Paper Sales (Australia) W.A. Pty Ltd v P.S.A. Pty Ltd

Re: PAPER SALES (AUSTRALIA) W.A. PTY. LTD. and ALLAN ROS TERRY
And: P.S.A. PTY. LTD.; KENNETH GEORGE COPPIN; LUIGI NATALINO VARTESI; T.J.
EDWARDS and ASSOCIATES PTY. LTD. trading as T.J. EDWARDS and ASSOCIATES
Nos. WA G129 of 1989 and 88 of 1990
FED No. 556
Trade Practices
(1991) 13 ATPR 41-142

COURT

IN THE FEDERAL COURT OF AUSTRALIA

WESTERN AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
Lee J.(1)

CATCHWORDS

Trade Practices - misleading or deceptive conduct - reliance - disclaimer - whether director of first respondent knowingly concerned in the contravention - assessment of amount of loss or damage under s.82 of the Trade Practices Act 1974.

Trade Practices Act 1974 ss.52, 75B, 82

Bateman v Slatyer (1987) 71 ALR 553

East v Maurer (1991) 1 WLR 461

Gates v The City Mutual Life Assurance Society Ltd. (1986) 160 CLR 1

Gould v Vaggelas (1985) 157 CLR 215

Henjo Investments Pty. Ltd. v Collins Marrickville Pty. Ltd. (1988) 79 ALR 83

Henjo Investments Pty. Ltd. v Collins Marrickville Pty. Ltd. (1989) 89 ALR 539

McMahon v Pomeray Pty. Ltd. (1991) ATPR 41-125

Munchies Management Pty. Ltd. v Belperio (1988) 84 ALR 700

Wheeler Grace and Pierucci Pty. Ltd. v Wright (1989) ATPR 40-940

Yorke v Ross Lucas Pty. Ltd. (1982) 69 FLR 116

Yorke v Lucas (1985) 158 CLR 661

HEARING

PERTH

#DATE 11:9:1991

Counsel for the Applicants: Mr B. Goetze

Solicitors for the Applicants: Northmore Hale Davy and Leake

Counsel for the First Respondent and first
named Second Respondent: Mr C.W. Sanderson

Solicitors for the First Respondent and first
named Second Respondent: E.N. Stamatiou and Co.

Counsel for the second named Second
Respondent and the Third Respondent: Mr K.E. Valenti

Solicitors for the second named Second
Respondent and the Third Respondent: Pullinger Sanderson and Workman

ORDER

In application number WAG129 of 1989 judgment be entered for Paper Sales (Australia) W.A. Pty. Ltd. in the sum of $271,735 against the first respondent, P.S.A. Pty. Ltd., and the first named second respondent, Kenneth George Coppin.

The said respondents, P.S.A. Pty. Ltd. and Kenneth George Coppin, pay the applicants' costs to be taxed.

The cross-claim of P.S.A. Pty. Ltd. and application number WAG88 of 1990 be dismissed.

Any costs incurred in respect of the cross-claim and application number WAG88 of 1990 are to be costs in the cause of application number WAG129 of 1989.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

In January 1989 Paper Sales (Australia) W.A. Pty. Ltd. ("Paper Sales") agreed to purchase a stationery and paper distributing business ("the business") conducted by P.S.A. Pty. Ltd. ("P.S.A."). Pursuant to that agreement Paper Sales took possession of the business on 1 February 1989. It now seeks an order pursuant to s.82 of the Trade Practices Act 1974 ("the Act") that P.S.A. and one of its directors ("Coppin") pay the amount of loss or damage suffered by Paper Sales as a result of entering into the agreement, which Paper Sales contends occurred as a result of misleading or deceptive conduct by P.S.A. in contravention of s.52 of the Act.

Paper Sales also claims relief based upon pleadings of fraud and negligent misstatement but, at this stage, it is sufficient to deal with the principal claim which relies upon an alleged contravention of the Act.
In November 1988 P.S.A. advertised the business for sale. The advertisement was in the following form:

" $ $ $

CASH FLOW

Business For Sale $150,000

An excellent opportunity to acquire a proven commercial business, with huge future prospects. Good profit margins. Can be run under management. Projected T/O 88/89 in excess of $1.5 million PA. Enquiries to accountant: Mr L. Vartesi - Mon 328 9100 "

Evidence presented in the trial revealed that the advertisement was inaccurate in a number of respects, to wit:

i) The business had been commenced no earlier than late May 1988 and could not be described as proven;

ii) the future prospects of the business were unknown; iii) the profit margins of the business were less than would be expected for such an enterprise; iv) as at May 1988 the business was not able to be run at a profit under management; and v) as at November 1988 there was no apparent basis for a prediction that the turnover of the business would exceed $1.5m for the 1988/89 year.

In its defence P.S.A. denied that the advertisement was misleading or deceptive and claimed that it "was mere exaggeration and/or puffery and ... a mere invitation to treat".

The intention of a corporation that representations made by it in trade or commerce be understood to be no more than mere puffery or inflated "sales-talk" does not mean that the conduct of the corporation is incapable of being misleading or deceptive if it remains possible that an ordinary member of the class of persons to whom the conduct is directed may fail to discern that representations about the advertised product are to be disregarded.
However, in the present case, as described below, whether the advertisement amounted to misleading or deceptive conduct became irrelevant after the effect of the statements therein was overtaken by subsequent events.
The advertisement attracted the attention of an experienced businessman, Mr Barrington ("Barrington"). Barrington was on the lookout for an appropriate small business able to be acquired by a longstanding friend, Mr Terry ("Terry"), whose retirement from employment was imminent. Terry was an accountant by profession with many years' experience in trade and commerce. He was due to retire in about June 1990 from the position of General Manager of a substantial trading corporation, a position he had held for almost nine years.
Barrington contacted and arranged a meeting with the person nominated in the advertisement, Mr Vartesi ("Vartesi"). Vartesi was an accountant employed by T.J. Edwards and Associates Pty. Ltd. P.S.A. had its registered office at the offices of T.J. Edwards and Associates Pty. Ltd. and that company maintained the books of account for business conducted by P.S.A. T.J. Edwards and Associates Pty. Ltd. was a shareholder in P.S.A. and rendered accounting services to P.S.A. without charge. Vartesi was a director of P.S.A. At the meeting with Barrington, Vartesi handed Barrington a profit and loss statement for the business as at 30 November 1988 together with four pages of alternative projections for the business for a period between 1 August 1988 and 31 July 1989. Each document had been prepared by T.J. Edwards and Associates Pty. Ltd. A disclaimer was endorsed on the profit and loss statement in the following terms:

"These unaudited financial statements have been prepared for Paper Sales Australia Pty. Ltd. from the books of account and from information supplied. Responsibility to third parties is disclaimed."

Barrington contacted Terry and handed to him the profit and loss statement and projections and, with some enthusiasm, encouraged Terry to follow up the proposition.
On about 9 December 1988 Terry and Barrington met with Coppin, a director of P.S.A. and manager of the business. Terry was told that the business supplied four main lines of stationery, namely, photocopy paper, facsimile paper, computer paper and envelopes. The business had been commenced and operated by the use of "cold canvassing" methods in which salespersons made unsolicited telephone contact with potential customers and sought orders for stationery, promising prompt delivery of all orders.
After that meeting Terry instructed an accountant experienced in auditing, Mr Gorey ("Gorey"), to make some enquiries into the accounting records of the business and to provide advice as to its financial position.
On or about 12 December 1988 Gorey met Vartesi to obtain further information about the business offered for sale in the advertisement. Gorey had received from Terry, and took with him to the meeting, a copy of the profit and loss account Vartesi had handed to Barrington. Gorey ascertained from Vartesi that the profit and loss account, which was headed "To 30 November 1988", was for the period 1 July 1988 to 30 November 1988. After perusing sales records and having further discussion with Vartesi, Gorey discovered that the business had commenced in late May 1988 and that, in fact, the sales figures in the profit and loss statement included all sales made from the commencement of the business. By inspecting recorded sales, bank deposits, and debtors outstanding, Gorey was able to reconcile total sales for the business with the figure recorded in the profit and loss statement. In the course of inspecting the sales records, one sale of unusual size made in November 1988 caught his attention and he made an enquiry of Vartesi in respect of it. In that sale the value of goods sold was recorded as $22,500 and the recorded purchaser was "Multitrans Holdings" ("Multitrans"). Vartesi informed Gorey that as far as he was aware it was a genuine sale. Gorey then had a cursory discussion with Vartesi about the costs of operation of the business as recorded in the profit and loss statement and formed the view that they were reasonable.
The meeting between Gorey and Vartesi was a discussion between two practising accountants. Gorey left the meeting satisfied that the profit and loss statement could be relied upon as an indicator of the financial standing of the business. He reported to Terry upon the outcome of his enquiries. Apparently Terry did not understand from that report that the profit and loss statement covered a period which commenced before 1 July 1988. Terry had an understanding that the profit recorded was for the period of four months to 30 November 1988.
Barrington and Terry met again with Coppin on 17 December 1988 to further discuss the manner of operation of the business. On Monday 19 December 1988 Gorey and Terry met with Coppin and Vartesi at Gorey's office with the intent that an offer to purchase the business be made.
It was Gorey's evidence that prior to the meeting he and Terry had agreed that before an offer was made, Coppin, as manager of the business, should be asked about the particular sale made to Multitrans in the previous month. Gorey said that it was agreed that Terry would raise the question but towards the end of the meeting when it appeared to Gorey that Terry would overlook it, Gorey took the opportunity to seek Coppin's comments. Gorey stated that Coppin indicated that the invoice represented a bona fide sale. Terry did not recollect the discussion and nor did Coppin.
After that meeting a contract of sale eventuated in which Paper Sales agreed to purchase the business for a price of $150,000 plus value of stock on hand to be valued at the lower of cost or net realisable value.
Later events disclosed that the invoiced sale to Multitrans was fictitious. It was said to have been raised as a practical joke and erroneously included in the accounts of the business. The humour was too recondite for the Court to divine. The purported sale was recorded only two weeks before the business was advertised for sale and was for an amount slightly more than the net profit of the business as represented in the profit and loss statement delivered to Terry as prospective purchaser. It was a term of the sale that the vendor collect all book debts and, therefore, any falsity in the representation of past sales would not have become apparent to a purchaser in the ordinary course of events.
In addition to the above it was accepted by P.S.A. and Coppin that the profit and loss statement was false in a further respect in that it understated the costs of sales by failing to make provision for the cost of goods sold but undelivered and by failing to include other costs that had been incurred. The true position of the business as at 30 November 1988 was that it had returned a gross profit margin on all sales of only 12.5 per cent and had been carried on at a net loss of approximately $28,000.
Although Paper Sales pleaded other representations as particulars of misleading or deceptive conduct on the part of P.S.A., the principal issue in the trial was whether Paper Sales, through Terry, had relied upon P.S.A.'s conduct in delivering a false profit and loss statement to Terry and suffered loss in consequence of that reliance.
It was admitted that the delivery of the false profit and loss statement was conduct that was both misleading and deceptive in contravention of s.52 of the Act. It was also admitted that the business had no value at the time it was sold to Paper Sales. The defence pleaded by P.S.A. and Coppin was that the decision by Paper Sales to purchase the business did not result from any reliance upon representations contained in the profit and loss statement but solely from reliance upon Terry's "business experience and accounting expertise, the investigations and accounting expertise of Gorey and the advice of Vartesi". It was further contended that the disclaimer of responsibility clause endorsed on the profit and loss statement supported a conclusion that Terry undertook his own enquiries and did not rely upon the document.
The essence of that pleading was that it could not be shown as required by s.82 of the Act that the amount of any loss or damage suffered by P.S.A. was suffered by reason of the conduct of P.S.A. in contravention of s.52 of the Act. (See Henjo Investments Pty. Ltd. v Collins Marrickville Pty. Ltd. (1988) 79 ALR 83 per Lockhart J. at p 96.)
Resolution of the issue of reliance depends upon a simple finding of fact. Terry stated that he did rely upon the representations of the profit and loss statement. Notes he made in the course of the negotiations show that he calculated the worth of the business according to the net profit represented in the statement and that such a calculation supported the price asked by P.S.A. I found Terry to be a most forthright witness and have no hesitation in accepting his evidence that the profit and loss statement played a major part in the decision-making process he undertook on behalf of Paper Sales.
Obviously Terry was aware that purchase of the business entailed some risk and that its continued success may have been dependent upon the quality and experience of its sales staff. He also understood that the business was less established than the proven business he had intended to acquire. But fortified by his accountant's advice that the sales figures recorded on the profit and loss statement appeared to be in order and that the expenses listed in the profit and loss statement appeared to be reasonable, he accepted that the business had returned a net profit of $22,000 in its short life and that such trading augured well for the future. Although his calculation of the worth of the business was based upon his understanding that the profit had been recorded in four months trading rather than six, his unequivocal evidence, which I accept, was that if he had been aware that the business had not traded at a profit at all but at a loss he would not have participated in any negotiations to purchase it.
Whatever assurance was provided in the advice received from Gorey, it did not supplant the impact on Terry's mind of the representation of profitability contained in the profit and loss statement. (See McMahon v Pomeray Pty. Ltd. (1991) ATPR 41-125.) The representation of profit was calculated to persuade and was capable of persuading a prospective purchaser to enter into a contract to acquire the business. It retained that inducing character throughout. This was not a case of the falsity of the representation being ignored or being overtaken and swept away by other events. It continued to play a part in the formation of the contract. (See Gould v Vaggelas (1985) 157 CLR 215 per Wilson J. at p 236.)
With regard to the endorsed disclaimer, it is necessary to determine whether it had any impact upon Terry's reliance upon the document. Terry stated that the endorsement did not dissuade him from accepting the figures contained in it as an accurate representation by P.S.A. of the effect of its trading. I am satisfied that the endorsement placed on the statement by T.J. Edwards and Associates Pty. Ltd. purporting to decline to accept responsibility to third parties was of no consequence to Terry who received the document as a representation by P.S.A. as to the profitable nature of its trading.
I now turn to the claim that pursuant to s.75B of the Act Coppin was a person knowingly concerned in the contravention by P.S.A. of s.52 of the Act.
To establish such liability it is necessary to show that Coppin had involvement in and knowledge of the relevant conduct and knowledge of facts which made manifest the prospect that the corporation was engaged in conduct in contravention of s.52 of the Act. (See Yorke v Lucas (1985) 158 CLR 661 per Brennan J. at pp 676-677; Wheeler Grace and Pierucci Pty. Ltd. v Wright (1989) ATPR 40-940 at p 50,257.) Coppin was aware that the profit and loss statement prepared for P.S.A. had been delivered to Terry. The question to be answered is whether he was aware of facts which would have indicated that delivery of that document amounted to misleading or deceptive conduct on the part of P.S.A.
Coppin was a participant in the events which led to the creation of the fictional sales invoice prepared in the name of Multitrans in the sum of $22,500. As manager of the business he was probably aware that the invoice had been delivered to T.J. Edwards and Associates Pty. Ltd. for inclusion in the books of account of the business. However, if there were any doubt on that point it was removed by the evidence of Gorey to the effect that on 19 December 1988 Coppin had affirmed that the invoice had been properly included in the recorded sales of the business. Gorey was obviously a truthful witness and although neither Terry nor Coppin had any recollection of the exchange between Gorey and Coppin, I am quite satisfied that Gorey's recollection was not grounded in mistake. The size and nature of the invoice was of particular concern to Gorey when he discovered the entry in P.S.A.'s books of account in the course of his initial enquiries and his recollection that he made a point of raising it with Coppin, after it appeared that Terry had forgotten to raise the matter in the manner previously agreed between Terry and Gorey, suggests likelihood of accuracy of recall. Similarly, his recollection that he asked Coppin whether the invoice was a bona fide sale and that Coppin's answer confirmed that it was, was likely to be accurate. It was a question and response in respect of which an experienced auditor would be expected to make a particular mental note.
As a result of Gorey's enquiry Coppin would have been aware that Gorey understood that the recorded sales for the business included the invoice in question and by his answer he would have known that he was participating in misleading or deceptive conduct on the part of P.S.A. in failing to disclose the falsity of the sales figures recorded in the profit and loss statement.
It is now necessary to assess the amount of the loss or damage suffered by Paper Sales by the conduct of P.S.A. in contravention of the Act.
As stated earlier the conduct of P.S.A. was admittedly deceptive and the remedies available for the tort of deceit are likely to be of assistance in assessing the amount of loss or damage able to be recovered under s.82 of the Act.
The general principle in deceit is that the aggrieved party be returned, as far as possible, to the position that person would have been in had the inducement of the deceit not been acted upon. In most cases where rescission of a transaction has been effected upon discovery of the deceit, or relief in the form of an order of rescission is sought from the court, the assessment will involve a process of restitution including recovery of any losses incurred as a direct, and perhaps foreseeable, consequence of the deceit. (See Gould v Vaggelas (supra) per Gibbs C.J. at pp 221 and 224, and Dawson J. at p 266; Gates v The City Mutual Life Assurance Society Ltd. (1986) 160 CLR 1.)

In an action for deceit in the case of the sale of a business the usual measure of damages will be the difference between the real value of the property at the time of purchase and the price paid for it. If the business has no value the purchaser would be expected to rescind the contract and throw any potential trading losses back on the vendor. However, the rule is not inflexible, (see Gould v Vaggelas (supra) per Gibbs C.J. at pp 220-222) and, furthermore, where the amount of the loss or damage is being assessed under s.82 of the Act, the assessment is governed by that which is reasonable having regard to the degree of connection between the loss suffered and the contravening conduct as well as the extent to which the loss could have been avoided. (See Henjo Investments Pty. Ltd. v Collins Marrickville Pty. Ltd. (1989) 89 ALR 539 per Lee J. at p 556; Yorke v Ross Lucas Pty. Ltd. (1982) 69 FLR 116 per Fisher J. at pp 131-132; Munchies Management Pty. Ltd. v Belperio (1988) 84 ALR 700 at pp 712-713.)
Paper Sales elected to retain the business and not rescind the bargain, notwithstanding that at all times the business ran at a loss. As at the date of trial Paper Sales considered that the business could be made profitable. As controller of Paper Sales, Terry held the view that it was worthwhile to attempt to continue to develop the business by applying his management skills and by investing more capital.
Having been inveigled into the acquisition of the business, it was not unreasonable for Paper Sales to commit effort and capital for some months thereafter in an endeavour to ascertain whether the business could be given some worth, notwithstanding that it had no value at the time of acquisition.
Paper Sales commenced these proceedings in November 1989. At that time it was aware that the profit and loss statement was false. The proceedings sought no order in the nature of rescission but Terry was hopeful that the commencement of proceedings may lead to a resolution of the problem by reversal of the bargain. It seems that a positive election to retain the business had not then been made and that a decision to affirm the bargain and to carry on the business at its own risk evolved from an assessment of the future prospects of the business after operating it for some months. In the circumstances and notwithstanding that the bargain was affirmed and not rescinded, it is reasonable to treat losses incurred until 30 June 1990 as losses which retained a sufficiently direct connection with the deceitful conduct to be properly recoverable from P.S.A., not being losses reflected in the difference between the price paid and the value of the business. As at 30 June 1990 when seventeen months of trading had been completed, Paper Sales had sufficient knowledge to decide what should be done with the business, namely, whether to accept the business and recover damages for its lack of value and losses incurred to that point or throw the business back to P.S.A. and obtain restitutionary orders.
Paper Sales sought to recover the profits it claimed were to be anticipated in the profit and loss statement and projections delivered by P.S.A. The case of East v Maurer (1991) 1 WLR 461, a decision of the English Court of Appeal, was cited in support of this submission. The submission departed from the usual rule that the represented benefit of a bargain was not recoverable as part of the compensation to be ordered in deceit. The compensatory sum awarded in East did not include any amount referable to profits the business acquired should have made and failed to make. The profits included in the sum awarded in that case related to a hypothetically profitable business which, by appropriate evidence, the plaintiffs had satisfied the Court they would have undertaken but for the deceit of the defendant. (See Beldam L.J. at p 466 and Mustill L.J. at p 468.) Although Terry's evidence was to the effect that he was looking for a profitable business to acquire, there was no evidence to show that he had passed up the opportunity to enter a particular enterprise likely to return a profit. In the circumstances it cannot be said that the claim to loss of profits, as presented by Paper Sales, relates to loss or damage suffered by reason of the deceptive conduct.
However, Paper Sales did suffer loss to the extent to which capital provided by a related party was applied in part payment of the purchase price and in discharging trading losses, was not available to be applied to earn income. An appropriate calculation of an amount of interest able to be earned by the ordinary investment of that sum at the relevant time should be made to offset that loss. There was no dispute between the parties that the appropriate rate of interest to be applied would be 14 per cent per annum. That interest should be calculated on annual rests to provide an appropriate compounding of earnings. As at 30 June 1989 Paper Sales had borrowed a sum of $75,500 from Terry as trustee of the Arteryal Family Trust and as at 30 June 1989 the borrowings from Terry personally and from Terry as trustee stood at $110,376 and $116,000 respectively. The accounts of the business conducted by Paper Sales made no provision in the calculation of trading losses for the payment of interest on borrowings from persons described therein as "related parties" so no element of double recovery would arise in awarding interest on so much of that capital as was applied to meet the part payment of the purchase price and to discharge the losses incurred to 30 June 1990. The calculations have been made on the assumption that the loan of $75,500 from the trustee was applied in part payment of the purchase price on 1 February 1989 and that advances from the bank applied in payment of the remainder of the purchase price were replaced by additional borrowings from Terry on 1 July 1989. It has also been assumed that trading losses accrued in a linear progression throughout the year and were met as incurred by increased loans from Terry personally, or as trustee.
Of the purchase price of $150,000, $100,000 was paid at the date of takeover, 1 February 1989. The balance of $50,000 was not paid when it fell due on 30 June 1989. Stock was valued at $18,066.80 on 31 January 1989 of which $9,033.40 was paid on 1 March 1989. The moiety remaining was not paid when it fell due on 1 April 1989. Paper Sales claimed a sum of $2,263.45 as a sum due to it for an over-valuation of stock, such over-valuation said to result from sales made by P.S.A. prior to the handover of the business and not completed by deliveries from the stock in hand prior to stocktake, no adjustment being made therefor in the valuation of the stock in hand. The orders were satisfied from the stock of the business conducted by Paper Sales. Other adjustments related to items which P.S.A. conceded were owed by it to Paper Sales. I was satisfied that the offsets to which Paper Sales was entitled were sufficient to match its liability for the balance of the unpaid price of stock but was not satisfied that the amount to which Paper Sales was entitled exceeded that sum.
Having found that Paper Sales is entitled to the relief provided by s.82 of the Act, it is unnecessary to make any determination upon the alternative pleadings in negligence and fraud, the remedies for which provide no greater relief than is available to Paper Sales under the Act.
It was agreed by the parties that the cross-claim of P.S.A. for the balance of unpaid purchase price and unpaid value of stock and its claim for the same amounts contained in a proceeding commenced in the District Court of Western Australia and transferred to this Court for hearing should be dealt with in this proceeding. The appropriate order to be made is that the cross-claim in this proceeding and the claim in proceeding no. WG88 of 1990 each be dismissed and that there be no additional order for costs in respect thereof. Any further costs incurred therein are to be treated as costs in the cause of the application in this proceeding and are to be included in the taxation of costs of the application.
Paper Sales is entitled to judgment against P.S.A. and Coppin in the sum of $271,735 calculated in the manner set out in the schedule, and costs. I have not included in the trading losses amounts noted in the accounts as "reasonable remuneration to directors and officers for executive services rendered" which appear to be of the nature of an anticipatory loss rather than an actual loss occasioned by the misleading and deceptive conduct. (See Yorke v Ross Lucas Pty. Ltd. (supra) per Fisher J. at p 137; Bateman v Slatyer (1987) 71 ALR 553 per Burchett J. at p 566.) At the commencement of the hearing and by consent, the applicants obtained judgment against Vartesi and T.J. Edwards and Associates Pty. Ltd. in a sum of $350,000 with costs to be taxed. To the extent of $271,735 liability under the several judgments is the joint liability of all respondents.

SCHEDULE Sum paid in part payment of

purchase price $100,000 Trading losses incurred

to 30 June 1989 $ 46,939 Trading losses incurred

to 30 June 1990 $ 58,334 Interest to 11 September 1991 on capital applied in part

payment of purchase price and discharge of trading losses $ 66,462 $271,735

[1991] FCA 556

11 SEPTEMBER 1991