather because as a friend she recognised the plaintiff’s inadequacies and was diplomatically attempting to ensure that these inadequacies were addressed. Shortly afterwards the plaintiff approached Mrs Vozzo and offered her part time work. On 19 April Mrs Vozzo started working in the shop for a few hours each morning before she commenced her other employment at Katies.
Shortly after the settlement the 2nd defendant recommended to the plaintiff that she should carry on the shop business through a trust. He arranged for the incorporation of the 2nd plaintiff on 24 April 1997 to act as the trustee of that trust. On 28 April the 2nd defendant as settlor entered into a deed of settlement with the 2nd plaintiff to set up the “Susan Myers Family Trust”. The plaintiff was the sole director of the 2nd plaintiff and was the primary beneficiary of the trust. Thereafter the trading in the shop was carried on through the trust. There was no evidence of any agreements between the plaintiff and the 2nd plaintiff concerning the transfer to the 2nd plaintiff of any stock, debtors, shop fittings or any other assets which the plaintiff had obtained from the 1st defendant. In the accounts of the trust the $140,000 which the plaintiff had borrowed from the bank was treated as a loan by her to the trust.
In mid May the first monthly franchise fee became payable to the 1st defendant. The 1st defendant sought an amount assessed on the retail value of the sales and the plaintiff paid it without complaint, although she claimed that it was then her understanding that it should only have been half that amount. Under the terms of their arrangement the plaintiff believed she was required to take $15,000 worth of stock from the 1st defendant on 1 March and 1 September in each year. In addition she could purchase such other stock as she wished. The 1st defendant, who was attending regularly at the shop, supplied in May and June considerable quantities of additional stock which far exceeded the amount of stock which the plaintiff was selling. The plaintiff paid for some of this stock without complaint, and in early June took out a bank overdraft of $10,000 to assist her in paying for this additional stock.
Negotiations had been continuing with the Adelaide Arcade for a lease to be granted to the plaintiff. On about 28 May she received a letter from the Arcade containing an offer of a lease for five years to the 2nd plaintiff, with a guarantee from the plaintiff, which offer had to be accepted within twenty one days. The plaintiff accepted the offer on 19 June which was about the last day for its acceptance.
For May 1997 the turnover in the shop was only $2,976 and the takings were only $5,798. On this level of sales the plaintiff was trading at a substantial loss.
The plaintiff had become increasingly friendly with Mrs Vozzo and substantially reliant upon her. It is clear from what she said to Mr Bartsch that the plaintiff had never intended to work full time in the shop. To her it was more of a hobby than an occupation. She had difficulties with her health, and on occasions in getting up in the mornings, and she did not wish to commit herself in the long term to having to be at the shop at 9.30am six days a week. Initially Mrs Vozzo had been employed part time to see if she would be suitable to run the shop. Once the plaintiff was satisfied with her she offered her full time employment so that she could give up her other employment at Katies. She started working full time in the shop on 26 May. The 1st defendant came into the shop regularly in the first week of June to train Mrs Vozzo. Friction developed between them as Mrs Vozzo considered that she took her orders from the plaintiff and not from the 1st defendant. Although the trading in June was improved over that in May (a turnover of $10,544 and takings of $8,648), Mrs Vozzo with her business experience was concerned that the shop was not viable. She expressed her concerns to the plaintiff. She was particularly critical of the amount of additional stock which the 1st defendant was advising the plaintiff was required and which she was delivering to the shop. The plaintiff then became sufficiently concerned about this issue to approach the 2nd defendant for advice on it. On 30 June the plaintiff gave a letter to the 1st defendant, which was prepared on her behalf by the 2nd defendant, which stated that she was returning a quantity of stock which she did not require and that she would only take such future stock as she ordered. This letter led to some negotiations between the plaintiff and the 1st defendant in which the plaintiff agreed to take back the stock which she had returned on the basis that payment for it would be deferred on some terms to be subsequently agreed. I infer that Mrs Vozzo did not approve of this arrangement. In these negotiations the 1st defendant also proposed that she should come back to work in the shop in an effort to improve the sales. However, her offer to do so was conditional upon the plaintiff dismissing Mrs Vozzo. It was this ultimatum from the 1st defendant about sacking Mrs Vozzo that brought matters to a head. In effect the plaintiff was being asked to choose between which of her two friends would run the shop for her.
In late June Mrs Vozzo had enquired of the plaintiff about the circumstances in which she had come to buy the shop and to enter into the Franchise Agreement. With the plaintiff’s permission Mrs Vozzo took the plaintiff’s copies of some of the relevant documents to her son who was a lawyer practising in Adelaide. He recommended that the plaintiff should urgently consult another solicitor who specialised in franchising law. As a result on 2 July the plaintiff first consulted Mr Iles, a solicitor at Piper Alderman, who has acted for her ever since. He gave her certain advice as a result of which she decided that she wanted to withdraw from her arrangements with the 1st defendant. On 3 July there was a major confrontation at the shop between Mrs Vozzo and the 1st defendant. Mrs Vozzo told the 1st defendant to leave the shop and threatened to call the Arcade Security Service if she did not. When the 1st defendant refused to leave Mrs Vozzo rang Mr Iles who then spoke on the phone to the 1st defendant and also told her to leave. The 1st defendant rang Mr Wheeler and the 2nd defendant seeking to assert her right to stay. Eventually she left in a distraught state and never returned. It was an incident of high drama. The plaintiff obviously found this confrontation most distasteful and was very reticent in giving evidence about it.
On 9 July the solicitors for the plaintiff gave notice to the 1st defendant that the plaintiff had purported to exercise her right of cooling off under the LBS Act on the basis that the transaction was the sale of a small business to which that Act applied and that she did not intend to be bound by the Sale Agreement or the Franchise Agreement. Thereafter there was protracted correspondence between the solicitors for the parties concerning the possibility of the 1st defendant taking back the stock and/or the shop. These negotiations came to nothing because the plaintiff would not give up the shop and the defendant would not, and was not in a position to, refund the moneys paid at settlement. This action was commenced against the 1st defendant on 16 July 1997.
As an apparent result of the traumas in the first week in July the plaintiff, in the words of Mrs Vozzo, went to pieces and dropped her bundle. From 14 July she had protracted periods of debilitating migraine headaches which lasted with a few small breaks until well into August. Mrs Vozzo continued to run the shop. Its name was changed to “Susan Myers Boutique”. Sales did not improve. In early August Mrs Vozzo arranged with a friend of hers, Margaret Heaven, who ran another women’s fashion shop, to take stock from her on consignment for the shop. This was reasonably priced and more middle of the range women’s fashions. The idea was to attract customers into the shop with this stock and hope to sell them the more expensive Evelyn Neis Creations. The plaintiff was only obtaining a 4 to 5% commission on the Margaret Heaven consignment stock which she sold. Sales of the Evelyn Neis stock did not markedly improve and as from 30 August the plaintiff started a half price stock clearance sale.

Fortunately for the plaintiff she had never signed the lease for the shop. In August her solicitors were able to negotiate a payment to the Arcade upon which she was released from any further obligations under the agreement to lease. She closed the shop on 26 September. All of the remaining stock was then put into storage.
The shop was taken over by Margaret Heaven who employed Mrs Vozzo as her manager. The shop turned over over $200,000 in sales of Margaret Heaven stock between October 1997 and the end of June 1998 and had even better results in the following year.
The plaintiff continued to attempt to sell the remaining Evelyn Neis stock which she held. She did not market it through a retail shop, but she organised two events to display the stock in the hope of selling it. The last of the stock was disposed of to a shop selling recycled clothes in about March 2000. In July 1999 the plaintiff was forced to sell her home at Auldana to raise sufficient money to pay out the outstanding loan and interest to the ANZ Bank. That loan was discharged upon settlement on the sale in October 1999.
In this action the 1st defendant issued 3rd party proceedings against Mr Winter. At the commencement of the trial before me those 3rd party proceedings were dismissed by consent with no order as to costs.

The witnesses

Neither Mr Winter nor Mr Bartsch were called as witnesses. Various documents prepared by them were tendered under s45a of the Evidence Act. Those tenders were not opposed and no party sought that the author of the documents be called as a condition of allowing the tenders. These contemporaneous records are the best evidence of what occurred and I accept their contents.
I accept the evidence of Mrs Vozzo. There was certainly considerable antagonism between her and the 1st defendant, but she was an impressive witness and I do not consider that such antagonism unduly coloured her evidence. She conceded that she had described some of the 1st defendant’s garments as rubbish, but that does not mean that she did not do her best to sell them. She admitted that one of the 1st defendant’s garments which she was displaying was torn by her, but I do not infer anything sinister from this.
I accept the evidence of Mr Wheeler. I am satisfied that the only way in which he could have known about the interior of the plaintiff’s home was because he had been there as he said.
I accept the accounting evidence of Mr Krantz, the expert accountant called by the plaintiff.
I did not find any of the plaintiff, the 1st defendant or the 2nd defendant to be impressive, or very reliable, witnesses. As between them it is really the case of who was the least unsatisfactory of them. I reject the evidence of each of them insofar as it is inconsistent with the other evidence mentioned in the preceding paragraphs.
I cannot accept the plaintiff’s evidence that the 1st defendant told her that the turnover of the shop was $5,000 per week, at least in most weeks. If it had been said the plaintiff must have known that it was false. In the period of seven weeks in which she worked part time in the shop from 3 February 1997 to 24 March 1997 the recorded turnover shown in the weekly reports was only about $3,288 per week on average. (The reports for before and after these dates are missing.) In this period the plaintiff had regular access to the current docket book and made entries in it for the sales and expenses in which she was involved. It is highly likely that she looked at the other entries in the book made by the 1st defendant and other employees and possibly at the other prior records which were in the shop. A person of her intelligence, and with her accounting education, must have appreciated from what was in the current docket book that there was nothing like a turnover of $5,000 per week in the shop during this period. In cross examination on this topic she claimed that the 1st defendant had told her that there were unrecorded cash sales which made up the deficiency. While it is possible that there were some unrecorded cash sales I accept the conclusion of Mr Krantz that they were not significant. They would not have been sufficient to account for the difference between what could be readily gleaned from the docket book and the alleged representation of a current average turnover of $5,000 per week. Insofar as there was any talk by the 1st defendant of a turnover of $5,000 per week it was only in vague terms of the possible potential of the shop and not of what was occurring or what had occurred in the recent past. As this assertion by the plaintiff of representations of a current turnover of $5,000 per week was central to her case my rejection of it seriously undermines her general credibility about other alleged misrepresentations made to her.
I cannot accept the plaintiff’s evidence that she had no opportunity to read the Sale Agreement before she signed it at the meeting on 9 April. The effect of her evidence about it was that it was only presented to her at that meeting with Mr Winter, but as stated above, that was quite incorrect. It is likely that the 1st defendant gave a copy of a draft of it to the plaintiff before the meeting with Mr Winter on 4 April. That draft agreement was clearly part of the documentation discussed between the plaintiff, the 1st defendant and Mr Winter in their meetings on both 4 and 6 April. If the plaintiff did not read it before she signed it, it was only because she had chosen not to do so and not because she did not have any adequate opportunity to do so. Her evidence on this topic was unreliable, and again adversely affects her general credibility.
The plaintiff was adamant in her evidence and under cross examination that she had first worked for the 1st defendant on 28 December 1996, and not earlier, that she had never told anyone that she had worked for the 1st defendant for six months before she bought the business, that her first meeting with Mr Winter was on 26 March 1997, that she had not signed the Franchise Agreement at her home on 15 April and that Mr Wheeler had never been to her home, but other acceptable evidence clearly contradicts her on each of these matters. I do not find that her credibility was adversely affected by her omission to put her earnings from the 1st defendant into her tax return or by her likely mistake about the date of the meeting with Mr Bartsch in April. I do not find that she consciously fabricated evidence. If she had wanted to bolster her case by fabrication, it would have been easy for her to have said that she had seen the contents of the Projection at the meeting with Mr Bartsch and relied upon it. It is likely that the plaintiff’s present inability to remember accurately a number of important aspects of her dealings in purchasing the business was because they were of no importance or concern to her at the time. As much of her evidence where it can be checked against other more reliable indicators is shown to be unreliable, no great weight can be placed on her assertions on other matters which cannot be independently verified.
The 2nd defendant was as erratic in her evidence as she was in the conduct of her business. Her assertions that the plaintiff was an expert accountant and well familiar with her records was absurd. Her claim that the plaintiff was represented by her own accountants and lawyers in the events leading up to the settlement was also too far fetched to be accepted. She claimed that the plaintiff had prepared some of the secondary accounting records of the business, but the plaintiff’s writing was not identified on them. She told a false story to various people about supposed arrangements for her to set up a franchise in Melbourne to justify the urgency of the settlement on the sale to the plaintiff. She was evasive and unconvincing in merely answering the allegations about what occurred at 301 North Terrace on 4 April by saying that she could not remember. Her evidence was inconsistent with the instructions which she must have given for parts of her pleaded defence. Many of her responses in cross examination were merely argumentative or specious. I do not find that she was in any way involved in the malicious damage of stock in the shop in September 1997.
I am satisfied that the 2nd defendant deliberately gave false evidence to bolster his own case and is unworthy of any credit on matters which are in dispute. Many of his assertions were unconvincing, self-serving attempts to bolster his defence and to deny that he had acted unethically. The records of Mr Bartsch contradict his evidence in numerous respects. His assertion that when he commenced to work for the plaintiff on 10 April he thought that the sale of the 1st defendant’s business to her was complete was quite incredible in the light of the other evidence. There is a strong inference that a good deal went on between him and the 1st defendant which neither of them were prepared to disclose in their evidence because it would have been adverse to their cases. However, I remind myself that the fact that he has lied on many matters does not mean that the opposite of his lies is therefore proved, but only that there is no evidence from him on that topic. When he prepared the 1st defendant’s 1997 financial statements, which was well after he knew that misrepresentation was alleged in the Projection, he included various items totalling about $76,000 as income for the 1st defendant in that financial year which were not earnings by her. This was apparently done to make it appear that the 1st defendant’s earnings from the shop after 1 July 1996 were considerably greater than they were, and therefore spuriously to justify the sales figure in the Projection.

The representations

I am not prepared to accept on the plaintiff’s evidence alone that it is proved that there were representations in the terms which she alleged about the turnover, profitability and budgets of the shop. I accept that there were some nebulous discussions in general terms along the lines that there were expectations about what the business might be able to achieve. However, I do not find the plaintiff’s evidence to be sufficiently reliable to accept on the balance of probabilities that either the 1st or 2nd defendants said that the business was generating sales of approximately $5,000 per week or $22,000 per month, that the 1st defendant had budgeted for these sums, that the 1st defendant was meeting budget, that the plaintiff could expect to achieve similar sales and that the plaintiff could expect to achieve profits of between $40,000 and $50,000 per annum. Likewise I am not satisfied on the balance of probabilities that the 2nd defendant made any such representations to the plaintiff except in respect of the Projection. I do find based on the admission in paragraph 13.3 of her defence that the 1st defendant represented to the plaintiff that she could expect to achieve a profit of between $40,000 and $50,000 per annum from the shop. (I do not accept the 1st defendant’s specious explanations about how and when that representation was made.) I find that insofar as the plaintiff saw part of the Projection at the meeting with Mr Bartsch, and heard in the conversation between the 2nd defendant and Mr Bartsch other parts of it, these constituted representations by him to the plaintiff about what could be expected when she bought the business. Insofar as the plaintiff’s counsel sought to claim that other words and conduct of the 2nd defendant amounted to false and misleading conduct I am not prepared to act upon it as it was outside the pleadings and under Rule 46.04(4)(b) it would be unfair to the 2nd defendant to do so.

Inducement and causation

The misrepresentations can only be actionable at common law or under the Fair Trading Act (“FTA”) if it is proved that they had some causative effect upon the plaintiff entering into the transactions with the 1st defendant: Australian Steel & Mining Corporation Pty Ltd v Corben [1974] 2 NSWLR 202 particularly at 209-10. This question must be looked at against the background that the plaintiff was a good friend of the 1st defendant at the time and that their dealings were not an arms length business transaction. The plaintiff trusted the 1st defendant and wanted to help her in her times of personal difficulties. Considerations of money and profit did not really influence the plaintiff. She was obviously attracted to the idea of being the proprietor of a high class fashion boutique and the kudos that went with it. She was not entirely naive about the business world and she must have realised that she was placing her trust in the integrity of the 1st defendant rather than in resorting to expensive lawyers and accountants. The most likely reason why she ignored Mr Winter’s advice to obtain independent legal advice was because she was committed to the transaction even if it might not be as good as she might have expected. She was not so stupid or naive as not to appreciate the significance of Mr Winter’s intimation to her. (Although she would not admit it, I accept that she had told Mr Winter that she would be consulting Peter Scragg who had previously acted for her.) It seems that despite Mr Winter’s intimation she continued to act on the basis that Mr Winter was representing the interests of the 1st defendant and herself. When Mr Wheeler came back into the transaction after Mr Winter was dismissed he was told by the 1st defendant, and probably with the concurrence of the plaintiff, that Mr Winter had been acting for both of them. It is likely that the plaintiff’s head was being ruled by her heart and she did not concern herself with protecting her own financial position or worrying about the financial future of the shop. Her statements to Mr Bartsch seem to indicate that she had no great expectations of making any significant profit from the business. The various alleged representations about the $5,000 per week turnover and sales of $200,000 per year, while not necessarily mutually inconsistent, could be expected to have alerted someone of her experience and intelligence to seek some clarification about them if they were of any significance to her. As the figures of Mr Krantz show the turnover of the shop in each of the four weeks before and after the settlement was about the same. Thus there was no significant downturn immediately after settlement from what the plaintiff had experienced in the weeks leading up to settlement. Her assertion that she was not concerned about the low takings in the second half of April and May is contrary to her having relied on any representations about the turnover. Her conduct up until the end of June was not consistent with a person who had been deceived by substantial misrepresentations about the financial viability of the business. Her only complaint was to Mrs Vozzo in about June, when she was probably seeking to justify herself, that the 1st defendant had said that she could expect to make between $5,000 and $7,500 per week, but nothing else. Her having been deceived is inconsistent with her having signed the acceptance of the conditional offer of the lease on 19 June when she must have realised that there were problems with the financial viability of the shop. Even in her first attempt to assert herself in the letter of 30 June there is no suggestion of any misrepresentation, but only that the 1st defendant was over-burdening her with excessive stock. If she had believed that she had been deceived, or even possibly deceived by the 1st defendant, it seems unusual that she would have gone to the 2nd defendant, as she did, to voice her complaint or that she would have expressed her complaint in the terms in which she did. Even after the letter of the 30 June she was still seeking to sort the matter out amicably with the 1st defendant and that was only thwarted when she was forced by other circumstances to choose between her friendships with the 1st defendant and Mrs Vozzo. In the correspondence from her solicitors there was no allegation of misrepresentation other than by the Projection. It was only when she first had proper independent legal advice from Mr Iles on 2 July that the reality of her financial situation in the business was apparently brought home to her and she was prepared to acknowledge it. Overriding everything else in the plaintiff’s actions in purchasing the shop was her close friendship with the 1st defendant and a desire to have the shop for herself. It was not that she gullibly accepted what the 1st defendant said about the business and was thereby duped into acting against her best interests. It is more likely that she had no real concern for the financial implications of what she was doing and was prepared to trust the 1st defendant to sort out any possible problems in the future in an amicable manner. Her subjective state of mind was that she was not interested in how the business had been performing, was then performing or would perform, or in spending money on professional advice to protect her financial interests. Her attitude was that the formalities and the legalities did not matter because if any problems arose in the future she and her good friend the 1st defendant would sort them out as friends on a mutually acceptable basis. Accordingly, all of the causes of action based on proved misrepresentations about turnover and profitability must fail as no sufficient inducement or causation has been proved. Insofar as any causes of actions are based on misleading and deceptive conduct under the FTA, they also fail for similar reasons because, for the purposes of s84(1) of the FTA, the plaintiff did not suffer loss or damage “by” the conduct which was in contravention of Part X of that Act: Cut Price Deli Pty Ltd Jacques (1994) 126 ALR 413.
I do not accept the allegation in paragraph 13.4 of the Statement of Claim that there was any misrepresentation that the franchise fee would be 10% of the wholesale cost of the clothes. The plaintiff was told by Mr Wheeler before she signed the Franchise Agreement that that item in the Schedule had been altered and she was prepared, because of her friendship with the 1st defendant, to acquiesce in it. She was not particularly concerned about what was in the documents. She believed that she and the 1st defendant could sort out any future difficulties between themselves without resort to legalities. (The reason that she did read the draft Franchise Agreement in some detail was because it dealt with how she was to run the business which was a topic which did interest her.)
I find that the 1st defendant did impliedly represent to the plaintiff, as alleged in paragraph 13.6 of the Statement of Claim, that the amounts due and payable by the debtors of the 1st defendant’s business as set out in Annexure B to the Sale Agreement were recoverable in full. The plaintiff relied upon the 1st defendant having properly assessed and calculated that the balances outstanding on the layby and similar accounts referred to in that schedule were recoverable. There was no suggestion in the evidence that the plaintiff herself ever checked that schedule against the layby dockets or in any way concerned herself about it. She relied in part upon some nebulous assurance from the 1st defendant that if there were problems about the recovery of the debts in the future the 1st defendant as a friend would make good the deficiency, but there was no concluded collateral term to the contract about precisely what was to occur if these debts were not fully recoverable. The representations were false in that a number of the debts were not recoverable. Apart from a few instances there was no evidence about each of the numerous layby transactions where the amount outstanding was not paid. It was always understood that there would be a few layby transactions where the customers would not complete them, but the business then had the benefit of whatever had been paid and the garment could be resold. Here the problems arose mainly from transactions which were not true laybys, but which had been treated by the 1st defendant as laybys. There were a significant number of layby dockets made out where the customer had expressed some interest in the garment and the 1st defendant had put it aside with the layby items hoping that the customer would return to buy it, but where the customer had never placed a firm order for the item. In these cases there was no debt which could be sold to the plaintiff. The 1st defendant’s representation was that all of these were enforceable debts, but even if it was only a representation of a future matter, she had no reasonable grounds for making it. The 1st defendant was guilty of misleading and deceptive conduct contrary to s56 of the FTA in her representation about the totality of the so-called layby debts. The plaintiff was induced by these representations to pay $35,000 for them as a package, which she would not have done if the misrepresentation had not been made. I find that the plaintiff and Mrs Vozzo did their best to recover the amounts outstanding. The gross loss resulting from this representation was $19,264, being the difference as calculated by Mr Krantz between $35,000 and what was recovered. Against this must be offset what was received by the plaintiff on her sale of the garments which had been allocated to the layby sales which were not completed. Those garments were ultimately put back into general stock and disposed of with the other stock. There is no evidence about what each of these garments which had been laybys were sold for by the plaintiff. The only evidence which I have is what all of the stock was sold for being both unsold general stock and former laybys. I infer that no significant amount of the layby stock was put back into general stock until after 30 June 1978. The total stock sales after that date were about $5,000 On a broad axe basis I find that $1,000 of that amount was attributable to the former laybys. Thus the plaintiff’s loss on this head is $18,264.

There was no evidence to support the misrepresentations pleaded in paragraphs 13.5 and 13.7 of the Statement of Claim.

Plaintiff’s rights under the Land and Business (Sale and Conveyancing) Act 1994

Section 5(1) of the LBS Act provided:
“....... a purchaser under a contract for the sale of ....... a small business may, by giving the vendor written notice before the prescribed time of the purchaser’s intention not to be bound by the contract, rescind the contract.”

Section 5(8) defines the “prescribed time” for the purposes of (1) as the earlier of the end of the fifth clear business day after the vendor’s statement under the LBS Act is served on the purchaser and the time settlement takes place. Here no vendor’s statement was served. The plaintiff did not have any right of “cooling off” under s5(1) after settlement occurred on 16 April 1997 because that was earlier than any end of the fifth clear business day in the definition of “prescribed time”. Insofar as the plaintiff’s solicitors’ letter and notice of 9 July 1997 purported to exercise a right of cooling off and effect a consequent rescission of the contract, they had no effect under the LBS Act.

Section 8(1) of the LBS Act stated:
“A vendor of a small business must, at least five clear business days before the date of settlement, serve, or cause to be served, on the purchaser a statement in the form required by Regulation.”

Such a statement sets out the cooling off rights and various particulars in relation to the business and its financial history. Under s8(2) the statement must be accompanied by a certificate signed by a qualified accountant certifying that the particulars in the statement appear to be in conformity with the accounts of the business. This is the Form 2 which has been referred to earlier.

Section 15 of the LBS Act provided:
“(1) Where a vendor’s statement is not given or certified as required by this Part, ...... the purchaser may apply to a Court of competent jurisdiction for an order under this section.
(2) On the hearing of an application under subsection (1) the Court may, if satisfied that the purchaser has been prejudiced by the failure to comply with this Part, exercise any one or more of the following powers:
(a).... avoid the contract and make such other orders as the Court thinks necessary or desirable to restore the parties to the contract to their respective positions before entering into the contract;
(b) award such damages as may, in the opinion of the Court, be necessary to compensate loss arising from non-compliance;
(c)... make such other orders as may be just in the circumstances.”

The plaintiff’s right to relief under s15(2) is dependent upon the subject matter of her transaction with the 1st defendant being the sale of a business for the purposes of the LBS Act. The 1st defendant pleaded that the transaction did not constitute the sale of a business for the purposes of that Act, but it was the sale of stock, fittings and debtors and the granting of a franchise. Although the 1st defendant’s counsel did not argue the point strongly at trial, he did not concede it.

“Business” is a protean expression whose precise meaning depends upon its particular context: R v Perre (No 3) (1981) 28 SASR 112 at 115. Its general meaning is any activity having a commercial flavour carried on continuously and seriously, that is, not merely for pleasure: Eglinton v Barmera Hotel Motor Inn (1980) 25 SASR 465 at 467. In this matter the definition in s3 of the LBS Act is not helpful. There is no reported judicial exposition of its precise meaning in this Act. In Aidinis v Hotchin [1971] SASR 446 a contract for the sale of a house and shop, certain shop plant and house furniture and stock in trade was held to be one for the sale of a business within the meaning of the Business Agents Act 1938. There the Court characterised a contract which did not expressly refer to the transfer of either a business or the goodwill of a business as one for the sale of the business because the implicit effect of the contract was to give the goodwill of the business carried on in the shop premises to the purchaser. However, there is authority that a contract which gives an entitlement in the future to the purchaser to the goodwill attaching to assets sold, but not an immediate right to it, is not to be characterised as the sale of a business: Zeekap (No 56) Pty Ltd v Commissioner of Stamp Duties (Tas) (1999) 99 ATC 4745. Here the Franchise Agreement did not give the plaintiff the whole of the goodwill of the business in the way in which a contract for the sale of a business would usually do. The Franchise Agreement fettered how the plaintiff could utilise and transfer the goodwill. It effectively reverted to the 1st defendant upon the expiry or termination of the franchise. It could be regarded more as a lease, rather than as a sale, of the goodwill. However, the disposition of the goodwill is not the only relevant consideration on whether a transaction is the sale of a business, and all of the relevant circumstances must be considered: Kenmir Ltd v Frizzell [1968] 1 All ER 414. In the light of the purposes of the LBS Act to protect purchasers “business” in the Act should be construed as encompassing any transaction where the assets used in the conduct of the vendor’s business are transferred to the buyer and the buyer obtains a substantial immediate right to exploit the goodwill of the business.
Here the 1st defendant was carrying on a business in the shop immediately before the settlement on 16 April 1997. Immediately after that settlement at which the plaintiff had paid her a substantial sum of money for stock and debtors relating to the business, the plaintiff was carrying on the same business. I find that the transaction is to be properly characterised in law as the sale of a small business for the purposes of the LBS Act and the 1st defendant did not comply with her obligation under that Act to provide the necessary vendor’s statement.
The 1st defendant relied upon a defence under s16 of the LBS Act which stated:
“It is a defence ....... to civil proceedings under this Part arising from an alleged ...... non-compliance with a requirement of this Part if the defendant proves -
(a).... that the alleged ........ non-compliance was unintentional and did not occur by reason of the defendant’s negligence or the negligence of an officer, employee or agent of the defendant. .....”

The 1st defendant’s non-compliance with s8 was because her solicitor Mr Winter advised her that the transaction was not the sale of a business for the purposes of the LBS Act and therefore its requirements did not apply. The 1st defendant accepted this advice and had no reason to question it. Thus I find that her non-compliance with s8 was unintentional and did not occur by reason of her negligence.

The plaintiff contended that s16(a) did not provide a defence because the defendant had not proved that the non-compliance did not result from the negligence of Mr Winter as the 1st defendant’s agent. Although it was not raised at the trial, it may be that Mr Winter was not an agent for the purposes of s16(a). Section 3 of the LBS Act provides:
“In this Act, unless the contrary intention appears -
‘agent’ has the same meaning as in the Land Agents Act 1994.”

“Agent” is defined in s4 of the Land Agents Act 1994 to mean a person carrying on a business which consists of, or involves, the selling, purchasing or otherwise dealing with land or businesses on behalf of others. This definition would not encompass the usual business of the practice of a solicitor and there is no evidence that Mr Winter carried on any other business which might bring him within that definition. However, it is arguable that “agent” in its context in s16(a) means any type of agent and that is a contrary intention which excludes the definition in s3. I do not express any conclusion on the point.

I need to consider whether on the evidence before me the 1st defendant has proved on the balance of probabilities that her non-compliance with s8 did not occur by reason of the negligence of Mr Winter. Mr Winter is not to be found negligent merely because he reached a wrong conclusion of law: Fletcher v Jubb [1920] 1 KB 275 at 280. He can only have been negligent if his mistake was one which a reasonably competent solicitor in the circumstances should not have made: Hawkins v Clayton (1988) 164 CLR 539 at 575. No expert evidence was adduced on the topic and from my own understanding of the law and the legal profession I must decide the question: Neagle v Power [1967] SASR 373 at 376; Permanent Trustee Ltd v Boulton (1994) 33 NSWLR 735. The question of what transactions are to be characterised in law as the sale of a business for the purposes of the LBS Act is one of some complexity and difficulty. There are arguments both ways. I can see that it is reasonably possible that a competent solicitor could honestly reach a conclusion that the dealings proposed between the 1st defendant and the plaintiff in the form of a franchise would not be properly characterised as the sale of a business. There is no evidence about how much consideration Mr Winter gave to the point or what, if any, researches or enquiries he made about it. (I reject the plaintiff’s submission that in effect he merely adopted the 2nd defendant’s assertion on the point.) If the plaintiff was required to prove that Mr Winter was negligent, she would be required to discharge a heavy onus of proof: “Laws of Australia”, Volume 27.3-18. As s16(a) puts the onus on the defendant to prove that Mr Winter had not been negligent, it is a correspondingly light onus. There is no evidence that Mr Winter knew of the proposed Fit Out Agreement or what the 1st defendant and the plaintiff proposed about what was to happen to the fittings in the shop when the plaintiff took up the franchise. I find that the 1st defendant has proved that her non-compliance with s8 did not occur by reason of the negligence of Mr Winter. Therefore, she has no liability under s8 of the LBS Act. It was also argued that it was necessary for the 1st defendant to prove that the 2nd defendant, as her agent, had not been negligent but the failure to provide the s8 statement did not occur by reason of the 2nd defendant’s failure to prepare the documents or his view that s8 was not applicable.

Liability of the 2nd defendant as the accountant for the plaintiff

Paragraph 4B of the fourth Amended Statement of Claim pleaded:
“From in or about April 1997 to in or about July 1997 (the 2nd defendant) was the 1st and 2nd plaintiffs’ accountant.”

Paragraph 18B of that Statement of Claim pleaded:

“By virtue of the matters pleaded in paragraphs ....... 4B ...... (the 2nd defendant) owed to the plaintiffs a duty of care commensurate with the standard of care expected of a reasonably diligent accountant to:
18B.1....... provide accurate information concerning the 1st defendant’s business to the 1st plaintiff and to ANZ; .......
18B.3advise the 1st plaintiff and ANZ that the purchase of the defendant’s business was not a viable business opportunity for the 1st plaintiff.
18C........... in breach of that duty of care (the 2nd defendant) failed to discharge their responsibilities with reasonable care in failing to:
18C.1give accurate information concerning the 1st defendant’s business to the 1st plaintiff and to ANZ.

PARTICULARS
18C.1.1See paragraphs 13, 14 and 16 hereof.
18C.2....... Advise the 1st plaintiff to seek independent financial advice before agreeing to purchase the 1st defendant’s business; and
18C.3Advise the 1st plaintiff and ANZ that the purchase of the 1st defendant’s business was not a viable business opportunity for the 1st plaintiff.”

In paragraphs 15 to 17 of his Defence the 2nd defendant pleaded that he gave accurate information to the plaintiff and the ANZ Bank, that he was not required to provide advice to the plaintiff as he was acting for the 1st defendant and otherwise denied paragraphs 18B and 18C of the Statement of Claim.

In his final address the plaintiff’s counsel submitted that the plaintiff could succeed against the 2nd defendant based on him having become her accountant by 10 April 1997 and thereafter being negligent in not fulfilling his duties to her as her accountant before the settlement in the light of what he knew, or should have known, about the financial affairs of the 1st defendant. The 2nd defendant’s counsel objected to this submission on the grounds that it was outside the plaintiff’s pleadings. However, I ruled that it was properly encompassed within the paragraphs of the Statement of Claim which are quoted above, although I did not think that it extended to an allegation of a breach of a fiduciary duty. The 2nd defendant’s counsel then intimated that he had not previously understood that the plaintiff was pursuing such a claim against his client and had not conducted the defence case to meet it. I gave him an opportunity to take instructions on whether he wished to apply to re-open the evidence on the topic, but no such application was made.
The 2nd defendant acted as the accountant for the plaintiff in relation to the business from at least 10 April 1997, and possibly slightly earlier. He thereupon became obliged in law to act in her best interests and to disclose to her all material information which he had about the business she was about to purchase including what he knew about it through having acted as the accountant for the 1st defendant: “Laws of Australia”, volume 27.3-34. I reject his evidence that he then believed that the transaction between the plaintiff and the 1st defendant had been finalised. He clearly knew from what was said at the meeting with Mr Bartsch that settlement was not to take place until 15 April. I will deal later with what he then knew, or should have known, was the financial position and history of the 1st defendant’s business in the shop. There is no doubt that any independent accountant advising the plaintiff at that time who knew what the 2nd defendant did about the business and its history had a duty of care to her to have given her very strong advice that it was not in her financial interests to complete the proposed transactions or to pay the amount of money which was being asked by the 1st defendant. The duty of an independent accountant acting for the plaintiff at that stage in those circumstances would also have been to have strongly urged the plaintiff to obtain proper legal advice. That legal advice, if obtained, would have reinforced the undesirability of the plaintiff completing the transaction and would have been likely to raise that she did have a right under the LBS Act to cool off. Furthermore, even under the documents which she had executed by that time she could probably have avoided the obligation to settle on the sale because she would have been advised not to agree to the alteration of the Franchise Agreement doubling the franchise fee. If the 2nd defendant had made a full disclosure to the plaintiff of relevant matters known to him and given proper advice to her, it is likely that she would have accepted that advice and would not have settled. The consequence of the 2nd defendant not discharging his duty to the plaintiff in this way is that she entered into what has proved to be a financially disastrous transaction and he is liable in law for the damage to her which flowed from it.

Contributory negligence of the plaintiff

The claim on which the plaintiff has succeeded against the 2nd defendant is one framed in tort. Thus 27a of the Wrongs Act can apply to reduce the 2nd defendant’s liability to the extent that it is just and equitable that the plaintiff bears responsibility for it: Astley v Austrust Ltd (1999) 161 ALR 155. I have not found any reported case in which an issue of contributory negligence has been dealt with in claims against accountants in their capacity as accountants and not as auditors. However, there are a number of instances of reductions for contributory negligence by a client in claims for professional negligence against other types of professionals: Jackson and Powell “Professional Negligence”, 1st edition, paras 1-33, 1-34; Laws of Australia, 27.4-25 (blue replacement pages), 27.4-32; 27.3-50.
I find that the plaintiff was negligent in not taking the advice of Mr Winter to obtain independent legal advice on the transaction. If she had taken such advice, it is highly unlikely that she would have gone ahead with the transaction. As I have stated earlier there was no good reason why she should not have obtained such advice. She knew a solicitor and she could afford legal advice. She seems to have believed in a misguided way that the 2nd defendant would look after her interests as well as those of the 1st defendant. The 2nd defendant knew that the plaintiff had no other independent advice, although there is no proper basis to infer that he knew that she had disregarded advice from Mr Winter to get her own lawyer. It was a significant failure of the plaintiff to take reasonable care to protect her own financial interests in the transaction. None of the other particulars of negligence in paragraph 21 of the Defence of the 2nd defendant are made out by him. The liability of the plaintiff to the 2nd defendant will be reduced by 1/3rd for her contributory negligence.

Misleading or deceptive conduct of the 2nd defendant in relation to the ANZ Bank

I find that the 2nd defendant in putting forward the Projection, and in much of what he told Mr Bartsch, was guilty of misleading or deceiving the ANZ Bank contrary to s56(1) of the FTA. Insofar as that conduct of the 2nd defendant related to future matters he, for the reasons given below, did not have reasonable grounds for making the representations under s54(1) of the FTA. Even at the best for the 2nd defendant if he had put forward the projected sales figure of $200,000 on an assumption that the numerous personal difficulties of the 1st defendant had depressed the sales potential of the business in the previous two years, but it should be able to achieve those sales under a new proprietor, he was still guilty of misleading and deceptive conduct in not having made explicit the basis of his assumptions and conclusions: Bateman v Slatyer (1987) 71 ALR 553 at 559. I find that the ANZ Bank was induced by the 2nd defendant’s misleading and deceptive conduct to grant the loan of $140,000 to the plaintiff and I reject the 2nd defendant’s evidence to the contrary. This is a separate issue from the effect of similar misleading or deceptive conduct by the 2nd defendant in relation to the plaintiff. However, the plaintiff is not shown to have suffered any loss or damage from that misleading and deceptive conduct of the 2nd defendant in relation to the ANZ Bank. The plaintiff’s loss flowed from her decision to apply the loan to the purchase of the business. The plaintiff’s ultimate loss in acquiring a business which was worth far less than she agreed to pay for it is too remote a consequence of the 2nd defendant’s misleading and deceptive conduct in relation to the ANZ Bank to be recoverable by reason of it.

Financial position of the shop

The calculations and figures of Mr Krantz, which I accept, are not necessarily entirely correct, but where they are in doubt they are based on the financial statements for the 1st defendant as prepared by the 2nd defendant. Some of the primary records were missing and it was impossible for Mr Krantz to reconcile what were stated to be the sales figures and the cash expenditure with what was actually banked by the 1st defendant. While there were some cash dealings I accept Mr Krantz’s opinion that the checks he was able to make did not suggest that they would have any significant effect on his conclusions. There was some difficulty in dissecting out from the 1st defendant’s records what related to the business of the shop as distinct from her other businesses, but again this does not significantly affect the conclusions expressed by Mr Krantz about the shop business. As mentioned above the layby transactions were not brought into account until the financial year in which the transaction was completed. This meant that some income which was received on layby transactions in a financial year was not brought into account in that year. However, if the level of layby transactions remained relatively constant, as appears to be the position, it did not significantly distort the figures for any particular year as what was attributable to the previous year was balanced out by what was not brought into account in the current year. For the purpose of my findings it is not necessary to go into any great detail about the financial history of the shop.

The 2nd defendant based his figures in the Projection loosely upon what was contained in his trial balance as at 30 June 1996 which he had produced for the 1st defendant shortly before 4 April 1997. The recorded sales in that trial balance were $121,000. They had been $152,000 in the 1995 year. The 2nd defendant inflated the figure for sales to $200,000 in the Projection for the reasons mentioned earlier, but it was at the best a dubious assumption. The Projection showed the cost of the goods for the year to be $80,000. This figure was substantially incorrect. On the terms which had been agreed for the franchise as at 9 April the cost of the goods on sales of $200,000 would have been $110,000 on the basis that the franchise fee was 10% of their wholesale cost. The 2nd defendant probably knew what were the terms of the proposed Franchise Agreement, but even if he did not he could, and should, have readily ascertained them. Furthermore, the Projection contained no allowance for wages to be paid or for the cost of the plaintiff’s borrowings from the ANZ Bank. On what was said to Mr Bartsch this would have further reduced the nett profit by $56,774. When the true cost of goods was brought into account it meant that there was no nett profit to be made even if the inflated sales figure could be justified. As the plaintiff’s accountant the 2nd defendant had a duty of care to disclose this to her immediately.
When the 2nd defendant prepared the Projection he probably did not have the details of the 1st defendant’s trading in the shop since 1 July 1996. If he had had those figures, it would have shown an average turnover for the forty one weeks to 15 April of about $1,613 which would represent about $85,000 for a full financial year. That was a substantial downturn from the 1996 year and made the sales figure of $200,000 in the Projection totally unrealistic. The weekly and monthly sales reports kept by the 1st defendant would have quickly disclosed to the 2nd defendant this substantial downturn in sales in the first three quarters of the 1997 financial year if he had investigated them. As the plaintiff’s accountant it was his duty on 10 April in the light of what else he knew about the 1st defendant’s business in the shop to have made such investigations. If they had been made, and their results reported to the plaintiff, it is highly likely that she would not have completed the purchase of the business.
On the conclusions of Mr Krantz there was no possible justification for a profit projection of $40,000 per annum for the shop business and no reasonable grounds upon which any statement of such an expectation could have been made by the defendants.

Right of the 2nd plaintiff to claim

It is unlikely on the evidence that the plaintiff contemplated the formation of the 2nd plaintiff before she settled on the purchase on 16 April 1997. There is no evidence that she entered into any of her agreements with the 1st defendant in the expectation that the benefit of those agreements would pass to the 2nd plaintiff. There is no suggestion in the evidence that the plaintiffs came within ss131-133 of the Corporations Law such that the 2nd plaintiff could, or did, ratify any pre-incorporation contracts with the 1st defendant which had been entered into on its behalf by the plaintiff. There is no evidence of any assignment by the plaintiff to the 2nd plaintiff of any interest which she had in any of her agreements with the 1st defendant or of any notice of such assignments having been given to the 1st defendant. Thus there is no basis in law for the 2nd plaintiff to have any contractual claims against the 1st defendant arising out of any of the agreements relating to the sale of the shop. While the plaintiff’s accountants have treated the 1st plaintiff’s interest under those contracts as being part of the business carried on by the 2nd plaintiff there is nothing in the evidence as to how this occurred. I do not consider that the 2nd plaintiff has any cause of action for breach of contract, misrepresentation or otherwise against the 1st defendant relating to anything pleaded in the Statement of Claim.
A difficult question arises as to whether the 2nd defendant owed any duty of care in tort to the 2nd plaintiff prior to its incorporation, and in particular prior to settlement on the sale of the shop. While the old law was that no duty of care could be owed to a person who was not in existence that was relaxed to some extent in X v PAL (1991) 23 NSWLR 26 at 37 where in a claim by a child subsequently born against its mother’s gynaecologist for failing to treat her properly before the child’s conception which resulted in the child being born with syphilis it was held that the gynaecologist could be liable in damages to the child after its birth where in the particular circumstances he owed a duty to a particular class of persons of which the child became a member. However, the situation here is somewhat different. It is not established that the existence or use of the 2nd plaintiff was in contemplation by either the plaintiff or the 2nd defendant prior to the settlement. While it was always a possibility, it was not a probability. (The 1st defendant had not used a trading trust to conduct the business of the shop.) I do not consider that on the authorities as they stand the 2nd defendant owed any duty in law to the 2nd plaintiff prior to the settlement. Accordingly, the 2nd plaintiff has no cause of action similar to that of the plaintiff against the 2nd defendant. There is no basis in law upon which the 2nd plaintiff can recover the loss which it may have suffered as a result of the 2nd defendant’s breach of duty to the 1st plaintiff, but there is no reason in law why the 1st plaintiff cannot recover from the 2nd defendant her personal loss from her involvement in the 2nd plaintiff. There is no cause of action pleaded that the 2nd defendant was in breach of any duty to the 1st plaintiff in having advised upon, and being instrumental in, the setting up of the 2nd plaintiff and the trading trust.

Assessment of the plaintiff’s damages against the 2nd defendant

As mentioned above the damages are only recoverable by the 1st plaintiff and not by the 2nd plaintiff. The primary submission of the plaintiff’s counsel was that the major part of the damages should be awarded to the 2nd plaintiff, but that course is not open to me. In his reports Mr Krantz calculated the plaintiffs’ loss as if it was solely the loss of the 1st plaintiff. He ignored the intervention of the 2nd plaintiff and the trust into the trading of the shop after its purchase by the 1st plaintiff. However, in his evidence he conceded that the position had been complicated by the intervention of the trust. It may be that as a matter of strict law the 1st plaintiff’s loss should be assessed by having regard to what her financial position would be if there was a notional winding up of the trust and with the taxation implications which that might involve. I do not have sufficient evidence to be able to assess her damages on that basis. If the 2nd defendant had wanted an assessment on that basis, he could have adduced accounting evidence to provide a basis for it, but he did not. On the evidence before me I can only assess her loss against the 2nd defendant by not drawing any distinction between her and the trust which was the original approach of Mr Krantz. I will make the assessment on this basis.
The legal basis for the assessment of the plaintiff’s damages against the 2nd defendant is the tortious measure of damage of what amount would be needed to put the plaintiff back into the position which she would have been in if the 2nd defendant’s breach of duty had not caused her to purchase the business of the shop. This is represented by what she paid the 1st defendant for the stock and laybys less any nett amounts which she received for the sale of the stock and on the completion of the laybys plus any proper allowance for consequential loss flowing from her having purchased the shop. In this calculation in respect of the 2nd defendant it is not necessary to differentiate between the stock originally purchased, the stock subsequently purchased and the items which came back into the stock from laybys which were not completed. Apart from the claim for unpaid labour from the plaintiff I do not make any deduction from the gross amounts assessed for any income tax or other taxation which would be payable by the plaintiff on this award. No evidence was adduced about what practices the Commissioner of Taxation might adopt in any possible assessment for taxation against the plaintiff on these damages.
Subject to the qualifications stated below, I adopt the calculations of the plaintiff’s losses as stated by Mr Krantz in his report of 7 July 2000:

Operating loss 1997 $ 5,088.00

Operating loss 1998 28,112.00

Operating loss 1999 1,083.00

Loss on stock sold after 30 June 1999 61,360.00

Laybys not realised (after credit for garments resold) 18,264.00

Some accountancy fees 775.00

Nett allowance for labour by plaintiff after tax 2,500.00

Bank interest and charges 20,757.00

TOTAL $ 137,939.00

I have reduced the accountancy fees on a broad axe basis to reflect that they include some fees which would have been payable in any event for the plaintiff’s personal tax returns in the three financial years. I accept that as part of her consequential loss the plaintiff is entitled to recover an appropriate amount after tax reflecting her loss of earning capacity for the time that she was necessarily involved in running the business until 30 September 1997 and thereafter in attempting to dispose of the remaining stock and collect the layby debts. However, the conduct of the business until 30 September 1997 did not require two full time employees and the wages paid to Mrs Vozzo are already reflected in the amounts allowed for the operating losses. The plaintiff’s entitlement is limited to some part time work in the shop until 30 September 1997 where a part time employee would have been needed to assist Mrs Vozzo if the plaintiff had not done the work and for her work after 30 September 1997.

The defendants have not discharged the burden upon them to show that the plaintiff did not properly mitigate her losses. It was reasonable for the plaintiff to continue to run the business in the way in which she did until 30 September 1997 in order to dispose of the stock. It was very much in her financial interests to do so. The problem in selling the stock was not in any lack of endeavour from the plaintiff or Mrs Vozzo, but because it was substantially over priced and directed to a small niche market which had lost interest in it. The plaintiff was not obliged to expend any more money after 30 September 1997 in attempting to sell the remaining stock. There is no evidence that she could have obtained any better price for it if she had adopted any other means to sell it which were reasonably open to her.
I reject the plaintiff’s claim for damages for the profits which she would have made if the business had had the level of profitability which she claimed was represented. This claim falls with the dismissal of her causes of action based on misrepresentations relating to the turnover and the profitability of the shop. It is not an appropriate head of damage arising out of the tortious liability of the 2nd defendant to her for breach of his duty to her as her accountant. If he had performed his duty, she would never have made any such profit.

Claim for rescission

The plaintiff seeks orders that the Sales Agreement, the Franchise Agreement and the Fit Out Agreement either have been, or should be, rescinded. On the findings I have made it could only be on the legal basis of innocent misrepresentation at common law relating to the laybys. It is far from clear that the plaintiff went as far as actually rescinding any of the agreements by the initial correspondence from her solicitors to the 1st defendant’s solicitors. All that may have been done was to exercise a purported right of cooling off under the LBS Act which I have found did not exist. In any event the plaintiff’s summons which was issued on 16 July 1997 contained the claim for rescission.
A claim for rescission can only succeed if a restitutio in integrum is possible between the parties: Brown v Smitt (1924) 34 CLR 160 at 165. This is not a case of fraudulent misrepresentation, and so a greater latitude about the ability of the Court to restore the parties in those cases is not applicable: Alati v Kruger (1955) 94 CLR 216; Balfour v Hollandia (1978) 18 SASR 240. Here the transaction must be looked at as a composite one for the sale of the business. The three agreements for which rescission was sought were so inter-related that a ground of rescission for one of them would also justify the rescission of the other two: Dykes v Blake (1838) 132 ER 866. Here an integral part of any restoration of the parties to their pre-contractual positions upon a rescission ab initio would require the 1st defendant also to be put back into possession of the shop. However, in view of its previous experiences with the 1st defendant it was unlikely that the Adelaide Arcade would have agreed to the plaintiff assigning her rights to the shop back to the 1st defendant or to the 1st defendant occupying the shop as a sub-tenant of the plaintiff or the like. There are no terms which could be imposed in conjunction with an order for rescission which would substantially return the parties to their original positions. Accordingly, no rescission is possible. The plaintiff’s counsel did not submit to the contrary in his final address. The claims must be resolved on the basis that the contracts remain on foot.

Counterclaim

The 1st defendant counterclaimed against the plaintiff for various breaches of the Franchise Agreement and the Fit Out Agreement. These breaches are:
The loss of the franchise fees payable to the 1st defendant under clause 8 of the schedule to that agreement which provided that it should be “10% of gross sales calculated on a monthly basis”. The total sales effected by the plaintiff after 16 April 1997 were $63,509. The franchise fee is to be assessed on this sum. What the 1st defendant had put into the changed wording of item 8 to the schedule does not refer to her designation of a retail price for the garments, but means merely what the plaintiff was able to sell them for. As previously mentioned I find that the amounts realised by the plaintiff for the garments were reasonable. Accordingly, the franchise fee still payable is $5,779 after the deduction of $571 which was paid by the plaintiff on about 15 May 1997.
The loss of profit of the 1st defendant on sales to the plaintiff.
Paragraph 5 of the counterclaim pleaded:
“The conduct of the plaintiff .... constituted a breach by the plaintiff of the Franchise Agreement, in that the plaintiff after about 9 July 1997 was in breach of:
5.1... Her obligations as set out in clause 9(7) of the Franchise Agreement/Operations Manual P46 in relation to the purchase from (the 1st defendant) of certain minimum quantities of ‘Evelyn Neis Creations’ garments; and
5.2Her obligations as set out in clause 9(9) of the Franchise Agreement to give preference to (the 1st defendant) in purchasing her supplies.”
Clause 7.2 of the counterclaim pleaded:
“Loss of profit on sales to the plaintiff:
7.2.1......... (the 1st defendant) has lost the expectation of receiving profit on the sales of ‘Evelyn Neis Creations’ garments to the plaintiff. Based on sales of $60,000 pa in accordance with the terms of clause 9(7) of the Franchise Agreement/Operations Manual P46 (which provided for the purchase from (the 1st defendant) of certain minimum quantities of ‘Evelyn Neis Creations’ garments) (the 1st defendant) estimates a loss of profits on total sales of $300,000 at (sic) $180,000.”
Clause 9(7) of the Franchise Agreement provides, inter alia:
“(The plaintiff) agrees to strictly abide by the standards, specifications and operating procedures contained in the Manual and any amendments and modifications thereto made by the (1st defendant) at any time.”
No manual was ever tendered in evidence. From the evidence which I do have about it it is not proved whether such a document was ever finalised. Certainly the version produced by Mr Winter was not acceptable to the parties. Mr Wheeler did not say that he had produced a manual which had been agreed to in its entirety by the 1st defendant and the plaintiff. While there is evidence that the parties had some understanding that the plaintiff would be required to purchase $30,000 worth of garments in each year, it has not been proved that that was incorporated into a document which was contractually binding between them. Accordingly, the 1st defendant has not proved that she has suffered any loss on purchases which the plaintiff was obliged to make from her. The evidence does not show that the plaintiff was in breach of her obligations under clause 9(9) of the Franchise Agreement to give preference to items supplied by the 1st defendant when purchasing her supplies. The only other supplies which she purchased were the garments from Margaret Heaven, but they were not a class of garment which the 1st defendant would have supplied.
The failure to pay the price of $17,500 which became due to the 1st defendant from the plaintiff under the Fit Out Agreement on 16 April 1999. The plaintiff’s defence to that claim that she was induced to enter into the Fit Out Agreement by the 1st defendant’s misrepresentation that the value of the items in that agreement was less than one half of $17,500 was not the subject of any evidence and so it fails.
Non payment of the price of stock delivered, but not paid for, of $17,895. Paragraph 8 of the counterclaim was abandoned during the course of addresses.
Non payment of wages of $1,980. This was not established on the evidence. Insofar as the 1st defendant worked in the shop after 16 April it was no more than her giving the assistance which was required under the Franchise Agreement.
The total damages assessed on the counterclaim are $23,279. This is to be offset against the judgment on the claim by the plaintiff against the 1st defendant of $18,264 leaving a balance in the 1st defendant’s favour of $5,015. In addition the 1st defendant is entitled to pre-judgment interest on this balance at a commercial rate of interest. I treat the amount as only being payable from when the price became due under the Fit Out Agreement on 16 April 1999. I fix a lump sum in lieu of such interest at $480. Thus there will be judgment for the 1st defendant on the counterclaim for $5,495.

Amount of judgment for plaintiff against 2nd defendant

In addition to the $137,939 mentioned above the plaintiff is also entitled as part of her damages to damages of $5,495 for the balance judgment on the counterclaim. (The amount of the deficiency on the layby debtors has already been included in the damages assessed against the 2nd defendant.) Accordingly, the plaintiff’s total damages against the 2nd defendant are assessed at $143,434 before the reduction for contributory negligence.
The plaintiff is entitled to pre-judgment interest on these damages at a commercial rate, but only after October 1999 as the interest which she paid to the ANZ Bank up until that time has already been brought into account in assessing her damages. I assess a lump sum in lieu of interest of $9,100 on the whole damages.

Contribution proceedings

The plaintiff has succeeded against both the 1st and the 2nd defendants for $18,264 damages on the layby debtors, but on different causes of action. I consider that as between themselves the 1st and 2nd defendants should be equally responsible for this liability to the plaintiff. Thus there will be an order on the 2nd defendant’s contribution notice that insofar as the 2nd defendant satisfies the judgment of the plaintiff he be entitled to recover from the 1st defendant $9,132. There is no basis on the pleadings or the evidence for any other order to be made that the 1st defendant contribute to the liability of the 2nd defendant to the plaintiff. As the 1st defendant has succeeded against the plaintiff on a balance judgment there will be no order on the 1st defendant’s contribution notice against the 2nd defendant.

Summary

·.. On the claim by the plaintiff against the 1st defendant and on the 1st defendant’s counterclaim against the plaintiff there will be a balance judgment in favour of the 1st defendant for $5,495.

·.. There will be judgment for the plaintiff against the 2nd defendant (and including the 3rd defendant) calculated as follows:

Damages as assessed including pre-judgment interest             $      152,629.00
Less reduction for contributory negligence of 1/3rd    50,876.00
Judgment for  $      101,753.00

·.. All claims by the 2nd plaintiff are dismissed and there will be judgment against it for each defendant.

·.. On the 2nd defendant’s contribution notice there will be an order for contribution by the 1st defendant to the 2nd defendant of $9,132.

·.. On the 1st defendant’s contribution notice against the 2nd defendant there will be no order.

I will hear the parties on what orders should be made about costs.

[2000] SADC 111

25 September 2000