Palin v Vetterli - [2013] NSWSC 893

Supreme Court

New South Wales

Amendment notes

Medium Neutral Citation: Palin v Vetterli [2013] NSWSC 893
Hearing dates: 25 March 2013, 26 March 2013, 27 March 2013, 28 March 2013, 2 April 2013
Decision date: 08 July 2013
Jurisdiction: Common Law
Before: Schmidt J
Decision:
Judgment for the Vetterlis. The parties should confer on the final calculation of the damages and should file proposed short minutes of the orders to be made within 21 days. The orders should include an order that:
All exhibits and subpoenaed material may be returned forthwith; any exhibits returned must be retained intact by the party or person that produced the material until the expiry of the time to file an appeal, or until any appeal has been determined.
The usual order as to costs is that they follow the event. That would be an order that the Palins bear the Vetterlis' costs, as agreed or assessed. If the parties wish to be heard on the question of costs, they should approach.

Catchwords:
CONTRACTS - sale of wholesale bakery business - three agreements - sale of business, lease and chattel mortgage - breach of lease - misrepresentations - breach of collateral contract - misleading and deceptive conduct - unconscionable conduct in relation to business title and bread contract - whether plaintiff's son a co-owner of business when sold - established - whether defendants obtained good title to the business - nemo dat rule - bread contract for the supply of bread - good faith - misrepresentation as to contract terms established - defendants entered contract while relying on misrepresentations - damages - orders

EVIDENCE - witnesses - credibility and reliability of evidence
EVIDENCE - application by plaintiffs seeking leave to call evidence in reply - failure to give notice - failure to comply with Court's direction - prejudice - leave sought refused
Legislation Cited: Fair Trading Act 1987
Industrial Relations Act 1996
Sale of Goods Act 1923
Uniform Civil Procedure Rules 2005
Cases Cited: Associated Midland Corporation v Sanderson Motors Pty Ltd (1983) 3 NSWLR 395
Bellingen Shire Council v Colavon Pty Ltd [2012] NSWCA 34; (2012) 188 LGERA 169
Bishopsgate Motor Finance Corporation Ltd v Transport Brakes Ltd (1949) 1 KB 322
Cairnsmore Holdings Pty Ltd v Bearsden Holdings Pty Ltd [2007] FCA 1822
Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337
McHugh Holdings Pty Ltd v Newtown Colonial Hotel Pty Ltd [2008] NSWSC 542; (2008) 73 NSWLR 53
McRae v Commonwealth Disposals Commission [1950] HCA 79; (1951) 84 CLR 377
Pethybridge v Stedikas Holdings Pty Ltd [2007] NSWCA 154
Southern British National Trust Ltd v Pither (1937) 57 CLR 89
Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165
Watson v Foxman (1995) 49 NSWLR 315
Category: Principal judgment
Parties: Caterino Palin (First Plaintiff)
Dorothea Lucy Palin (Second Plaintiff)
Rene Vetterli (First Defendant)
Ngoc Vetterli (Second Defendant)
Representation: Counsel:
Mr P Folino-Gallo and Mr D D'Souza (Plaintiffs)
Mr L Gor (Defendants)
Solicitors:
Sydney Law Practice (Plaintiffs)

File Number(s): 2011/39438
Publication restriction: None

Judgment

In March 2010, the parties entered into an agreement for the sale of a wholesale bakery business known as R & D Foods, together with a chattel mortgage and a lease. The vendors, Mr and Mrs Palin, re-entered the premises where the bakery business was conducted in September 2010. By a statement of claim filed in February 2011 they claimed that the defendants, Mr and Mrs Vetterli, had breached the lease, with the result that an amount of $80,000 became immediately payable under the mortgage. Mr and Mrs Palin sought damages for what was owing under the agreements, as well as a declaration that they are entitled to sell and dispose of certain items set out in a schedule to the mortgage.

By their defence Mr and Mrs Vetterli claimed that Mr and Mrs Palin did not have all right, title and interest in the bakery which they had purported to sell them and that therefore, they could not and did not transfer the business to them as had been agreed. In the result, the sale agreement did not impose any valid or binding obligations upon them, nor did the mortgage or lease agreements.

By a further amended cross-claim filed on 28 March 2013, Mr and Mrs Vetterli also claimed that they had been induced to enter the three agreements by various misrepresentations, which entitled them to elect to rescind the agreements. In the alternative, they claimed that they had also entered a collateral contract, under which certain promises as to ownership of the business and the existence of a contract for the supply of bread to Seda Bakery were made and that this contract had been breached. They also claimed that Mr and Mrs Palin had engaged in misleading and deceptive conduct within the meaning of s 42 of the Fair Trading Act 1987, as well as unconscionable conduct, in relation to their title to the business and the contract with Seda.

Mr and Mrs Vetterli claimed that there was in fact no Seda contract, but merely an ad hoc arrangement between Mr and Mrs Palin and Seda, which it was entitled to terminate at will. The arrangement was terminated less than two months after the sale, with the result that what had been a viable business when acquired, became a struggling business which could not meet operating expenses, or pay rent due under the lease.

They sought declarations that the sale agreement, as well as the lease and mortgage agreements, have been rescinded and that they were unconscionable transactions; restitution by way of repayment of all moneys paid under the agreements; and various damages at common law, under s 72 of the Fair Trading Act, as well as equitable compensation.

The breach of collateral contract and certain of the unconscionability claims were not finally pressed.

By their defence to the cross-claim Mr and Mrs Palin denied that they made the alleged representations or that Mr and Mrs Vetterli had relied upon them; that they had engaged in any unconscionable conduct; or that the damages claimed had been suffered as a result.

The parties' written agreements

The three agreements which the parties entered reflected the terms which were agreed. The alleged representations on which Mr and Mrs Vetterli relied were not referred to in any of those agreements and they were not otherwise evidenced in writing.

The agreements were for:

The sale of the business for a purchase price of $180,000, with Mr and Mrs Palin providing $80,000 in vendor finance, with completion due on 24 March 2010 (it actually occurred on 6 April 2010).

A three-year lease of two adjoining units owned by Mr and Mrs Palin, from which the bakery operated.

A chattel mortgage over the equipment of the business acquired under the sale agreement, securing $80,000.

There was no dispute that only $100,000 had been paid under the sale contract, that certain rent due under the lease had not been paid and that the chattel mortgage acted as security for what was owed.

The sale agreement apportioned $90,000 of the purchase price for goodwill and $90,000 for equipment and provided for a deposit of $18,000 and a two-week post completion training period. Interest at 8% was payable if the vendor financed amount of $80,000 was not repaid within one year of completion. No warranty was given as to the condition of electrical equipment and machinery sold. Risk was to pass on the 'adjustment date', defined to be the earlier of giving possession to Mr and Mrs Vetterli or completion (cl 5). Until completion Mr and Mrs Palin were obliged to run the business as a going concern, to carry it on in a proper and businesslike way and to maintain the goodwill of the business (cl 9.1). Amongst other things Mr and Mrs Palin promised that they had 'full authority and capacity to enter into the contract and sell the business', as well as absolute title to the business (cl 10.1). Clause 10.3 provided:

"If the vendor becomes aware before completion of any fact which makes a promise in clause 10.1 incorrect or misleading, the vendor must disclose that fact to the purchaser before completion."

Clause 12 restrictions of rights on purchaser, provided:

"The purchaser cannot make a claim or requisition or rescind or terminate in respect of:

12.1 a promise, representation or statement about this contract or the business, not set out or referred to in this contract, or

12.2 anything the substance of which is disclosed in this contract"

The issues

There was no issue between the parties as to the terms of the written transactions; that Mr and Mrs Vetterli fell into arrears on the rent due under the lease after Seda ceased buying bread from them; and that when Mr and Mrs Palin were not prepared to forego further rent due under the lease and the parties were unable to resolve their dispute, that Mr and Mrs Palin re-entered the premises and took possession. In the result, Mr and Mrs Vetterli were not able to continue operating the bakery business, which they had bought.

The issues initially lying between the parties revolved around whether:

Mr Palin and Mr Dahari had reduced the terms on which bread was sold to Seda to writing;
Mr Palin had made representations that there was a contract with Seda with a 12 month term commencing in December 2009; that Seda was obliged to purchase a minimum quantity of 2,000 loaves per day at $0.52 per loaf; and that it was prepared to purchase as much bread as the business could produce;
If made, these representations had been relied on by Mr and Mrs Vetterli;
The bakery business which Mr and Mrs Palin sold was owned by them and their son Mr Robert Palin, who was not a party to the transaction;
If it was, whether Mr and Mrs Vetterli had received good title to the business;
Mr and Mrs Vetterli had not engaged solicitors to act for them, understanding that Mr and Mrs Palin's solicitor, Mr Morgan Jones, was acting for both sides;
Mr and Mrs Vetterli were disadvantaged because Mr Morgan Jones did not act for them;
Mr and Mrs Vetterli were entitled to any of the various relief which they claimed.

Mr and Mrs Vetterli called evidence from Mr and Mrs Palin's solicitor, Mr Morgan Jones and from Mr Dahari, a director of Seda. They finally accepted that Mr Morgan Jones had acted only for Mr and Mrs Palin and that they had no basis for understanding otherwise. They also accepted that Mr Palin and Mr Dahari had reduced the terms of their agreement to writing.

Mr and Mrs Palin sought orders as to the outstanding rent and the balance of the purchase price, $80,000. Mr and Mrs Vetterli sought repayment of $100,000, losses of $36,348.61, while the business traded and Mr Vetterli's foregone salary, calculated at $77,500 per annum, plus 9% superannuation, until Mr Vetterli would otherwise have retired from his employment. Orders for interest were also sought.

Credibility and reliability of evidence

One of the difficulties in resolving what really transpired between these parties was that aspects of the affidavit evidence given by various witnesses were in relevantly identical terms. Mr Williams is a long term friend of Mr Vetterli, who was initially also a proposed purchaser of the business. He worked as marketing manager in the business, after Mr and Mrs Vetterli acquired it. In the case of Mrs Vetterli and Mr Williams, they gave identical accounts to those given by Mr Vetterli in relation to certain events which they had not themselves been involved in, in respect of which they gave an account of what Mr Vetterli had told them. These accounts differed markedly from accounts given by Mr and Mrs Palin.

In cross-examination, Mr and Mrs Vetterli and Mr Williams all denied colluding with each other in preparing their affidavits. In Mrs Vetterli's case, it had to be considered that her first language is Vietnamese, that her affidavit was prepared with the assistance of an interpreter, and that she gave her oral evidence with such assistance. In final submissions it was accepted by Mr and Mrs Vetterli's counsel, Mr Gor, that the common denominator in the preparation of their affidavits was him. It was submitted that he had sought faithfully to replicate their recollections.

For their part Mr and Mrs Palin also gave virtually identical accounts of certain matters which favoured the case which they advanced and which departed markedly from the versions of events which Mr Vetterli, Mrs Vetterli and Mr Williams gave.

Also to be considered was that in relation to some important aspects of the dispute, curiously, Mr and Mrs Palin did not, by their affidavits, give accounts of what had transpired at various relevant stages of the parties' dealings with each other, they merely denied the accounts which Mr and Mrs Vetterli and Mr Williams had given in their affidavits. That approach was adopted even when they were responding to accounts given by Mr and Mrs Vetterli and Mr Williams as to matters plainly relevant to the cross-claim being pursued against them.

The resulting difficult evidentiary picture has to be considered in circumstances where these proceedings followed proceedings which were unsuccessfully brought by Mr and Mrs Vetterli in the Industrial Court of New South Wales under s 106 of the Industrial Relations Act 1996. In final submissions it was accepted for Mr and Mrs Palin that as a result, at the time of swearing their affidavits, they had a wider understanding of Mr and Mrs Vetterli's case, than a mere reading of the complaints advanced in the cross-claim could have given them.

The state of aspects of the affidavit evidence certainly stands in stark contrast to what has long been understood as to the fallibility of human memory. As discussed by McClelland CJ in Eq in Watson v Foxman (1995) 49 NSWLR 315. There his Honour observed at 318:

".... human memory of what was said in a conversation is fallible for a variety of reasons, and ordinarily the degree of fallibility increases with the passage of time, particularly where disputes or litigation intervene, and the processes of memory are overlaid, often subconsciously, by perceptions or self-interest as well as conscious consideration of what should have been said or could have been said. All too often what is actually remembered is little more than an impression from which plausible details are then, again often subconsciously, constructed. All this is a matter of ordinary human experience."

In the result the credibility and reliability of the evidence given by Mr Palin, Mrs Palin, Mr Vetterli, Mrs Vetterli and Mr Williams was in issue.

In the circumstances I have concluded that the evidence of all these witnesses had to be approached with considerable caution. I was not satisfied that any of them had approached their evidence by way of strict adherence to what their oaths and affirmations required.

The background to the parties' transaction

It was common ground that Mr and Mrs Palin, Mr Vetterli and his former wife Rosetta, were friends of many years standing. They remained close after Mr Vetterli separated from his wife in 1998. Mr Vetterli later introduced Mrs Ngoc Vetterli to the Palins and they socialised together, but it was not in dispute that she and Mrs Palin did not get on well with each other. Mr Williams was also a longstanding acquaintance of Mr Palin. Both he and Mr Vetterli worked at Bakers Maison, before the transaction was entered and initially, Mr Williams and Mr Vetterli intended to purchase the business together.

Mr and Mrs Palin commenced their bakery business in about 1993. It consisted of a wholesale bakery business known as R & D Foods and a grissini (Italian breadsticks) business known as Elba Grissini, which they had purchased in about 2000. Their son, Mr Robert Palin, began working in the business in about 2000 and became a part-owner of the business in 2003. The bakery side of the business closed in 2005. Mr Robert Palin then ceased working in the business. Whether he remained a co-owner of the business when it was sold was in issue. Mr and Mrs Palin continued working together in the grissini business after the bakery side closed. They then commenced actively marketing that business, planning to use the proceeds in retirement.

Over time the price they were seeking for the business reduced significantly. In February 2005, it was advertised in the Trading Post for $300,000. Mr Palin said in cross-examination that they were then testing the market. It was advertised regularly throughout 2006 and 2007, when it was advertised at $220,000 and later for $240,000 or nearest offer. In January 2008 it was advertised for $180,000 and in August for $160,000.

In July 2008 Mr and Mrs Palin thought they had buyers, Mr and Mrs Tansli and Mr and Mrs Solyli, but that sale, at an agreed price of $150,000, finally did not proceed. Mr and Mrs Palin's efforts to sell the business then continued. In March 2009 there were discussions with Bakers Maison, where Mr Vetterli worked, for sale of the bread line, which was then not being used, at a price of $120,000. This also did not proceed. On the evidence of both Mr Vetterli and Mr Williams, over the years Mr Palin also offered the business to them, but neither was then interested.

Mr Vetterli is a trained patissier, confectioner, pastry cook, baker and chef. He obtained his qualifications in Switzerland and later completed a Hotel Restaurant Catering and Management Course at TAFE. In 2009, he was employed as Production Manager at Bakers Maison, reporting to the general manager, Mr Chaneliere. He had in the past operated his own retail bakery businesses and from time to time had assisted Mr Palin at the bakery.

Mr Palin had an accident in December 2009 and Mr Vetterli then helped him out at the bakery. This was at a time after Mr and Mrs Palin had recommenced the bakery side of the business, selling bread to Seda. Mr Palin explained that they had pursued this opportunity when it arose, because they were able to obtain very good flour, at a very good price from Seda. His evidence was that they were planning to also use that flour for the grissini business. They acquired a small truck and a new packaging machine to service this new business. Mr Palin's evidence was that in October to December 2009 they were providing various quantities of bread on a daily basis to Seda, from as low as 500 loaves a day, to as high as 1,600 or 1,700 per day. Mr Palin explained in cross-examination that this depended on the orders which Seda placed. Mrs Palin gave similar evidence.

The loaves were supplied at $0.52 per loaf. Seda used the bread to make bread crumbs, which it supplied to its customers. On Mr Palin's evidence the arrangement was not generating much revenue. It was he who had proposed this price to Mr Dahari after he and Mrs Palin had supplied sample loaves. Mr Palin's evidence was that the price agreed was based on an estimate of the costing of everything involved. He denied that in arriving at that figure, that he had had regard to any minimum supply per day. Mr and Mrs Palin also denied that there had been any agreement reached as to a minimum daily supply. The written terms did not refer to any such minimum.

It was in December 2009 that Mr Vetterli learned of the new business with Seda. He and Mr Williams then became interested in buying the business. Mr Palin wanted $180,000. What representations, if any, Mr Palin made to generate this interest was in issue. It was in February 2010 that they offered $130,000 for the business, which Mr Palin refused. Mr Williams dropped out of the negotiations. A price of $180,000 was then agreed between Mr Palin and Mr Vetterli.

The parties signed the three agreements in March 2010 at Mr Morgan Jones' office. A sum was initially paid to Mr and Mrs Palin. Both Mr and Mrs Vetterli then worked in the business with Mr and Mrs Palin, to learn its operation. The final payment was made on 5 or 6 April. Who kept control of the business in the period prior to the final payment being made and what occurred before and afterwards, was in issue.

How the dispute between the parties arose

Before Mr and Mrs Vetterli made the final payment in April, a dispute arose between Mr Palin and Mr Dahari as to the quality of the bread which was being supplied to Seda. There was no issue that at a meeting attended by Mr Palin and Mr Vetterli on 4 April, before Mr and Mrs Vetterli made the final payment, Mr Dahari reduced the bread order to 1,000 loaves a day and foreshadowed cancelling the order entirely. Mr Dahari told them that he had lost a big customer and that he wanted to take only 1,000 loaves for the time being. He also said that down the track, he would stop making orders altogether.

Mr Vetterli's evidence was that he was then concerned that he would not be able to pay rent, but Mr Palin assured him that there was a contract with Seda for the supply of 2,000 loaves per day, which Mr Dahari would have to honour. Mr Vetterli had not seen the contract to that point and made the final payment, without seeing it. He asked to see the contract and then attempted to supply 2,000 loaves every other day, as he claimed Mr Palin advised him to do, but Seda rejected that supply. Mr Palin denied giving him this advice. Mr Dahari refused that supply, requiring the delivery of 1,000 loaves per day.

On 19 April, when flour was running low, Mr Vetterli placed an order for more flour with Seda. It was not delivered. On 22 April, he was advised that Seda would not place any more bread orders. The last day that bread was purchased by Seda was 22 April. Mr Vetterli then spoke to Mr Dahari. He then denied that there was any contract and confirmed that Seda would not be placing any more orders. He told Mr Vetterli that the quantities and duration of the orders placed had always been at his discretion. When Mr Vetterli said he had bought the business believing there was a contract, Mr Dahari told him that Mr Palin had cheated him and that he needed to take the matter up with him.

Mr Vetterli and Mr Palin met on 22 April. Mr Vetterli's evidence was that he was upset, having bought a business with an ongoing bread contract, which turned out not to exist. He wanted his money back, which Mr Palin refused. He was again asked to produce the Seda contract. Mr Palin offered to help him find other customers, an offer which Mr Vetterli refused.

There was another meeting on 30 April attended by Mr and Mrs Palin, Mr and Mrs Vetterli and Mr Williams. An unsigned version of a document which Mr and Mrs Palin claimed had been signed by Mr Palin and Mr Dahari, was then produced. Mr Vetterli did not accept their claim, Mr Dahari having denied that there was any contract.

Mr Vetterli's evidence was that he said he was not able to pay rent without the income from Seda. Mr Palin and Mrs Palin suggested that he needed to look for other customers and sell other products. An agreement was reached that Mr and Mrs Vetterli would have six months rent free on the breadline unit, while Mr Vetterli tried to get other business to cover the loss and sought legal advice as to his rights against Seda. Mr and Mrs Palin warned Mr Vetterli against pursuing Seda.

On legal advice, Mr Vetterli stopped paying rent after 18 May 2010. Mr Vetterli met again at the bakery with Mr and Mrs Palin on 10 August 2010. The discussion failed to resolve their dispute. Mr and Mrs Palin required that rent be paid. Mr Palin met again with Mr Vetterli on 23 August. Mr Vetterli's evidence was that Mr Palin told him that he thought that he had a contract with Seda, but he had made a mistake. In early September, he was served with a notice in relation to the outstanding rent and on 20 September, found that the locks had been changed. Mrs Palin told him that it was for non-payment of rent.

Proceedings were brought against Mr and Mrs Palin in the Industrial Court of New South Wales. They were dismissed in June 2011.

Was Mr Robert Palin a co-owner of the business when it was sold?

Mr Robert Palin was not a party to any of the agreements which the parties entered. Mr and Mrs Palin did not deal in their affidavits, with his position, but the defence to the cross-claim pleaded that he had a stake in the business name, not the business, at the time of the sale.

Mr and Mrs Vetterli had subpoenaed Mr Robert Palin to give evidence, but did not finally call him. Mr and Mrs Palin made an application to call evidence from him in reply, which was opposed, in circumstances where he had not sworn any affidavit, as the Court had earlier directed and where no other notice had been given of the evidence to be called from him. The leave sought was refused, given the time and circumstances in which this application was made and the obvious prejudice which would flow and the further costs and delay which would result, if it were granted.

There was no question that Mr Robert Palin had become a co-owner of the business in 2003 and had finished working in the business in 2005. There was no evidence that he then ceased being a co-owner. To the contrary, afterwards he was still named as a partner in partnership tax returns, although he received no drawings from the business, consistently with him then no longer being a working proprietor. He was also named on a 2008 business name registration certificate as a proprietor. As discussed in Pethybridge v Stedikas Holdings Pty Ltd [2007] NSWCA 154 that registration provides prima facie evidence of the facts it deals with. The sale contract provided for the transfer of the business name to Mr and Mrs Vetterli. That was achieved by the execution of a transfer form signed by Mr and Mrs Palin, as well as by Mr Robert Palin, after the contract was signed.

In cross-examination, Mr Palin denied telling Mr Vetterli that he had to pay his son $40,000 out of the sale price. I am not inclined to accept that evidence. Mr Palin found it difficult to explain whether or not, at the time of the sale, his son was still a co-owner of the business, or why the tax returns and other records in evidence showed that he was still involved in the business.

Mr Palin said at one point in his cross-examination, that it was a matter to do with his accountant, which he did not understand. He also said that his partner, or co-proprietor, was Mrs Palin and that he did not understand why his son's name was still 'in the papers'. He then said that it was his accountant who had put his son's name there, although he agreed that he had reviewed the tax returns prepared by the accountant, to ensure that they were accurate, before they were filed.

Mrs Palin confirmed that their son was named as a partner in the business in the tax returns which they had filed. She also agreed that they had signed the returns after their accountant had prepared them and that she had approved their filing.

It was on 6 March 2010 that Mr Robert Palin signed the application to change proprietors of a business name document, by which he indicated that he had ceased carrying on the business and that Mr and Mrs Vetterli were the continuing proprietors. Thereafter they changed the name of the business to 'The Bakery Styx' and operated the business under that name, without demur by Mr Robert Palin.

Had Mr Robert Palin evidence to give, which supported Mr and Mrs Palin's case and which cast doubt on the inferences which could be drawn from the relevant records and the steps he took to give effect to the sale, no doubt they would have led that evidence from him in their case and would themselves have dealt with that matter in their affidavits. That they expected Mr and Mrs Vetterli would call him, does not explain why they had not earlier served an affidavit from him, or called him in their own case. The obvious inference is that his evidence would not have assisted their case.

On all of the evidence I am satisfied that Mr Robert Palin remained a co-owner of the business when it was sold.

Mr and Mrs Vetterli obtained good title to the business

The case advanced for Mr and Mrs Vetterli was that they were misled as to the ownership of the business, Mr Robert Palin's interest not being disclosed to them before the contracts were entered. In the result, because not all of the owners of the business were parties to the contract, all right title and interest in the business was not conveyed to them by the sale contract. What Mr and Mrs Palin had done was also argued to have amounted to misrepresentation by silence, or the putting forward of a half truth, or silence as to Mr Robert Palin's interest having distorted the positive representation made in the contract, as to Mr and Mrs Palin's ownership of the business. In the circumstances, it was argued, they were entitled to the relief which they sought on various grounds, including on the basis of the nemo dat principle.

To support the latter argument, reliance was placed on the approach of Jacobsen J in Cairnsmore Holdings Pty Ltd v Bearsden Holdings Pty Ltd [2007] FCA 1822 at [87] - [98]. For Mr and Mrs Palin it was initially argued that the nemo dat principle had no application to choses in action such as the goodwill the subject of the contract; later, that it applied only in limited circumstances to choses in action; and further, that in Cairnsmore Holdings, Jacobsen J was not in fact dealing in with the application of that principle, given that in both McRae v Commonwealth Disposals Commission [1950] HCA 79; (1951) 84 CLR 377 on which his Honour's judgment rests and Cairnsmore Holdings, the subject matter of the contracts in question did not exist.

It was also submitted that if it was concluded that Mr Robert Palin did have an interest in the business, it also had to be considered that he had never made any claim against Mr and Mrs Vetterli. To the contrary, not only had his interest been revealed to them when the transfer of business name documentation was provided to them, shortly after the contracts were signed and before the final payment was made in April 2010, thereby he acknowledged that he was no longer a proprietor of the business. He had never acted inconsistently with that acknowledgment. Consequently, Mr and Mrs Vetterli thereafter changed the name of the business and conducted it, until they were locked out for non-payment of rent. The complaint that they had not been given full title to the business emerged only after the lockout, in the absence of any claim ever having been made against them by Mr Robert Palin. In those circumstances the nemo dat principle had no application.

In closing submissions, a defence not pleaded was also relied upon by Mr and Mrs Palin, namely, that a partner was able to deal with partnership assets, including by way of sale of the partnership business itself, on behalf of all partners, including an undisclosed partner, on the basis of actual, not merely ostensible authority. If the undisclosed partner was aggrieved by the action taken, the partner could take action, in which event the nemo dat principle on which the Vetterlis relied might have work to do.

Mr and Mrs Vetterli opposed any defence of actual or ostensible authority being advanced, because it had not been pleaded, as Rule 14.14 of the Uniform Civil Procedure Rules 2005 required. It seems to me that there is merit in the complaint that reliance on partnership law needed to have been pleaded, if they were not to be caught by surprise. For reasons which I will later explain in relation to another unpleaded defence, the submissions which rested on partnership law, cannot provide an answer to this aspect of the Vetterlis' case.

This aspect of the issues lying between the parties can, in any event, be otherwise resolved.

It was Mr and Mrs Palin's case that on the evidence, Mr Robert Palin would be estopped from denying that the Vetterlis had received good title to the business under the contract, given the transfer of business name which he had provided in their favour. The transfer document was executed on 6 March and the contracts were signed by the parties on 8 March. Whether Mr and Mrs Vetterli actually saw it before the contracts were signed at Mr Morgan Jones' office, is not clear. They certainly must have seen it not long afterwards.

For Mr and Mrs Vetterli it was accepted that this was relevant, but argued that at best, it transferred an interest in part of the goodwill that formed part of the business, but could not transfer to them all right, title and interest in the business and its assets.

On Mr Vetterli's' evidence, had he known of Mr Robert Palin's position, he would not have signed the contracts. Mrs Vetterli's evidence was that she entered the transaction and signed the documents only because Mr Vetterli was prepared to do so. It seems to me that this evidence must be accepted. Mr and Mrs Vetterli were not legally represented. Mrs Vetterli was not long in Australia. English was not her first language and she was anxious to pursue the business opportunity which her husband was satisfied that they should invest in together. Mr Vetterli had operated his own businesses in the past and in the course of his then employment as Baker Maison's production manager, had to deal with various contracts. His evidence was that he had read and understood the sale contract as reflecting what had been agreed with Mr and Mrs Palin, although he had not read the other two contracts in detail, or understood them in the same way. Still, there is no suggestion that any of the documents departed from what had been agreed.

In my view, it is a matter of plain commonsense in these circumstances that had Mr Vetterli known that the sale contract did not have as a party one of the owners of the business which he and his wife were seeking to buy, neither he nor Mrs Vetterli would not have entered the contract, at least without making further enquiry and satisfying themselves as to Mr Robert Palin's position. That position was, however, revealed by the transfer document which Mr Robert Palin, as well as his parents executed, that is, that he was aware of and acquiesced in the sale. That was consistent with Mr Vetterli's understanding from Mr Palin, that he was to be paid $40,000 out of the purchase price. It follows that this was not a situation akin to those dealt with in the authorities relied on for Mr and Mrs Vetterli.

In Cairnsmore Holdings Jacobsen J concluded that the vendor did not have title to the financial services business it had purported to sell. Like in McRae, his Honour concluded that the contract there in question included a promise that the subject matter of the agreement existed. In that case, it was concluded at [28] that 'there was no oil tanker to sell, and so there was no contract'. In Cairnsmore Holdings the commercial purpose which the contract sought to achieve could not have been put in place, without an agreement between the purchaser and a third party. His Honour thus concluded that the case fell within the principles stated by Dixon and Fullagar JJ in McCrae and that the vendor had to pay damages for breach of its promise to give title. That is not this case.

The construction of the parties' contract must of course be approached in the way discussed in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165 at [40]:

"This Court, in Pacific Carriers Ltd v BNP Paribas (2004) 78 ALJR 1045; 208 ALR 213. has recently reaffirmed the principle of objectivity by which the rights and liabilities of the parties to a contract are determined. It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction Pacific Carriers Ltd v BNP Paribas (2004) 78 ALJR 1045 at 1050-1051 [22]; 208 ALR 213 at 221."

In a contract such as this, the exercise has to be undertaken in the context of its commercial purpose, as revealed by 'the genesis of the transaction, the background, the context, the market in which the parties are operating" (see Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337 at 350 [22]).

There is no question that the business the subject of the contract, including its goodwill, existed. There can also be no question that objectively, a reasonable person in the position of Mr and Mrs Vetterli would have understood from the contract that it was Mr and Mrs Palin alone who had title to the business that they were purchasing and that their title to that business and its assets, including the goodwill, was what was being sold to them.

The nemo dat rule was explained in Bishopsgate Motor Finance Corporation Ltd v Transport Brakes Ltd (1949) 1 KB 322 at 336 - 337 (Denning LJ):

"In the development of our law, two principles have striven for mastery. The first is for the protection of property: no one can give a better title than he himself possesses. The second is for the protection of commercial transactions: the person who takes in good faith and for value without notice should get a good title. The first principle has held sway for a long time, but it has been modified by the common law itself and by statute so as to meet the needs of our own times. The modification here in question is one conferred by the common law itself.

It has always been held that a sale in market overt - according to the usage of the market - to one who takes in good faith and for value without notice confers a good title on the buyer."

The concept of good faith was discussed by Clarke J in Associated Midland Corporation v Sanderson Motors Pty Ltd (1983) 3 NSWLR 395 at 401:

"The proviso applies if the purchaser acts in good faith and without notice.

Good faith connotes "honesty" and whilst negligence of itself, would not establish an absence of good faith, lack of reasonable care may, when coupled with other facts and circumstances, lead to an inference that the purchaser was suspicious and refrained from inquiring because of a fear that he would become aware of irregularity.

The concept is, in this sense, and although an element separate from notice, tied in with it."

If Mr and Mrs Vetterli did not have prior notice of Mr Robert Palin's interest, they did give value for the business and entered this commercial transaction in good faith. Afterwards they certainly received a transfer document which Mr Robert Palin had executed, acknowledging the transfer of the name and that they were to be the continuing proprietors of the business. Had Mr Robert Palin ever challenged their title, on the evidence they would have established that they had obtained good title. Consistently with his obvious knowledge of and acquiescence to the sale, there was never such a challenge made.

Curiously, the argument advanced for Mr and Mrs Palin, however, was that the nemo dat principle could have no application in this case, because the contract assigned $90,000 for goodwill. This submission was initially advanced on what was said to be the conceptual difficulties of establishing ownership of goodwill, rather than on any authority which suggested that the nemo dat principle could not apply to such a chose in action.

There were a number of difficulties with this submission. The parties to this contract were agreed as to what value that chose in action had. There was no question that the goodwill the subject of their agreement belonged, at least in part, to Mr and Mrs Palin. What was put in issue, only in these proceedings, was whether it was Mr and Mrs Palin's alone to sell and whether good title to the business as a whole was conveyed to them, given that Mr Robert Palin was not a party to the contract.

Reliance was placed on Brereton J's decision in McHugh Holdings Pty Ltd v Newtown Colonial Hotel Pty Ltd [2008] NSWSC 542; (2008) 73 NSWLR 53 for Mr and Mrs Palin. That case was concerned with the lease of a hotel. On an application for an injunction restraining an application to the Licensing Court for transfer of the licence, his Honour had to consider whether a particular contractual restraint was reasonable. The proceedings were not concerned with the sale or ownership of the goodwill of the business, or the application of the nemo dat principle. There was there no issue as to whom the hotel business or goodwill in question belonged. The reasonableness of the restraint depended upon it being established that the covenant protected a legitimate interest, as distinct from merely precluding competition. His Honour accepted that such interests could include the goodwill of a business.

Brereton J also accepted that a legitimate interest in goodwill could attach to premises where the hotel business was conducted, as distinct from the business itself (at [42]), but concluded that the covenant in question did not protect such "locational" goodwill. It follows that what his Honour there determined provides no support for the view that the nemo dat principle does not apply to contracts under which title in a chose in action is transferred.

Commercial transactions are frequently concerned with choses in action. The application of the nemo dat rule in respect of equitable titles, for example, in a case where it was a debenture which was the subject of the transaction in question, was discussed in Southern British National Trust Ltd v Pither (1937) 57 CLR 89 by Dixon J at 109. I can see no reason for supposing that the principle does not also apply to the title of all that was conveyed under this commercial transaction.

In the result it seems the nemo dat principle does not assist Mr and Mrs Vetterli. They entered the contract by which Mr and Mrs Palin represented that they had title to the business and its goodwill. Thereby they bought for value, in good faith and without notice of Mr Robert Palin's interest. He has never since made any claim that title to the business was not transferred to them. To the contrary, shortly afterwards, he executed the business name transfer document, in which he acknowledged that Mr and Mrs Vetterli were to be the ongoing proprietors of the business. Afterwards, the sale was completed. In accordance with his acknowledgment, their title to the business has never been challenged.

Those circumstances are not at all like those dealt with in either Cairnsdale Holdings or McRae, where the vendor in fact had nothing to sell. On the evidence, even if good title to the business was not transferred to them by the contract, the effect of the exception to the nemo dat principle is that Mr and Mrs Vetterli did obtain good title to the business.

Furthermore the evidence is that no damage of any kind flowed from the misrepresentation as to the true ownership of the business. It was the misrepresentation as to the terms of the Seda contract from which damage flowed.

The parties finally accept that the evidence established that there was a contract with Seda

It was only in final oral submissions that it emerged that it had become common ground that Mr and Mrs Palin did have a contract with Seda for the supply of bread. How that came to pass is relevant to the resolution of the question of whether Mr and Mrs Vetterli have established that Mr Palin made the claimed misrepresentations as to the terms of that contract. That remained in issue.

In written submissions for Mr and Mrs Palin, contrary to their own earlier evidence, it was submitted that there had been a contract for the supply of bread to Seda. In written submissions initially provided for Mr and Mrs Vetterli, it was argued that there was, in fact, no Seda bread contract, but only an ad hoc arrangement entitling Seda to terminate at will. That accorded with evidence which Mr and Mrs Palin later gave. In final oral submissions, however, it was announced that the authenticity of the document which Mr and Mrs Palin had produced as evidencing the arrangement was no longer challenged and that it was accepted that it recorded the arrangement between them and Seda.

In final oral submissions for Mr and Mrs Palin, it was urged that it would be concluded that the signed document was a contract, which reduced to writing the agreement which they had reached with Seda. It was submitted to be a contract by way of course of dealing, with respect to the price of a loaf and the ongoing supply of bread and flour. Implied by the Sale of Goods Act 1923 were said to be terms that the bread would be of merchantable quality and fit for purpose. It was then that it was announced for Mr and Mrs Vetterli that it was not in issue that there was such a contract.

The case which Mr and Mrs Vetterli had earlier advanced, was that the documents which Mr and Mrs Palin produced after Seda ceased buying bread in April 2010, which they claimed evidenced the arrangement which they had with Seda, were not genuine. That aspect of their case was abandoned after they called oral evidence called from Mr Dahari. That was after Mr and Mrs Palin had been cross-examined on the basis that there was no contract with Seda.

Mr Dahari had not sworn an affidavit. His evidence was that he had told Mr Palin how to bake the kosher bread he required, providing him with a recipe, which required 2% salt to be used. He explained that the salt content was important, because the bread was used to make breadcrumbs and without enough salt, the crumbs did not stick to the schnitzel. He did not remember the date, but explained that a dispute had arisen with Mr Palin about the quality of the bread he had supplied. It transpired that he had used only half the required salt. Seda had lost business as a result. Mr Dahari said that he had reduced the amount of bread he ordered, wanting to see if the quality improved, but because he had breadcrumbs returned, he stopped buying bread altogether. In cross-examination, Mr Dahari explained that beforehand, he had intended to sell the breadcrumbs throughout Australia.

There were two versions of the document which evidenced the arrangement with Seda. One had been signed by Mr Palin and Mr Dahari in October 2009 and the other, an unsigned copy of that document, had been printed off Mrs Palin's computer and provided to Mr and Mrs Vetterli at the meeting on 30 April 2010, they having learned on 22 April that Seda would not purchase any more bread. Before Mr Dahari was called, Mr and Mrs Palin had been cross-examined on the basis that the signed document was not genuine.

Mr Dahari is a director of Seda Pty Limited. His evidence was that contrary to what he had earlier informed Mr and Mrs Vetterli through his solicitor, it was his signature which appeared on the document which he and Mr Palin had signed in October. They had signed the document, he said, in order to please Mrs Palin. He said that earlier, he had done something by hand, but he no longer had that document. He explained that he had earlier told his solicitor that he did not sign a document in the terms produced by Mr and Mrs Palin, because that was not his memory. He accepted at the hearing, however, that both his signature and his handwriting appeared on the document in evidence, which Mr Palin had also signed. Mr Dahari also said that the document reflected the terms of his arrangement with Mr and Mrs Palin.

That was plainly quite a different account to that which he had given Mr Vetterli on 22 April 2010.

Mr and Mrs Vetterli also called Ms Portingale of Mr Dahari's solicitors office. A file note, which she had made of a conversation with Mr Dahari on 12 May 2012, was tendered. It indicated that he had then said that he had not signed the document which Mr and Mrs Palin had produced, but that he had himself written something in his own handwriting, to indicate that he would be buying bread and that it was this document which he had signed and given to Mr Palin. He did not have a copy of that document. While the signature on the document looked like his, he told Ms Portingale that he had not signed a printed letter. He accepted, however, that he had verbally agreed to the matters set out in Mr and Mrs Palin's document.

On all of this evidence, it is apparent that while that document reflected what Mr and Mrs Palin had agreed with Mr Dahari, it did not accord with the representations Mr Vetterli claimed Mr Palin had made, as to the terms of that arrangement. The document provided:

"Dear Shimon

Thank you for considering us as a supplier of bread loaves for your Bread Crumbs buseness(sic).

During our meeting on 16 September 2009 we established the price of the standard 680 gr. loaves at 0.52 c. as long you supply us with the flour at $ 500 per ton(sic) bulk.

we also agreed that you will make the crates available for the operation and you will take care of the Rabbi who ensures our permises(sic) are kosher.

Lastly ,we agreed that this project will continue for at least one year and that if you decide to terminate our arrangement it will not be before the flour in our silo is completely finished."

In his affidavit of 18 April 2012, Mr Vetterli's evidence was it was when Mr and Mrs Palin first produced the unsigned document on 30 April, that he first realised that there was no contract with Seda, as he had believed when he entered the agreements in March. That evidence must be accepted. There is no dispute that was the first time that Mr and Mrs Palin produced the document. Mr Vetterli's view then was that it was not a contract. That was plainly a view which Mr and Mrs Palin then shared. They warned him against pursuing Seda legally and later claimed at various times in their evidence that they had no contract with Seda. As I have explained, a different case was ultimately advanced for them in final submissions.

It was in her 13 June 2012 affidavit that Mrs Palin first recounted a conversation between Mr Palin, Mr Williams and Mr Vetterli in April 2010, after the Seda order had been cancelled, when Mr Vetterli asked to see a copy of the agreement. Mrs Palin did not then deny that there was an agreement, but said that she did not have a copy with her at the meeting. She later printed a copy of the document off her computer, when she could not find the signed version. In his 13 June affidavit, Mr Palin gave a similar account. He also did not then deny the existence of an agreement with Seda, although in his oral evidence he repeatedly denied that there was a contract, or that he ever told Mr Vetterli and Mr Williams that there was one.

There was a dispute about whether Mr and Mrs Palin had earlier been asked to produce the contract. In cross-examination, Mrs Palin denied, for example, that on 22 February when price was being discussed that Mr Williams and Mr Vetterli asked to see the Seda contract, claiming that she could have found it for them, if they had asked. This aspect of Mr and Mrs Palin's evidence was difficult to accept, given the difficulty which she actually had in producing the contract in April.

It was in her October 2012 affidavit that Mrs Palin gave an account of how the arrangement with Seda had come about. The account she gave was that on 16 September 2009 she and Mr Palin had a meeting with Mr Dahari, after they had undertaken a trial. What was then discussed was:

"Shimon: Rino, I want you to be my supplier. I'll give you flour at $0.52c per tonne. What's the cheapest price you can give me?

Caterino: I can supply you with dread at $0.52c per loaf.

Shimon: I agree with that. I'll also arrange for a Rabbi to inspect the premises where you're making the bread to make sure it is kosher. You'll need to come on a fortnightly basis.

Caterino: That's fine.

Me: How long do you need us to supply the bread to you?

Shimon: I'm not sure, probably about a year.

Me: That sounds like a good arrangement. However, if you decide you don't want us to supply any more bread Mr Shimon, I'd like you to agree that it is not before the flour in our silo is completely finished. I don't want to have all this left over flour that goes stale and brings rats and insects on to the property.

Shimon: Sure.

Caterino: Mr Shimon, we'll need to get additional delivery crates to supply the bread.

Shimon: I'll make my crates available to you.

Caterino: Sounds like we have an arrangement. Thanks for considering us as a supplier."

Mrs Palin said that on about 17 September 2009 she had typed up the note of this meeting and on about 15 October 2009, Mr Dahari and her husband executed a copy of this note, when they met at Seda. Mr Palin gave an almost identical account of these events in his October 2012 affidavit. He then said that the document recorded 'the arrangement'.

In her cross-examination Mrs Palin said that it was her idea to type up the notes and have them signed, because they had had to go out and buy a truck at a cost of about $15,000 and she "didn't want to all of this flour left in the silo, if something happened". The silo had a capacity of 13 tonne. On her oral evidence, setting the price of a loaf had nothing to do with her, she worked in the grissini side of the business.

Mrs Palin said that under the terms of the arrangement there was no minimum quantity commitment by Seda, yet she denied that Mr Dahari was entitled to order only one loaf per day. She said that the van carried 700 loaves and initially his order started off with a van full. After they bought the truck, sometimes he wanted more than 700 loaves. She denied, however, ever having supplied 2,000 loaves per day. The records which were produced, however, showed supply of up to 1,960 loaves per day after March 2010. Mr and Mrs Palin did not produce the relevant records prior to March. The obvious inference is that those records would not have assisted their case.

In cross-examination Mr Palin agreed that at the time of the initial discussion, Mr Dahari was not sure for how long he would need the bread supplied. The arrangement initially discussed was not to be fixed for a year, only for as long as there was flour in their silo. The document later signed on 15 October by he and Mr Dahari, contained a 12 month term. When cross-examined he explained that it referred to the arrangement lasting for a year, because in the meantime, they had to buy the truck, which had to be insured.

In cross-examination Mr Palin, like Mrs Palin, insisted, however, that there was no bread contract for 2,000 loaves per day. He said "There is just a customer wanting some loaves and we made some personal arrangements so that we don't get caught." He explained that the flour was kosher and that he and Mrs Palin wanted to ensure that they did not end up with six or ten tonnes of flour in their silo, with no bread to be baked for Seda. Mrs Palin's evidence was to similar effect.

For Mr and Mrs Palin the view finally urged was, however, as I have explained, that there was a contract. Mr and Mrs Vetterli then accepted that position.

Mr and Mrs Palin's evidence on this point was contradictory. What emerged was that there had been a written agreement pursued with Mr Dahari, because of their concerns about the acquisition of a truck and the need to guard against being left with flour which they had purchased from Seda. Finally they accepted that the written document which Mr Dahari and Mr Palin signed reflected the terms of the contract which they had entered.

It was the contract with Seda which excited Mr Vetterli's interest in the business

The evidence establishes that Mr and Mrs Palin's concession supported the conclusion that Mr Vetterli's interest in buying the business was generated by what Mr Palin had told him in December 2009 about the bread he was baking, that is, that it was being sold to Seda, with whom he had a contract on particular terms.

Mr and Mrs Palin not only relied on this development to excite Mr Vetterli's interest in a potential purchase, but also to require a higher purchase price than the price that the business had previously been advertised for. Mr Vetterli told Mr Williams about that development and that was what also excited his interest in the business.

As it finally emerged, there was no issue between the parties that any representation that there was a contract with Seda, could not have involved any misrepresentation. That there had been a misrepresentation as to its terms remained in issue, nevertheless.

Mr Palin did misrepresent the terms of the Seda contract

The case advanced for Mr and Mrs Palin was that the essential elements of any common law or statutory misrepresentation action were:

1. That there was a representation made by one party to another;

2. There was a falsity to that representation, or in the statutory cause of action, that the representor engaged in misleading or deceptive conduct or conduct likely to mislead or deceive;

3. That the representee acted in reliance upon that representation; and

4. The representee altered his or her position based upon the representation.

While it finally became common ground that the written document reflected the terms of the contract which had come into existence, it did not contain the terms that Mr and Mrs Vetterli claimed Mr Palin represented. Critically, it did not provide that there was to be a minimum supply of 2,000 loaves, Monday to Friday, for a period of 12 months.

In summary, I am satisfied that the evidence establishes that Mr Palin did represent that the contract with Seda contained such terms; that this representation was false; and that Mr and Mrs Vetterli relied on it, when they entered the agreements which they made with Mr and Mrs Palin.

I am not convinced that it was also represented that the contract commenced from December 2009, or that it was represented that Seda was willing to take all the bread that could be baked. It seems to me on the evidence that the date of commencement of the contract was something about which Mr Vetterli may well have been mistaken. Further, even if Mr Palin said what Mr Vetterli or Mr Williams variously claimed about Seda being prepared to take more than 2,000 loaves, it does not seem to me that amounted to a representation, let alone one on which Mr and Mrs Vetterli relied.

These conclusions rest on the following evidence.

It was Mr Vetterli's evidence that between 2005 and 2007 he had had a number of conversations with Mr Palin, in which he offered to sell the business to him. Mr Vetterli was not really interested, but at one point he took some documents which Mr Palin provided him to his ANZ bank manager. The manager advised him that the business was not worth buying and that the Bank would not lend against it, because it could not generate sufficient revenue to service the principal and interest payments. Mr Vetterli did not see the Trading Post advertisements for the business, but in 2008 Mr Palin again offered him the business, which he was then still not interested in.

It was common ground that Mr Palin approached Mr Vetterli in early 2009 about selling the bread line to Bakers Maison for $120,000. Mr Chaneliere later inspected the equipment but did not proceed. Over dinner in December 2009, Mr Palin again raised the purchase of the business with Mr Vetterli, but still he was not interested.

Mr Vetterli worked at the bakery in December 2009, after the bread contract commenced. His evidence was that it was then that Mr Palin first told him that he had a contract with Seda for 12 months, to make 2,000 loaves of bread per day. This information excited his interest. He and his wife had earlier sold their home and were looking for an opportunity to go into business together. It was in early January 2010 that Mr Vetterli first spoke to Mr Williams about whether he might be interested in buying the business with him. Mr Williams was interested. His own contract with Bakers Maison was due to end in February.

On Mr Vetterli's evidence, they then met with Mr Palin at the bakery, where they had a conversation to the following effect:

"Rino: "The bread side of the business is now operational. I have a contract with a bread company to sell 2000 loaves per day Monday to Friday. The customer will take up to 4000 loaves per day if you can produce this volume."

Monty: "How much do you want the business?"

Reno: "We've been friends for a long time. I will sell the business to you at a fair price. I want $240,000 for the business, but because we are friends, I will sell the business for $180,000."

Monty: "We'll need to see documents supporting the trading performance and documents supporting the bread orders. Can we see the bread contract?"

Reno: "No, the contract is at home. I have some delivery dockets and weekly statements for the bread and grissini orders. I can show these to you.""

While Mr Williams corroborated this account, Mr Palin denied it. Mr and Mrs Palin's evidence was that it was in December 2009, initially at a meal at their home, that they first discussed with Mr Vetterli and Mr Williams the sale of the business and that no such representations were made then, or subsequently.

Given Mr Vetterli's evidence as to his knowledge of the dilapidated state of the bread line, it is evident that he never had any understanding that Mr Palin was representing that 4,000 loaves could be produced. That explains the evidence, that all of the calculations made by he and Mr Williams were based on the production of 2,000 loaves, which he understood was then being supplied.

Mr Williams' affidavit evidence was also that it was in early 2010 that Mr Vetterli approached him, although Mr Vetterli had earlier told him that Mr Palin had said that he had a bread contract for 12 months for a minimum of 2,000 loaves per day, which he considered to be a good sized order. Mr Vetterli also told him that he was looking to purchase a business to get his wife employed and to start providing for his young boys.

Mr Williams' affidavit evidence was that when they met with Mr Palin they sought financial statements and a copy of the Seda contract, but Mr Palin did not provide them. In cross-examination, Mr Williams insisted that at their first meeting, Mr Palin had told them of the disputed terms of the Seda contract and that he had said that he would sell to them at a fair price. Mr Williams agreed that he was at that stage not happy to proceed with the purchase, until he saw the documents he had sought.

Mr Palin denied making the claimed representations. His evidence was that he had twice discussed the sale of the business with Mr Vetterli and Mr Williams in December 2009. He said that he had discussed with them a bread order, which was then part of the business, not a contract. He said that after the first meeting, Mrs Palin advertised the business again in the Trading Post. It was after their second meeting that Mr Vetterli told him that he had resigned his job and that he and Mrs Vetterli were shortly going to Vietnam on holidays.

Mr Palin agreed in cross-examination, however, that it was possible that he could be wrong and that the first time he offered the business to Mr Vetterli and Mr Williams and they had showed interest in it, was in early January 2010, as they had discussed the business many times. Mrs Palin resisted that concession.

In her 19 October affidavit Mrs Palin also said that it was in early December that Mr Williams and Mr Vetterli came to their home for a meal, at which the purchase of their business was first discussed. The discussion included:

"CP: The asking price for the business is $180,000 which includes a new $20,000 Dyna Truck, bought in October for deliveries to Seda Bakery.

RV: $180,000? Rino that's too much.

CP: That's what I'm asking for the business Rino $100,000.00 for the Elba Grissini and $80,000 for the bakery."

She also said that there was another meeting at the bakery in December 2009, when payment of $120,000 up front and another $60,000 in a year's time was discussed. It was then that she instructed Mr Morgan Jones, with whom they all later met.

Mr Morgan Jones was called to give evidence, but his file, which would have confirmed when he was instructed, was not produced or tendered. It emerged that it had been collected from him by Mr and Mrs Palin, who had instructed other solicitors to represent them in these proceedings.

In her cross-examination, Mrs Palin was certain that Mr Vetterli and Mr Williams came to their home for lunch in December 2009 and that they then said that they were losing their jobs, that Mr Vetterli had sold his house and that they wanted to buy the business together. That was the first that she knew of their interest. She was also certain that there were no further discussions about the sale in the first half of January, because she and Mr Palin had been away until 12 January and the bakery was closed until then.

I am satisfied that Mrs Palin's evidence cannot be accepted. Not only did Mr Palin concede that he might have discussed the sale with Mr Vetterli and Mr Williams in January, as they claimed, Mr Vetterli's evidence that he did not resign his job until 12 January was corroborated by Mr Chaneliere. His evidence was that but for that resignation, Mr Vetterli's position at Bakers Maison would have continued indefinitely, subject to considerations which might have arisen from other matters, such as Mr Vetterli's health. Mr Vetterli's letter of resignation was dated 12 January. It advised that his resignation would take effect on 15 March, two weeks after his return from Vietnam. He left for Vietnam on 22 January and was not required to work out all of his notice period.

Mr Vetterli insisted that he and Mr Williams had discussed the purchase of the business with Mr Palin, before he resigned. Given Mr Williams' evidence and Mr Palin's concession, that account must be accepted.

It was not in issue that Mr Vetterli considered that the grissini side of the business was a good one and that with the addition of the Seda business, the purchase of the Palins' business had become something which he was interested in exploring. He had seen the bread line in operation in December, although he was not then aware that the bread being made was kosher. Mr and Mrs Vetterli had two children. Mrs Vetterli had been having difficulty finding work; and because of his age, Mr Vetterli was concerned to improve their financial position, which he did not consider was possible, if he continued working as an employee. They wanted a business in which they could work together. That was why they sold their house in October, to free funds for such a purchase, if one became available.

Mr Williams had also long known Mr Palin. He and Mr Vetterli were working together at Bakers Maison in 2009, but Mr Williams' contract there was due to come to an end in February 2010. On his evidence he became interested in exploring the opportunity which Mr Vetterli raised with him, because of what Mr Vetterli had told him about the Seda contract.

Mr Vetterli said in his 18 April affidavit that when he and Mr Williams discussed the possibility of the purchase after their first January meeting with Mr Palin, they decided that they needed to negotiate on price. Mr Palin had shown them some delivery dockets and weekly statements for bread and grissini deliveries. They did not then know how much Seda was paying for the bread, but Mr Vetterli considered that it was likely to be 70 cents a loaf. From what he had understood over the years, the grissini side of the business was solid, with sales of about 100 cartons a week, at approximately $35 a carton. He thus considered the bread contract to be of great interest and very important. He trusted what Mr Palin had said, that the contract was for 12 months, at a minimum of 2,000 loaves a day, but Mr Williams wanted to see the contract and more financial information before they made an offer. It was after this discussion that they met again with Mr Palin.

There was no dispute that Mr Williams did want to know more about the financial performance of the business. Mr Williams' evidence was that at that stage, he wanted to negotiate the price down. He also wanted to see a draft contract and considered it important to see the bread contract, which Mr Vetterli had told him was a new development. He was also concerned that Mr Vetterli might not be as careful to check matters as he might with someone else, given his long friendship with Mr Palin, but he did not tell Mr Vetterli of his concerns about his approach to Mr Palin. In cross-examination, Mr Williams agreed that he was not prepared to enter into a contract until he had seen the financial statements. He wanted to verify what Mr Palin had told them.

Mr Vetterli said that at their second meeting with Mr Palin, Mr Williams said he wanted to see three years profit and loss statements and three years tax returns, which Mr Palin said he would think about providing. Mr Palin then wanted $90,000 up front and another $90,000 within 12 months. As to the Seda contract he said:

"The bread baking side of the business can do well. As I have already told you, you can sell 2000 loaves per day and the customer will take all the bread you can supply. I have a 12 month contract which started in December 2009. The customer is prepared to take everything you can bake."

Mr Palin also then revealed that the sale price for the bread was only $0.52 per loaf, packed in crates, but that the customer supplied the flour at $500 per tonne. The terms of the lease were also discussed. Mr Palin could not show them the bread contract, which he said was at the factory. Mr Williams also corroborated this account.

Mr Vetterli's evidence was that a few days later he and Mr Palin had a telephone discussion, in which Mr Palin told him that he was not happy to provide the financial information Mr Williams had requested. They also discussed the bread contract again, which Mr Palin said he would show Mr Vetterli the next time he came over. He also asked to see a sale contract before he went to Vietnam.

In his 13 June 2012 affidavit, Mr Palin denied having conversations in these terms, but himself gave no account of what had been discussed. He swore a further affidavit in October 2012. While he there gave accounts of other conversations, he gave no account of these conversations.

Mr Williams' evidence was that Mr Vetterli told him about this conversation, when they were at work together in the morning. In cross-examination he said that Mr Vetterli had not told him that he was going to resign, before 12 January, but it was not a surprise when he did. He was not then concerned, because Mr Palin had not refused to provide the documents.

Mr Vetterli's evidence was that he was not concerned with the financial statements which Mr Williams wanted to see, but he had repeatedly asked to see the bakery contract. Mr Palin did not provide it, before the agreements were signed. Mr Vetterli trusted Mr Palin and was content to rely on his word.

Mrs Vetterli was not involved in any of the negotiations. She said in her 18 April affidavit that they went to Vietnam on holiday on 22 January 2010 and returned on 16 February. It was after they returned that they went to see Mr Morgan Jones to sign the documents he had prepared.

They took no legal advice. Mr Vetterli said that Mr Palin had told him that he did not need a solicitor. He enquired of his own solicitor's assistant whether he needed to engage a solicitor to act for them. He was told that it was desirable, but not essential. In cross-examination Mr Vetterli said that he was used to reading various contracts at work. Mr and Mrs Vetterli decided to proceed without obtaining legal advice. Plainly, they decided that it was not necessary to incur that expense.

On his evidence it is apparent that Mr Vetterli read only part of the contracts which Mr Morgan Jones had prepared and Mrs Vetterli did not read them at all, before signing them. That Mr and Mrs Palin took any advantage of them in this regard, as was initially claimed, was not established. The evidence does not establish that the terms of the contracts departed from what had been agreed.

It follows from all of this evidence that there is no dispute that it was in 2009 that Mr Vetterli first became aware that Mr Palin had recommenced operating the breadline, in order to supply Seda with bread. It was when Mr Palin told him about the terms of the contract with Seda, that his interest was triggered. That caused him to approach Mr Williams to join him. Before that development, he had no interest in acquiring the business.

What Mr Vetterli told him about the terms of the Seda contract triggered Mr Williams' interest. Whether or not there were any discussions in 2009, even Mr Palin accepted that it was possible that the first discussion in which Mr Williams and Mr Vetterli showed an interest in purchasing the business was in January 2010.

That Mr Palin said that the contract had a 12 month term is consistent with the terms of the written contract. On the evidence of Mr and Mrs Palin, that was a term which they had sought and which Mr Dahari accepted when the document which Mrs Palin had prepared was put to him the day it was signed in October 2009. They were then concerned to have that timeframe agreed, because of the expense they had gone to in acquiring a truck and other equipment to service the business. In those circumstances there is no reason to think that Mr Palin would not have described the contract to have a 12 month term, as was the evidence of Mr Vetterli and Mr Williams.

The question of the claimed representation as to a daily minimum order of 2,000 loaves per day, is more difficult to resolve. No such term appears in the written contract with Seda. The Palins did not produce the records of the business before the sale. The records from March 2010 show orders of up to 1,960 loaves per day. In early April, Mr Dahari reduced his order to 1,000 and later terminated the contract when Mr Vetterli sought to order more flour.

It was Mrs Palin who drafted the document which Mr Palin and Mr Dahari signed, but it made no reference to any minimum supply. Both Mr and Mrs Palin denied that there was any agreement about minimum daily orders and Mr Palin denied making any representation as to a minimum daily order. Mrs Palin, however, denied that Seda was entitled to order as little as one loaf per day from them. She said that she would not have delivered less than a van full, which held 700 loaves. She also explained that they had purchased a truck in order to service this business, which could deliver considerably more than 700 loaves. There is no question that afterwards, much more than this was supplied.

Mr Palin claimed that trading documents of the business, financial statements and tax returns were always available, but he agreed that he did not provide them to Mr Vetterli and Mr Williams. He also denied that he was displeased with Mr Williams for seeking this information. He said the he could not recollect being asked for the bread contract, but confirmed that he had shown Mr Williams and Mr Vetterli delivery dockets and weekly statements from Seda. He also denied telling Mr Vetterli and Mr Williams in January 2010 that he had minimum orders from Seda of up to 2,000 loaves per day, which he was selling at $0.52 per loaf. His evidence was that he had told them about the price before that time.

As I have said, the inference from Mr and Mrs Palin's failure to produce the records which evidenced what was supplied before March 2010, is that they would not have assisted their case. On Mr and Mrs Palin's evidence it also seems inherently unlikely that they would have acquired the truck which they needed to service this new business, without some expectation that Seda would take a minimum daily supply, considerably in excess of the 700 loaves that they were able to deliver by the van.

The 1,960 loaves being produced in March, when Mr Vetterli went to work in the business, not only accords with the representation Mr Vetterli and Mr Williams' claim was made by Mr Palin, but with what they recollected of the records he had earlier shown them.

Mr Vetterli and Mr Williams' evidence was that their decision to pursue the negotiations with Mr Palin rested on calculations they had done by reference to a minimum daily supply of 2,000 loaves, which Mr Palin represented, after they were shown records, which revealed the size of deliveries then being made. Initially they were undertaken on the basis of a guess that the price per loaf was $0.70 and later, on the basis of the agreed price of $0.52, which Mr Palin told them of. Even beforehand, they considered that they would make an offer, but that the price had to be negotiated down to $130,000.

Plainly Mr Vetterli and Mr Williams had to have had some basis for their decision as to whether or not to pursue the possible purchase. Given their past disinterest in buying the business and Mr Williams' concerns in particular, it seems quite implausible that such an offer would have emerged, if he and Mr Vetterli had not received any information from Mr Palin as to an obligation on Seda to take a minimum daily number of loaves.

On all of the evidence, I am satisfied that Mr Palin was reluctant to show Mr Vetterli and Mr Williams the contract which they wanted to see. That document did not refer to the aspects of the arrangement which were important to Mr Vetterli and Mr Williams, as Mr Palin would undoubtedly have appreciated. That is an obvious explanation for his reluctance. Had he not represented the contract in terms not contained in the written document, there would clearly have been no reason to fail to produce it, when it was asked for.

That Mr Palin had misrepresented the terms of the Seda contract is also consistent with his later conduct.

While he later introduced Mr Vetterli to the grissini customers as the new owner of the business, he introduced Mr Vetterli to Mr Dahari as the new manager, insisting that the sale be concealed from him. In cross-examination, when asked to explain why he approached customers differently in this regard, Mr Palin said it was because he wanted to make 'a smoother transaction on the bread'. He had great difficulty in explaining how concealing the truth about the sale from Mr Dahari might have achieved this. He explained that Mr Dahari could be difficult to work with and that it had been necessary to 'work on the transfer', but there was no evidence that such 'work' was performed.

Mr Dahari only learnt of the sale after it had been completed, after Mr Vetterli had supplied bread and sought payment from Seda. Not surprisingly, Mr Dahari considered it necessary to speak to Mr Palin, to confirm that the business had been sold as Mr Vetterli claimed.

An obvious reason for concealing the true nature of Mr Vetterli's position from Mr Dahari beforehand, was to ensure that there would be no discussion between him and Mr Vetterli about the contract which Mr Vetterli understood existed with Seda, which might have jeopardised the sale completing. On their evidence both Mr and Mrs Palin were concerned about this.

There was also a dispute between Mrs Palin and Mrs Vetterli, as to whether or not Mrs Palin introduced her as one of the new purchasers and whether Mr Palin also mentioned to her that there were minimum orders of 2,000 loaves per day from Seda. I found it difficult to resolve these conflicts, but concluded in all of the circumstances I have outlined, that Mrs Vetterli's evidence should be preferred.

While it may be accepted that Mr and Mrs Palin were not desperate to sell, that they had long been trying to sell the bakery and wanted to use the funds in their retirement, may not be overlooked. Another sale, at a lower price, had earlier fallen through and on both their evidence, Mr and Mrs Palin were concerned that this sale would also fall through. They wanted to sell and were even prepared to offer vendor finance and a rent free period, in order to secure this sale.

Given the obvious importance of the Seda contract to the price which they were then able to command and to Mr Vetterli's interest in acquiring the business, there was good reason for Mr Palin concealing the true position as to the Seda arrangement from him. Further, had the problem with the quality of the bread provided not emerged, it seems entirely possible that his misrepresentation may never have come to light. Mr Dahari's evidence was that he had planned to sell the breadcrumbs which he produced from the bread to his customers, Australia-wide. He wanted to build this new business and was unlikely to have reduced his orders, had the problem with the quality of the bread not emerged. It was only when he lost customers, that he cancelled the order.

In the period between the time when the transaction documents were signed in March and the final payment was made on 6 April, on his own evidence, Mr Palin kept tight control of the business. He agreed that he not only insisted that the sale be concealed from Mr Dahari, he refused to allow Mr Vetterli to change suppliers as he then wished, or to alter the machine set up at the bakery, over which they had a disagreement as to what safety required, or to terminate the employment of the two remaining employees then working at the bakery. Mr Palin also agreed that he then enforced a policy which he had in place, as to trade representatives visiting the bakery. On Mr Williams' evidence, he even denied him entry to the bakery, when he sought to call on Mr Vetterli there at this time. On Mrs Palin's evidence, she would not have left the premises without receiving a bank cheque for the final payment.

This was at a time when Mr Palin knew that Mr Dahari was dissatisfied with the quality of the bread which he was providing, with the eventual result that in April, prior to completion, Mr Dahari reduced the bread order to 1,000 loaves per day and threatened to cease purchasing bread at all.

On Mr Vetterli's evidence, he was concerned about Mr Palin's reluctance to reveal the sale and this threat, which he discussed with Mr Palin, who reassured him that he had a contract with Seda, which it was bound to honour. Again, Mr Palin did not deal with these conversations in his affidavit. In cross-examination he agreed, however, that Mr Dahari had informed him that he would be reducing his order to 1,000 loaves per day and that this actually occurred before the final payment was made. He denied however, that Mr Vetterli complained about this at the time.

This evidence was also difficult to credit. What seems to have been occurring is that Mr Palin was actively trying to conceal the magnitude of the problems which had emerged, by placating Mr Vetterli and concealing the true position from Mr Dahari. As was submitted for Mr and Mrs Vetterli, in the circumstances, why should Mr Vetterli have suspected even then, that his friend of over 30 years was so lying to him?

While Mr Palin's evidence was that there was no contract but that it was just 'demand and supply', he did concede that Mr Vetterli may then possibly have asked him to see the bread contract. At that point he insisted that it was not a contract, but a personal arrangement he had with Mr Dahari, but that the paperwork was always available at the office, where Mr Vetterli could have gone to see it, because by then he had bought the business. He then said that:

" ... most of the paper would have gone home but I don't recall the contract paper".

Mr Palin also said that it was Mrs Palin who handled the paperwork and that this contract would have been available any time that they asked for it. In fact, when it was required in April, at the time that Mr Dahari advised Mr Vetterli he would not be buying any more bread and Mr Vetterli wanted to take steps to enforce the contract, it could initially not be produced. Still, Mr Palin denied assuring Mr Vetterli that there was a contract, or that Mr Dahari would soon return to taking 2,000 loaves per day.

I am not able to prefer Mr and Mrs Palin's evidence about these matters over that of Mr and Mrs Vetterli and Mr Williams. Mr Palin's evidence was not only inherently implausible, given the circumstances, it was also inconsistent with aspects of his own evidence and that of his wife, as to how they had conducted themselves.

Mrs Palin's evidence in cross-examination, for example, was that after contracts had been signed, she and Mr Palin were unable to insist that employees not be let go, as Mr Vetterli wished. That was contradicted by Mr Palin's evidence. He also contradicted her evidence that they could not prevent Mr and Mrs Vetterli changing the setup of the grissini and bread production at the bakery, or controlling who they wanted to invite onto the premises. Her evidence was that she would have been surprised if Mr Palin had introduced Mr Vetterli as a manager rather than as the owner, because he was taking over the business and there was no reason not to tell them.

The obvious reason for concealing the true position from Mr Dahari, of course, was to conceal from Mr Vetterli the true terms of the contract with Seda, at a time when he was concerned that Mr Vetterli might still pull out of the sale, knowing that the representations he had made to him as to the terms of the contract with Seda had not been entirely accurate.

Mrs Palin's evidence in cross-examination was that when they met on 30 April Mr Vetterli was upset because the Seda order had been cancelled. He said that he thought that he had a contract for a minimum of 2,000 loaves per day and that without the order, he would be unable to pay the rent. She denied that they had ever told him that they had a contract with Seda, or that there had been any misrepresentation on their part. She thought that he might have considered that figure was what was required to make the business profitable and that it was a figure he and Mr Williams had invented, because they wanted to make the business profitable. She also then believed that he could have sold bread elsewhere, as they had, before they had closed up the bread side of the business in 2005 and that he could then have sold 4,000 loaves a day, if he had wanted to work day and night. She believed that he was then going to pursue other products.

This evidence seems quite implausible to me. If Mrs Palin had truly had this belief, it is difficult to understand why she and Mr Palin felt obliged to provide a copy of the Seda agreement to Mr Vetterli in April, or why they then agreed to provide Mr and Mrs Vetterli with rent relief until August.

In the circumstances, I am satisfied that the resolution of this aspect of the evidentiary conflict must be resolved against Mr and Mrs Palin. It must be concluded that Mr Palin did tell Mr Vetterli in December 2009 and subsequently, that he had a 12 month contract with Seda for the provision of up to 2,000 loaves of bread per day, Monday to Friday.

Did Mr and Mrs Vetterli rely on the misrepresentations?

Mr and Mrs Vetterli's case finally was that Mr Vetterli resigned his employment and they entered into the contracts with Mr and Mrs Palin, reliant on Mr Palin's misrepresentations about the Seda contract. The representation that Seda was purchasing 2,000 loaves a day under the contract was significant to them, because that income covered all of the costs of the business. Without that representation, they would never have bought the business.

Mr Vetterli did not establish that he resigned his employment, relying on Mr Palin's representations.

Mr Vetterli and Mrs Vetterli's claim that he had resigned his employment on 12 January 2010, relying on Mr Palin's representations as to the Seda contract, was not expressly pleaded. His evidence was that this was, however, the reason for his resignation. The negotiations for the purchase of the business by he and Mr Williams had progressed and he then resigned, having complete faith and reliance on the information Mr Palin had provided them, as to the terms of the contract with Seda, information which was wrong.

Mr Vetterli's evidence was that he intended to work till aged 70 to 75. At age 70 his youngest child would be just over 10 years of age. Mr Chaneliere's evidence was that he was well satisfied with Mr Vetterli's work and regretted his resignation. Bakers Maison had no mandatory retirement age and that but for his resignation he could have continued to work there.

Also to be considered is that Mr Vetterli had decided, however, that he would leave that employment, if a suitable business opportunity for he and his wife arose, so that he could improve his financial position before retirement. They hoped that she could continue operating that business, after he retired. In cross-examination he denied, however, that in January 2010 he was actively looking for a business opportunity, or that he had decided to resign beforehand. He said that he then had a good job, was earning good income and was looking for the right thing. In deciding to resign, he had relied on Mr Palin's representations.

I have been unable to accept that this aspect of Mr and Mrs Vetterli's case was established on the evidence.

Of itself, the shortness of the timeframe within which the initial discussions with Mr Palin occurred, before Mr Vetterli's resignation on 12 January, makes this aspect of Mr and Mrs Vetterli's case rather difficult to credit.

There was a dispute between the parties as to when various discussions occurred and what was said. Even on Mr and Mrs Palin's case, however, the initial discussions between them and Mr Vetterli and Mr Williams occurred in December 2009, before Mr Vetterli resigned his employment on 12 January. They certainly approached Mr Palin together, before Mr Vetterli resigned his employment.

When they met with Mr Palin, they understood that the Seda contract was in the terms Mr Palin had represented. Mr Vetterli and Mr Williams then learned that he wanted $180,000 for the business, with $90,000 payable up front. Mr Vetterli and Mr Williams then met together and discussed their best guess at the revenue and expenses of the business, on the basis of what they knew about the grissini side of the business and their guess that the bread was being sold to Seda at $0.70 per loaf. While they had not been shown the Seda contract or the financial documents Mr Williams wanted to see, they were shown various delivery dockets, which showed the amount of business that the bakery was doing with Seda and the grissini customers. Those documents were not tendered, but as I have said, it must be inferred that they supported the representations which Mr Palin had made.

Mr Williams then prepared a document, which they did not keep, as a rough business plan. As a result of Mr Williams' exercise Mr Vetterli formed the view that the bread contract alone would generate sufficient revenue to pay the rent and any other business expenses, including grissini production. Even so, they were still not prepared to pay what Mr Palin wanted. They agreed that they should offer Mr Palin $130,000 for the business, payable straight away. At that point, Mr Vetterli said that he considered that the purchase of the business was viable and he believed that Mr Williams shared that view.

Mr Vetterli explained that he then considered that a lot of hard work would be required, but that they would have enough to cover their costs and a base from which to build. He envisaged increasing production, identifying prospective customers and markets and developing the business to increase production above 2,000 loaves a day. He said that with the hire of a casual at night, he thought that they could also increase production to 4,000 loaves per day and they could introduce a variety of grissini, as well as pastries and biscuits.

As I have said, I have difficulty accepting this aspect of Mr Vetterli's evidence, particularly given the evidence of the dilapidated state of the bread line and his view that even with 2,000 loaves a day, the business was sufficient to cover all costs, including the grissini part of the business. If Mr Vetterli truly believed that all of this increase was possible, it would have been a remarkable acquisition. Mr Williams, who was then concerned to see financial information and other documents, before any offer was made, did not support his view in this respect.

Mr Vetterli's evidence that it was at this time, early January 2010, that both he and Mr Williams became committed to the purchase of the business, with the result that on 12 January 2010 he resigned his position at Bakers Maison and on 22 January he left for Vietnam is thus difficult to credit. On Mr Williams' evidence at 12 January, the negotiations with Mr Palin had barely commenced.

Indeed, at this time, on his own evidence, all that Mr Vetterli and Mr Williams had decided was to make an offer to buy, but not at the price which they knew Mr and Mrs Palin required. On the information they then had, they were prepared to offer only $130,000, knowing that Mr Palin wanted $180,000. In fact, no offer to purchase was made before Mr Vetterli resigned his employment on 12 January at that, or any other price. Nor was any offer made even before he departed for Vietnam on 22 January.

There was no evidence that either Mr Vetterli or Mr Williams, with whom he then wanted to purchase the business, were prepared to pay what Mr and Mrs Palin wanted for their business when Mr Vetterli resigned. That Mr and Mrs Palin would be prepared to sell at the price he and Mr Williams were prepared to offer, was then also plainly unknown to Mr Vetterli. At that time not only had no agreement been reached, the price he and Mr Williams were prepared to offer for the business had not even been revealed to Mr and Mrs Palin, let alone agreed. They then still wanted Mr and Mrs Palin to provide them with more financial information and a copy of the Seda contract, before they even made an offer.

It was within several days of the second meeting, that Mr Vetterli told him that Mr Palin was not happy to provide them with these documents. Mr Williams still considered that they needed to see the documents, because they needed to understand more about the financial performance of the business, especially the revenue of the grissini business and operational costs. Mr Vetterli told him then that he was leaving shortly for Vietnam and that he had asked Mr Palin to send the draft contract to Mr Williams.

Mr Williams' evidence was that he was still concerned to see the documents they had asked Mr Palin for, because the revenue and costs of running the business were important, as they were contemplating expanding and improving the business, which might require loan capital. He considered that the business was in a terrible state, in terms of machinery maintenance and repair and HACCP compliance, which would also require capital outlay.

Mr Williams had discussed his handwritten budget for the business with Mr Vetterli on the basis that the bread contract alone would generate sufficient revenue to pay for all outgoings, including rent. Mr Vetterli agreed. They discussed offering $130,000 for the business, payable on contract. Mr Williams considered the purchase of the business viable at that price and that they could increase bread production and introduce new products and obtain new customers. In cross-examination, Mr Williams said that Mr Vetterli did not discuss his resignation with him beforehand, but that it did not surprise him.

On all of this evidence, it simply cannot be concluded that Mr Vetterli has established that he resigned his employment on 12 January, relying on Mr Palin's representations as to the bread contract.

Even accepting that Mr Palin had made the misrepresentations which I accept were established, before 12 January, not only had nothing then been agreed, nothing had even been offered. Mr Vetterli and Mr Williams were then still considering making an offer. They had asked for further information about the financial performance of the business. They also wanted to see the bread contract and a draft sale contract. On any view they were not then committed to the acquisition. Mr Palin had told them that he considered $180,000 to be a fair price, at which he was prepared to sell to them, but they were of the view that this price had to be negotiated down.

It follows that whatever motivated Mr Vetterli's resignation on 12 January, that it was reliance on what Mr Palin had told him beforehand as to the terms of the contract which he had with Seda, is simply implausible. That he had to give notice of his resignation to Bakers Maison, if he was to purchase the business takes the matter no further. On 12 January, he had nothing to resign for, so far as his dealings with the Palins were concerned. There was no transaction to which he could have been committed, only an intention that he and Mr Williams would make an offer at a price significantly lower than was being asked for the business. Even that offer depended on further information being provided to them.

This conclusion must have an impact on the calculation of damages which Mr and Mrs Vetterli claimed flowed from the misrepresentation which they have established.

The Vetterlis entered the contract, relying on Mr Palin's representations

While I am not persuaded that Mr Vetterli resigned his employment in January relying on Mr Palin's misrepresentations as to the terms of the Seda contract, I am satisfied that the evidence establishes that it is more probable than not that in coming to their decision to enter the transaction on the terms finally agreed, as reflected in the agreements executed in early March, that Mr and Mrs Vetterli relied on those misrepresentations. To pursue that opportunity, Mr Vetterli unquestionably could not have continued his former employment, given the work involved in the business. That was what all the parties to this transaction understood.

On the evidence, I am satisfied that Mr and Mrs Vetterli were misled by Mr Palin's misrepresentation that under the 12 month contract which he and Mrs Palin had with Seda, it was bound to buy a minimum of 2,000 loaves per day, Monday to Friday. That before the final payment was made in April, Mr Dahari had reduced his order to 1000 loaves per day and had foreshadowed that he would cease buying bread entirely, cannot detract from that conclusion.

In final submissions an unpleaded defence was raised, namely that various clauses of the sale agreement fettered the Vetterlis' right to pursue the misrepresentations as they had. As discussed in Bellingen Shire Council v Colavon Pty Ltd [2012] NSWCA 34; (2012) 188 LGERA 169 at [28] - [50] unfairness in so relying on an unpleaded defence might be such that it cannot be permitted. This seems to be such a case. Even if it were not, it seems to me that in all of the circumstances of this case, these contractual provisions could not shelter Mr and Mrs Palin from the consequences of their misrepresentations about matters not dealt with in the sale agreement. In the circumstances, it is not necessary to develop the reasons for this view.

Mr Williams collected the draft contract from Mr Morgan Jones' office early in February, while Mr Vetterli was away. It made no reference to the Seda contract, but provided for a price of $180,000, with $120,000 payable up front, rather than the $90,000 earlier discussed with them.

Mr Vetterli did not return from Vietnam until mid-February. Mr Vetterli then learnt from Mr Williams that the sale contract had departed from the terms earlier discussed. Mr Williams then told him that he did not have sufficient funds to pay for his share of the business at that price. Mr Vetterli was not prepared to lend Mr Williams $15,000 for his share, because he had already resigned his position at Bakers Maison.

On both Mr Vetterli and Mr Williams' evidence, it was when they then met again with Mr Palin on 22 February that they came to understand from him that while the loaves were being sold at only $0.52 per loaf, the Seda contract provided for a minimum quantity of 2,000 loaves per day and the customer would take more, up to 4,000 loaves per day. Mr Palin disputed this, but that Mr Palin had told them of the actual price beforehand seems unlikely, given that their initial calculations were based on a much higher price. Still, they considered that the business opportunity was worth pursuing.

Mr Palin refused the offer Mr Vetterli and Mr Williams then made to purchase the business for $130,000. It was not in issue that Mr Palin wanted $180,000, which Mr Williams finally said at the meeting he considered to be a reasonable price. On the evidence that view can only have rested on an understanding which Mr Williams then shared with Mr Vetterli, as to the existence of a 12 month contract with Seda with a minimum quantity of 2,000 loaves per day. To that point it was common ground that all the information that they had was what Mr Palin had told him and the delivery dockets they had been shown in January.

For his part Mr Palin agreed that he had insisted on $180,000, but was prepared to take $120,000 on contract, with the balance on vendor finance and that it was at this meeting, that he revealed that he was not prepared any longer to sell to Mr Williams, who then said that he only had $45,000 cash to offer. That approach accords with Mr Palin's reluctance to produce the records which Mr Williams was insisting on seeing, which included the Seda contract, whose terms he had plainly misrepresented, as it was later revealed.

Mr Vetterli said in cross-examination that he was then committed to the purchase. He trusted what Mr Palin, his longstanding friend had told him. He had resigned his job, had no other source of income and needed to ensure that he obtained another income stream as quickly as possible. In cross-examination, he explained that he also then considered that if he acquired the business without Mr Williams, he would be able to convince him to be involved on other terms, Mr Williams' contract with Bakers Maison coming to an end in February. That evidence, it seems to me, again, must be accepted. On Mr Palin's evidence he was aware of the position Mr Vetterli was in and unquestionably used it to his advantage.

Mr Vetterli's evidence as to the discussion which followed was:

"Me: "This is OK for the two of you because you have jobs. I have resigned my job and I have a young family for which I need to provide. I can get money from my super to make up $100,000. This is as much as I can pay now. The balance will have to wait 12 months."

Rino: "If you pay me $100,000 cash we have a deal. I will get another contract from my solicitor".

Me: "OK. I will get my solicitor to check it."

Rino: "I don't think you need a solicitor. You can save yourself money and the sale will also go quicker."

Me: "I would like you to consider a 3 month rent-free period."

Rino: "I cannot offer you this much. I can only give you 6 weeks rent free."

Mr Williams corroborated this account, which was reflected in the agreements Mr Morgan Jones later provided. In cross-examination, he said that Mr Vetterli was then concerned that he was pulling out of the deal, but he did not seem upset. That was consistent with Mr Vetterli's evidence that he believed that he could still come to an arrangement with Mr Williams later and that the representations Mr Palin had made as to the terms of the Seda contract were correct.

Mr Palin denied in cross-examination that he said at this meeting that he had a contract for a minimum of 12 months for 2,000 loaves per day to 4,000 loaves per day, in order to make the sale of the business interesting to him. His evidence was that bakery would have had a problem in producing that amount of bread, with which Mr Williams agreed, but Mrs Palin and Mr Vetterli did not. He also denied that he told Mr Vetterli that there was a purchaser interested in the business at a price of $240,000.

Mr Palin's evidence was difficult to accept. At one point Mr Palin said that he been approached by someone else in December 2009, but a price had not been discussed. At another, that there had been an "Islamic person" who had offered $240,000. Later, that apart from the negotiations with Mr Vetterli and Mr Williams, there were then no other offers made for the business.

Mr Palin also denied in cross-examination that when Mr Vetterli returned from Vietnam, he was desperate to sell, or that he then had him over a barrel, because he knew he had resigned his employment. He did agree, however, that he then thought that Mr Vetterli would buy his business, knowing that he had sold his house. He was aware that he had resigned his position, but said that he did not know when that would happen and that when Mr Williams pulled out, he did not know if the sale would go ahead.

The real difficulty with Mr Palin's evidence, particularly that given in cross-examination, was its inconsistency. He finally gave the distinct impression that the answers he was giving were being tailored to what he considered, from moment to moment, might best suit his case. I came to the conclusion that on these matters, the evidence of Mr Vetterli had to be preferred.

Mr Vetterli's evidence that he was then prepared to buy the business himself, because of his understanding as to the existence of the Seda contract, must be accepted, given the circumstances. Reaching an arrangement with Mr Williams, whereby he could still be involved, would have permitted the pursuit of the plans they had earlier discussed, which they considered the contract with Seda could fund.

The contract was thus signed in early March, before Mr and Mrs Vetterli learned of any difficulties with the quality of the bead being supplied to Seda, or Mr Palin's reluctance to reveal the sale to Mr Dahari. Mr Vetterli's conduct thereafter was also consistent with the reliance on Mr Palin's misrepresentations. He had commenced working 12 hour days from 3 am with Mr Palin on 1 March, observing what he did, even before the contracts were signed at Mr Morgan Jones' office. Mrs Vetterli also undertook some training with Mrs Palin, although that involved some obvious difficulty, which it is not necessary to explore, given their poor relationship.

It was after the agreements had been signed and the deposit paid, while Mr and Mrs Vetterli were training in the business, that Mr Dahari first complained about the quality of the bread. Later, he reduced the bread order, threatening to cancel it entirely. It was common ground that Mr Palin then insisted on keeping from Seda information as to the change of ownership of the business, while steps were taken to address the problems with the bread, prior to full payment of the purchase price the bakery.

Mr Vetterli explained in cross-examination that while he asked Mr Palin why the change of ownership had to be concealed, he acquiesced to Mr Palin's approach, because he trusted him and accepted that until the final payment had been made, the business was not his, and that Mr Palin remained in control. Mr and Mrs Palin took a similar view. Mr Vetterli said that despite the problem with the bread, he did not consider walking away from the acquisition, because he believed that with the contract for 2,000 loaves a day for five days week, it was a good deal and that he believed it could be built into a bigger business. He agreed that it was this which was keeping him in the deal.

Four days before the final payment was made, Mr Vetterli learned from Mr Dahari that he had reduced the order to 1,000 per day and that he was considering cancelling the order entirely. Mr Palin then assured him that Seda was obliged to buy 2,000 loaves a day and that the order would soon to be reinstated. Again, Mr Vetterli accepted his word.

Within weeks of the last payment made, on 22 April 2010, Seda advised that it would not be placing any further orders, when Mr Vetterli placed an order for further flour with Seda. When he protested, Mr Dahari denied the existence of any contract. When Mr Vetterli was later finally provided with a copy of the document which the parties finally accepted in these proceedings did constitute a contract, Mr and Mrs Palin plainly had a similar view. They both counselled him against pursuing Seda for breach. Their explanations in cross-examination were that they did not then consider that there was any contract and that they considered Seda to be too powerful. Mrs Palin said at the meeting on 30 April when the Seda contract was first provided to Mr and Mrs Vetterli, that she considered that Seda could not be 'touched legally'.

The parties finally took a different view in these proceedings. Nevertheless, in the light of all of this evidence I am satisfied it must be concluded that the misrepresentations as to the terms of the Seda contract did induce Mr and Mrs Vetterli to enter into the transaction, as they claimed.

Damages

There was no contest that if they made out their misrepresentation case, the rescission and restitution orders which they sought could be made in favour of Mr and Mrs Vetterli. That is, for the repayment of the purchase price, the return of what they had received under the contract to Mr and Mrs Palin and for the losses they had suffered. It was accepted for Mr and Mrs Vetterli that in calculating damages, there could be no "double dipping" for the period from March to September 2010, for Mr Vetterli's earnings.

Given the conclusions I have reached as to the misrepresentation established in relation to the crucial Seda contract, on which Mr and Mrs Vetterli relied to their considerable disadvantage, it follows that the orders sought for repayment of the $100,000 paid as part of the purchase price, as well as orders for the repayment of the rent and the other trading losses which they suffered in the conduct of the business, prior to 20 September 2010, should be made.

How some of this was to be calculated was in issue. After the Palins locked the Vetterlis out of the premises, they not only obtained possession of the premises, but also possession of certain assets which had been transferred to the Vetterlis on the sale of the business, such as plant and equipment located at the premises and a truck.

There was some evidence as to what occurred subsequently. Certain property and business records were returned to the Vetterlis and other equipment remained with the Palins. That has to be taken into account in the calculations.

For Mr and Mrs Palin it was also argued that account should be taken of the fact that Mr and Mrs Vetterli had changed the name of the business and that the accounts they relied on to establish the business performance, had included items relating to the depreciation of certain equipment and amortisation of loan expenses.

There was no evidence that the business was affected in any negative way by the name change. Seda was not the sole customer of R & D Foods. The evidence establishes that the grissini side of the business also had customers and that they were generating substantial income. There is no suggestion that the sale affected that aspect of the ongoing business, or that the Vetterlis did not receive what they had bargained for in that respect.

I can see no basis upon which the name change could be taken into account in calculating damages. Nor can I see that the consequences of the loans which Mr and Mrs Vetterli obtained to conduct the business should be overlooked.

When the Palins took possession of the premises, they also obtained possession of equipment included in the sale, which they retain. It follows that damages cannot be calculated by reference to the deprecation of such equipment. Depreciation of any equipment which Mr and Mrs Vetterli otherwise acquired, seems to fall into a different position. I can see no reason why they should not be taken into account in calculating damages. Further, if Mr and Mrs Palin retained or disposed of any such equipment after they took possession of it, rather than returning it to Mr and Mrs Vetterli, this would also have to be taken into account.

Mr Vetterli also sought damages calculated by reference to his earnings at Bakers Maison, having regard to his evidence that he intended to continue working into his 70's. I am satisfied that no basis for such an order has been established, Mr Vetterli not having established that it was Mr Palin's misrepresentations which induced him to resign that employment.

Were I to have come to a different view, in calculating such damages, account would have had to be taken of the fact that after the termination of the lease and the cessation of the business, Mr Vetterli fell ill. When he recovered, he sought other employment. Were damages on this account available, what was earned in that employment would have to be taken into account. Account would also have had to be taken of Mr and Mrs Vetterli's intention to acquire a business, if they could find one, to invest in. Despite Mr Chaneliere's evidence that Mr Vetterli's employment was secure, the possibility that he would have left Bakers Maison in any event, to pursue another business venture, as he intended to do prior to his retirement, would have had to be taken into account.

There was no issue between the parties that there must also be an order for interest.

Orders

For the reasons given there must be judgment for the Vetterlis. The parties should confer on the final calculation of the damages and should file proposed short minutes of the orders to be made within 21 days. The orders should include an order that:

All exhibits and subpoenaed material may be returned forthwith; any exhibits returned must be retained intact by the party or person that produced the material until the expiry of the time to file an appeal, or until any appeal has been determined.

The usual order as to costs is that they follow the event. That would be an order that the Palins bear the Vetterlis' costs, as agreed or assessed. If the parties wish to be heard on the question of costs, they should approach.

**********

Amendments

29 July 2013 - typographical errors [48] - April 2009 changed to April 2010[53] - April 2009 changed to April 2010[186] - 100 loaves changed to 1000 loaves

Amended paragraphs: [48], [53], [186]

Decision last updated: 29 July 2013

Medium Neutral Citation:	Palin v Vetterli [2013] NSWSC 893
Hearing dates:	25 March 2013, 26 March 2013, 27 March 2013, 28 March 2013, 2 April 2013
Decision date:	08 July 2013
Jurisdiction:	Common Law
Before:	Schmidt J
Decision:	Judgment for the Vetterlis. The parties should confer on the final calculation of the damages and should file proposed short minutes of the orders to be made within 21 days. The orders should include an order that: All exhibits and subpoenaed material may be returned forthwith; any exhibits returned must be retained intact by the party or person that produced the material until the expiry of the time to file an appeal, or until any appeal has been determined. The usual order as to costs is that they follow the event. That would be an order that the Palins bear the Vetterlis' costs, as agreed or assessed. If the parties wish to be heard on the question of costs, they should approach.
Catchwords:	CONTRACTS - sale of wholesale bakery business - three agreements - sale of business, lease and chattel mortgage - breach of lease - misrepresentations - breach of collateral contract - misleading and deceptive conduct - unconscionable conduct in relation to business title and bread contract - whether plaintiff's son a co-owner of business when sold - established - whether defendants obtained good title to the business - nemo dat rule - bread contract for the supply of bread - good faith - misrepresentation as to contract terms established - defendants entered contract while relying on misrepresentations - damages - orders EVIDENCE - witnesses - credibility and reliability of evidence EVIDENCE - application by plaintiffs seeking leave to call evidence in reply - failure to give notice - failure to comply with Court's direction - prejudice - leave sought refused
Legislation Cited:	Fair Trading Act 1987 Industrial Relations Act 1996 Sale of Goods Act 1923 Uniform Civil Procedure Rules 2005
Cases Cited:	Associated Midland Corporation v Sanderson Motors Pty Ltd (1983) 3 NSWLR 395 Bellingen Shire Council v Colavon Pty Ltd [2012] NSWCA 34; (2012) 188 LGERA 169 Bishopsgate Motor Finance Corporation Ltd v Transport Brakes Ltd (1949) 1 KB 322 Cairnsmore Holdings Pty Ltd v Bearsden Holdings Pty Ltd [2007] FCA 1822 Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337 McHugh Holdings Pty Ltd v Newtown Colonial Hotel Pty Ltd [2008] NSWSC 542; (2008) 73 NSWLR 53 McRae v Commonwealth Disposals Commission [1950] HCA 79; (1951) 84 CLR 377 Pethybridge v Stedikas Holdings Pty Ltd [2007] NSWCA 154 Southern British National Trust Ltd v Pither (1937) 57 CLR 89 Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165 Watson v Foxman (1995) 49 NSWLR 315
Category:	Principal judgment
Parties:	Caterino Palin (First Plaintiff) Dorothea Lucy Palin (Second Plaintiff) Rene Vetterli (First Defendant) Ngoc Vetterli (Second Defendant)
Representation:	Counsel: Mr P Folino-Gallo and Mr D D'Souza (Plaintiffs) Mr L Gor (Defendants) Solicitors: Sydney Law Practice (Plaintiffs)
File Number(s):	2011/39438
Publication restriction:	None