Phillips Contracting v Yensong

[2008] NSWSC 769

CITATION:	Phillips Contracting v Yensong [2008] NSWSC 769
HEARING DATE(S):	12, 13 and 14/05/08
JUDGMENT DATE :	29 July 2008
JURISDICTION:	Equity
JUDGMENT OF:	White J
DECISION:	Counsel for the defendant to bring in short minutes of order in accordance with reasons.
CATCHWORDS:	TRADE AND COMMERCE – misleading and deceptive conduct – no reliance on representations where true position known prior to contract – no question of principle
LEGISLATION CITED:	Trade Practices Act 1974 (Cth)
CATEGORY:	Principal judgment
PARTIES:	Phillips Contracting Pty Ltd & 1 Or v Yensong Pty Ltd
FILE NUMBER(S):	SC 6250/05
COUNSEL:	Plaintiffs: R I Bellamy Defendant: J Stevenson SC and V Whittaker
SOLICITORS:	Plaintiffs: Thomson Playford Defendant: Gillis Delaney

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

WHITE J

Tuesday, 29 July 2008

6250/05 Phillips Contracting Pty Ltd & 1 Or v Yensong Pty Ltd

JUDGMENT

1 HIS HONOUR: On 5 August 2005, the plaintiff entered into a contract to buy an electrical contracting business known as Ampcon Electrical from the defendant. The plaintiff claims that it was induced to enter into the contract by the defendant’s misleading and deceptive conduct. It has not rescinded the contract. It seeks an order under s 87 of the Trade Practices Act 1974 (Cth) for variation of the purchase price and claims damages. The purchase price was $536,649 allocated as to $250,000 to goodwill and $286,649 to plant, fittings and chattels.

2 The plaintiff company was part of a group of companies controlled by a Mr Daniel Phillips. That group of companies provided engineering services for maintenance of mines. Prior to 5 August 2005 the defendant carried on an electrical contracting business to coal mines in the Hunter Valley. The defendant’s business was a good fit for the businesses conducted by the group of companies known as the Phillips Group.

3 The plaintiff has not made any payments for goodwill. It seeks an order under s 87 of the Trade Practices Act to vary the purchase price to $286,649, that is, by removing any price for goodwill. It claims that neither the goodwill nor the plant and equipment was worth what it paid. It also seeks damages. The defendant cross-claims for the balance of the purchase price.

4 The misrepresentations alleged by the plaintiff are of three kinds. First, it complains of statements made in a document (described in the proceedings as the portfolio document). This document was used by the defendant to interest the plaintiff in the purchase. Secondly, it complains of statements made by Mr Bryan Gay, the managing director of the defendant, at a meeting on 21 July 2005 at Muswellbrook. These statements concerned income from particular contracts and the defendant’s income in the year to 30 June 2005. Thirdly, it complains of statements made in writing on 3 August 2005 concerning wage and certain other expenses in performing a contract known as the Bulga Coal contract and projected future gross profit from that contract.

5 Ultimately, there is very little dispute as to the representations made by the defendant about which the plaintiff complains. In some respects the defendant accepts that misleading representations were made. However, it contends that prior to entering into the contract the plaintiff learned the true facts and did not rely on any representation which was not true.

6 The contract contains a term that:

“ 3 Non Reliance

The purchasers [sic] acknowledge that they have in entering this agreement not relied upon any statement representation warranty or condition made or given by the vendor or anyone on behalf of the vendor in respect of the subject matter of this agreement other than those that are expressly herein contained. ”


In cross-examination Mr Phillips confirmed that that statement was true.

Background

7 Mr Bryan Gay describes himself as the principal of the defendant. He and his wife are the only shareholders and directors of the defendant. In the latter half of 2004 Mr Gay formed the wish to sell the Ampcon Electrical business. He prepared a document describing the business to be given to another potential purchaser. This is the portfolio document. That potential purchaser did not proceed.

8 In February 2005, Mr Phillips engaged a Mr Terry Mullens to look out for an electrical business which could be added to the operations of the Phillips Group of companies. In about February 2005, Mr Gay gave the portfolio document to Mr Mullens. He told Mr Mullens that it had been prepared for another interested party and detailed Ampcon’s client listing, work performed and actual invoicing for the year ended 2004.

9 The portfolio document included the following statements:

“ AMPCON ELECTRICAL – COMPANY PROFILE
Ampcon Electrical was established in 1988 and is involved with both maintenance and installation of electrical equipment for many of the Mining Operations within the Upper Hunter Area.
...
Ampcon Electrical has at present a work force of 20, with many being long-term (8 years plus) employees.
...
Ampcon Electrical has a long-term period Maintenance Contracts [sic] at both Mt Owen CPP and Bulga CPP.
...
AMPCON ELECTRICAL Work Details

§ During the last financial year Ampcon Electrical recorded a turnover of $3,266,266.00, with a projected profit of $953,000.00

§ Ampcon Electrical has existing assets including Vehicles, Plant, Tools, Spares, Site Offices and Storage Facilities of between $400,000.00 and $450,000.00

...
BULGA COAL
Ampcon Electrical has had an onsite presence at Bulga Coal for more than fourteen (14) years. In January 2004 Ampcon Electrical signed a Long-Term Period Maintenance Contract for the Low Voltage Electrical System Maintenance. This includes the Maintenance of the Overland Conveyor System, Raw Coal, Clean Coal and Train Loader Systems.
This contract was not put out to tender and was negotiated only with Ampcon Electrical. We would expect this contract to continue after this initial eight (8) year period.
This contract is tied to the C.P.I. and adjusted annually.
Ampcon Electrical has a permanent on-site staff consisting of the following,

§ Foreman Electrician 1

§ Leading Hand Electrician 1

§ Electricians/Apprentices 4

§ Boilermaker 1

...
Mount Owen CPP
Ampcon Electrical has had a permanent on-site presence since the beginning of Mining Production more than ten (10) years ago.
Ampcon Electrical signed a Long Term Period Maintenance Contract for the Maintenance of Low/Medium Voltage Systems in August 1998. This contract was for four (4) years with a two (2) year extension option.
This contract is to be re-tendered in the next few weeks.
...
NOTE:
We see the renewal of this contract as a formality.
...
Liddell CPP/Liddell Open Cut/Hunter Valley Earthmoving
Ampcon Electrical has had a permanent on-site presence at Liddell Coal for the past sixteen (16) years.
...
Wambo CPP
Ampcon Electrical has carried out various works throughout the CPP for more than twelve (12) years.
...
Unimin Australia
Ampcon Electrical has carried out various Upgrades For Unimin Australia over a period of fifteen (15) years.
...
Rix’s Creek CPP and Open Cut
Ampcon Electrical carried out the complete electrical installation of the Coal Preparation Plant, Stackout System and Trainloader in 1993 and have [sic] continued to have an on-site presence since its completion.
...
Bloomfield CPP
Ampcon Electrical has had a permanent on-site presence for the past 6 years.
...
United Collieries
Ampcon Electrical has had a part-time on-site presence for more than past ten (10) years.
...
Muswellbrook Coal
Ampcon Electrical supplied Muswellbrook Coal with electrical coverage of their Open Cut Mine for a six (6) month period.
...
AMPCON ELECTRICAL
GRAPH DEPICTING ALLOCATION OF RESOURCES PREVIOUS TWELVE (12) MONTHS

10 The defendant charged the mine operators for the services provided by its employees by charging an hourly rate which was a mark-up from its costs. It provided materials at cost plus GST plus ten percent and charged a monthly management fee of $2,210 to the mine sites. From February 2005 there was a reduction in the scale of the defendant’s business.

Misrepresentations in the Portfolio Document

11 The plaintiff alleged that the portfolio document contained seven representations which were misleading and deceptive, or were likely to mislead or deceive. They were:

“ (i) that Ampcon had a workforce of 20 with many long-term employees (Ampcon Electrical Company Portfolio)
(ii) that Ampcon had long-term maintenance contracts at both Mt Owen Coal Preparation Plant (Mt Owen CPP) and Bulga CPP.
(iii) that Ampcon recorded a turnover of $3,266,266 with a projected profit of $953,000 for the financial year ending 30 June 2004.
(iv) that Ampcon held assets including Vehicles, Plant, Tools, Spares, Site Office and storage facilities of between $400,000 and $450,000.
(v) that Ampcon had an eight year contract commencing on January 2004 with Bulga CPP for Low Voltage Electrical System maintenance;
(vi) that the said contract referred to above has an annual Cost Estimate Value of $747,552.00 per year.
(vii) that the renewal of the Mount Owen CPP Maintenance of Low/Medium Voltage Systems was a formality. ”

12 The reasons it is alleged that those representations were misleading and deceptive or likely to mislead or deceive were that:

“ (i) Ampcon had a workforce of 13;
(ii) Ampcon had no long term written maintenance contracts;
(iii) for the financial year ending 30 June 2004, Ampcon recorded a turnover of $2,778,372 with a net profit of $426,266;
(iv) the plant fittings and chattels were valued at $286,649.
(v) Ampcon’s contract with Bulga Coal for Low Voltage Electrical System maintenance was in fact a verbal agreement, able to be terminated at any time;
(vi) there was no continuing contract for the Maintenance of Low/Medium Voltage Systems at Mount Owen. ”

13 After some preliminary negotiations between Mr Mullens and Mr Gay, a meeting was arranged at the office of the defendant’s accountant, Mr Ramsay, on 13 July 2005. The representatives of the plaintiff at the meeting were Mr Phillips and Mr Jason Hammond, who, at that time, was retained by the plaintiff as its accountant. At the meeting, Mr Phillips offered to pay $325,000 for the physical assets used in the business and $250,000 for goodwill. Mr Hammond confirmed that he attended only one meeting at the office of Mr Ramsay and confirmed that at that meeting an agreement in principle was reached as to price on the basis of Mr Phillips’ offer. Mr Hammond also said that the price Mr Phillips offered at the meeting was based upon a calculation he, Mr Hammond, made as to an appropriate figure of goodwill, which in turn was based on profit and loss statements provided to him. However, Mr Hammond did not receive the profit and loss statements until 19 July 2005. He did not accept that the meeting took place on 13 July. However, Mr Phillips confirmed that the meeting took place on or about that date. In his affidavit Mr Hammond did not dispute the date of the meeting. Mr Gay said that the meeting took place on 13 July and this was confirmed by Mr Ramsay. I conclude that the meeting did take place at that time. At that time the information the plaintiff had as to the profits and turnover of the business was the information in the portfolio document.

14 On 14 July 2005, Mr Ramsay sent to Mr Mullens copies of the profit and loss statements for the business for the year ended 30 June 2004, with comparable 2003 figures, and also a profit and loss statement of the business for the period from 1 July 2004 to 31 March 2005. On 19 July 2005, he faxed those documents to Mr Hammond.

15 The profit and loss statements contained different information as to the revenue and profitability of the business from that shown in the portfolio document. There is no dispute as to the accuracy of the profit and loss statements. They showed that in the 12 months to 30 June 2004 the total income of the business was $2,820,828 comprising fees of $2,778,372 and other income of $42,457. The profit for the year ended 30 June 2003 was $238,315 and for the year ended 30 June 2004 was $426,256. For the nine months to 31 March 2005 the total fees received was $1,756,927 and the net income for the period was $365,752. Mr Hammond used this information to calculate a figure for goodwill. He took ten percent of the last three years’ average turnover, being $234,557 and 50 percent of the 2005 projected net profit, being $243,835. As it was intended to pay for the goodwill over 12 months he rounded those figures to an even $250,000. He provided his calculation to Mr Phillips and informed Mr Phillips what he believed to be a fair market value for the business based on those calculations and explained how he made the calculations. Mr Phillips had already proposed a price of $250,000 for goodwill and did not adjust his offer after receipt of the 2003 and 2004 profit and loss statements. Mr Phillips adhered to that price on the basis of Mr Hammond’s calculations based on the profit and loss statements.

16 Mr Phillips deposed that he agreed to purchase the Ampcon business for a figure which included a value for goodwill of $250,000 in reliance on the portfolio document, the profit and loss accounts (called the stage 2 documents), a later calculation prepared by Mr Gay of 3 August 2005 referred to below, and the calculations and multiples made by Mr Hammond. I do not accept that after the plaintiff received the profit and loss statements on the basis of which Mr Hammond made his calculation of an appropriate figure for goodwill, Mr Phillips placed any reliance on the statements as to turnover and profit contained in the portfolio document. The very respect in which the plaintiff alleges that the representation as to turnover and profit in the portfolio document was false was the further information provided to the plaintiff by the defendant on 14 and 19 July.

17 In mid July 2005, Mr Phillips employed Mr John Turnbull to be the sales and business development manager for the Ampcon Electrical business. He told Mr Turnbull that his duty would be the full management of the business. Mr Turnbull commenced his employment in mid July 2005 and spent the latter part of July 2005 and the beginning of August 2005 with Mr Gay to learn the operation of the business. He met the employees and went to the Bulga, Bloomfield and Mount Owen job sites. By 21 July 2005, the defendant’s workforce had been reduced from 20 to 16 employees. This was known to the plaintiff. At a meeting held on 21 July 2005 at Mr Phillips’ office, Mr Gay observed that the names, classifications and employee entitlements of all of the then 16 employees of the business were entered into the Phillips computer system. Mr Phillips was advised prior to execution of the contract for sale and purchase of the business of the resignations of three other employees bringing the workforce to 13 at the date of the contract.

18 One of the employees who had resigned by 21 July 2005 was Mr Shane Sansom who was the site manager supervising all sites. He resigned on 29 June 2005. He took up a position with another electrical maintenance provider. Mr Phillips deposed in his affidavit of 8 December 2005 that he had been informed prior to 3 August 2005 that Mr Sansom had left employment with Ampcon. In a later affidavit he deposed that he had not been informed by Mr Gay or anyone else that Mr Sansom had resigned. He said that he was informed by Mr Sansom himself that he was on personal leave. However, in cross-examination Mr Phillips accepted that his evidence of not having been informed of Mr Sansom’s resignation was incorrect. Indeed, Mr Phillips gave evidence of a conversation he had with Mr Gay on 3 August 2005 in which he expressed concern about Mr Sansom’s having left. He deposed that he told Mr Gay that he was concerned that Mr Sansom might take a large part of the business with him.

19 It follows that, prior to entering the contract, the plaintiff knew that the defendant then had a workforce of 13, and not 20 as had been stated in the portfolio document. The difference was due to resignations.

20 On 26 July 2005, Mr Hammond engaged the services of Gamer’s Auctions Australia to verify independently the assets to be sold as part of the business. These assets comprised a trailer and 13 motor vehicles, sundry items of tools and machinery, site buildings including shipping containers converted to workshops and office equipment. On 28 July 2005, Gamer’s Auctions provided a valuation of $222,000 for all of the assets. The assets were purchased at valuation, subject to certain adjustments. The plaintiff did not rely on the statement in the portfolio document that existing assets were worth between $400,000 and $450,000. It relied upon its own valuation.

21 On 2 and 3 August 2005, Mr Gay received letters of resignation from two employees, Messrs Hallam and Tarrantini. He faxed copies of those resignations to Mr Phillips on 3 August 2005. Mr Hallam carried out work at the Wambo coal mine. Mr Tarrantini carried out work at Rix’s Creek, United Collieries and Unimin Australia. Mr Phillips understood that Mr Tarrantini worked at Rix’s Creek for three days per week, at the United mine one day per week and at Unimin one day per week. He understood that Mr Hallam worked full time at Wambo. He knew that there was no written contract between the defendant and the owners of those sites and that they had each worked at the mine sites for about ten years each. He understood there was a serious risk that the resignation of those employees might well lead to the Ampcon business losing the opportunity to work at the mine sites they had been working at. He told Mr Gay that he had had a meeting with both Mr Hallam and Mr Tarrantini and believed he could turn them around.

22 As noted at [9] above, one of the plaintiff’s allegations of misleading and deceptive conduct was that the portfolio document represented that renewal of the Mount Owen contract was a formality. It was represented that the Mount Owen contract accounted for about 13 percent of the business. However, prior to entering into the contract for the purchase of the business, Mr Phillips was made aware that the owner of the Mount Owen mine had decided to give the electrical maintenance business at the mine to another contractor. Mr Queenan from Thiess, the owner of the Mount Owen mine, told Mr Turnbull and Mr Gay on 1 August 2005 that the Mount Owen contract had been awarded to another company. They were required to have their men and equipment off site by the completion of work on Wednesday, 3 August 2005. Mr Gay and Mr Turnbull then went to Mr Phillips’ office at Muswellbrook and informed Mr Phillips of those matters. The employee of Ampcon Electrical who had been providing the services at the Mount Owen mine was a Mr Glen Goodge. Mr Phillips said to Mr Turnbull and Mr Gay when told that the Mount Owen contract had been lost, “That’s alright, we will use Glen Goodge at another site.”

23 In his affidavits, Mr Phillips deposed that the Mount Owen contract was crucial to the business. In one of his affidavits he deposed that had he been informed prior to signing the contract for the purchase of the business that the Ampcon business would not be successful in obtaining the Mount Owen long-term maintenance contract as represented to him by Mr Gay, he would not have agreed to pay more than $250,000 for the Ampcon business and would not have signed the contract for the purchase of the business or his personal guarantee or the bill of sale which secured the outstanding balance of the purchase price. In another affidavit he denied having been informed prior to entering into the contract that Ampcon Electrical had not been successful in renewing its contract at the Mount Owen site and said that he relied upon the representation in the portfolio document that the renewal of the contract was seen as a formality. However, in his affidavit of 21 November 2007, Mr Phillips confirmed that he had learnt about the loss of the Mount Owen contract prior to signing the contract. In cross-examination he retracted his evidence that he had not been informed prior to entering into the contract that Ampcon Electrical had not been successful in renewing its contract at the Mount Owen site.

24 Mr Phillips said that it was only well after the “completion date” that he learned of the loss of the Mount Owen contract which was after he had finalised negotiating the contract price. The contract named the “completion date” as 31 July 2005. But contracts were not exchanged until 5 August 2005. The contracts were completed on the same day. Until contracts were exchanged there was no binding obligation on either party to buy or sell the business. Prior to contracts being exchanged Mr Phillips knew that Mr Sansom had left and he knew there was a risk that he would take business with him. Mr Phillips knew that the Mount Owen contract had been lost. When Mr Phillips signed the contract for purchase, he did not rely upon the Mount Owen contract being part of the business the plaintiff was acquiring. Mr Phillips knew that the employees who provided the electrical services at the Wambo, Rix’s Creek, United Collieries and Unimin mines had resigned and that there was a risk that the business at those mines would also be lost.

25 Contrary to what was stated in the portfolio document, the defendant did not have a written contract for the supply of services at Bulga Coal for an initial eight-year period from January 2004. The defendant accepted that the portfolio document misrepresented the terms of the Bulga contract.

26 Special condition 15 of the contract provided:

“ CLIENT CONTRACTS :
15. The parties acknowledge that the vendor, through its business entity, has entered into a written agreement of engagement with Bulga Coal and the assignment of the contract to the purchaser is fundamental to the consideration herein.
The parties have viewed a copy of the written contract. The parties will do all such things, sign all such documents and take all such steps so as to cause the benefit of that contract to be assigned to the purchaser on completion.
In the event that the contract with Bulga Coal shall not for any reason be assigned then the value of that contract shall be charged against the goodwill payable pursuant to this contract. ”

27 Notwithstanding the acknowledgment that the parties had viewed the written contract of engagement with Bulga Coal, Mr Phillips’ position is that he was not shown any written contract for Bulga Coal. He deposed that:

“ The Bulga contract referred to in the portfolio documents [sic] was not provided to me. ... I did not see a ‘Long-Term Period Maintenance Contract’ dated January 2004. The only written contract that was provided to me was an expired Forward Purchase Agreement. ... ”

28 He deposed that he was told by one of the managers employed at the Bulga site in August 2005 that the manager thought the arrangement was purely verbal. Mr Phillips said that in about July 2005, he had asked Mr Gay for a copy of the written contract with Bulga but was not provided with it and instead only received the expired Forward Purchase Agreement.

29 On Mr Phillips’ evidence, he did not rely on the written representation in the portfolio document as to the existence of a written contract for the supply of services to Bulga Coal which had an initial eight-year term.

30 The position is a little more complicated. Another company controlled by Mr Gay and subsequently the defendant had between them supplied services to Bulga Coal for 14 years. Mr Gay had signed a contract called a “Supply Contract” for the “Maintenance of Medium and Low-Voltage Systems”. The contract was expressed to be made between Bulga Coal Management Pty Ltd and the defendant. It does not appear that Bulga Coal Management Pty Ltd signed the agreement, but it held a copy of the agreement and the services provided by the defendant were provided on the terms of that agreement. The agreement is undated. There are contradictory provisions in relation to its term. Clause 10.5(a) provides that the principal (Bulga Coal Management Pty Ltd as manager for a joint venture) could terminate the agreement at its sole discretion by giving 28 days’ written notice. Clause 3 of Schedule 1 to the agreement provides that the principal may at its sole discretion at any time during the term and at no cost or penalty terminate the contract. Schedule 2, dealing with the “Scope of Work”, provides that the term of the contract is to be a period of one year from the date of contract (the contract is undated but there are references on the footer of Schedule 2 to a date of 13 November 2003). Clause 17 of Schedule 2 further provides for the contract being capable of extension for periods of 12 months for a maximum of four years at the discretion of the principal.

31 This document was provided by Mr Gay to Mr Mullens on 21 July 2005 in the presence of Mr Phillips.

32 Mr Gay also gave evidence, which was ultimately admitted and which I accept, that he was told by a Mr Sean Booth, being the superintendent at the Bulga Coal Preparation Plant that “The initial period of the contract will be for four years but I will give you a verbal for your option to continue it” to which Mr Gay responded “Okay” and then signed the contract. This conversation was ineffective to change the terms of the contract. The written document provided that it constituted the entire agreement of the parties about its subject matter and superseded all previous agreements, understandings and negotiations on that subject matter.

33 On exchange of contracts for the purchase of the business (which was effected between the parties’ solicitors through the DX) the defendant provided to the plaintiff a letter addressed to the Manager, Bulga Coal and signed by Mr Gay as director of the defendant, confirming that the defendant had assigned to the plaintiff the business of Ampcon Electrical and sought to assign all its entitlement pursuant to the contract of service with Bulga Coal effective as from 5 August 2005.

34 I find that the plaintiff proceeded on the basis that it would take an assignment of the defendant’s existing contract with Bulga Coal, a copy of which had been provided by Mr Gay to Mr Mullens on 21 July 2005 in Mr Phillips’ presence. It did not rely on what was said about that contract in the portfolio document.

35 After the exchange and completion of the contract for the sale of the defendant’s business, the plaintiff continued to provide the services which the defendant had previously supplied to Bulga Coal. Bulga Coal did not terminate those services. Whilst the written supply contract between Bulga Coal Management Pty Ltd and the defendant provided that the defendant could not assign any of its rights under the agreement without the prior written approval of Bulga Coal Management Pty Ltd, that company did not take any point that the assignment was effected without its consent. Mr Phillips has negotiated new rates and schedules of rates with Bulga Coal and has negotiated for a new term of four years. Mr Phillips said that he was hopeful of securing such a term and had not received any indication that such a term would be unsatisfactory from the point of view of Bulga Coal.

Conclusions Concerning the Portfolio Document

36 It follows that no damage was suffered by the plaintiff “by” the misleading or deceptive representations in the portfolio document. The plaintiff did not rely on the alleged representations in entering into the contract to buy the Ampcon electrical business because it had ascertained the true position prior to exchange of contracts. By 5 August 2005 it knew that the defendant had a workforce of 13 and not 20. It knew that the Mount Owen contract had been lost. It either knew the terms of the Bulga Coal contract or was indifferent to those terms and in any event it has continued to provide services and materials to the Bulga Coal Preparation Plant. It was given what are accepted to be correct figures for the defendant’s profit for the year ended 30 June 2004 and relied on those figures and not the figures in the portfolio document. It bought plant fittings and chattels according to the valuation made by its own valuers and not in reliance on the statement as to value contained in the portfolio document.

Representations at the Meeting of 21 July 2005

37 The meeting of 21 July 2005 at the office of Phillips Group in Muswellbrook referred to above was attended by Mr Gay, Mr Phillips, Mr Mullens and a Ms Angela Hayes. Ms Hayes was Phillips Group’s administration manager. She took notes of the meeting. Although initially there was some dispute as to what was said, it was ultimately not seriously in contest that during the meeting Mr Gay said:

“ The approximate income is $30,000 per month for Rix Creek and Bloomfield ... For Bulga we do $15,000 to $20,000 per week which is roughly $900,000 to $1,000,000 ... per year. Mount Owen is $25,000 to $30,000 per month ... and Wambo is $10,000 per month ... United and Unimin [are] $5,000 to $6,000 each ... All up it’s about $2.8 million this year. ”

38 The plaintiff alleged that these representations were misleading and deceptive or likely to mislead or deceive in that:

“ (i) the total income received in relation to the Rix Creek/Bloomfield contracts was $153,682, being on average $12,807 per month;
(ii) the average weekly income Yensong received was $17,214 per week from the Bulga Coal CPP contract which totalled approximately $895,114 per annum;
(iii) the total income for the year to 30 June 2005 was $2,356,401.”

39 In final submissions counsel for the plaintiff did not press the claim that the representations were misleading in respect of the first two particulars, but maintained that the representation that the income for 2005 was $2.8 million was misleading. It was common ground that the income for the business for the 12 months to 30 June 2005 was $2,356,401.

40 Mr Phillips deposed that had Mr Gay not told him the information quoted at [37] above, he would not have caused the plaintiff to enter into the contract, nor to have given a bill of sale to secure the outstanding purchase price. Nor would he have given his personal guarantee. However, I do not accept that the information given by Mr Gay as to the defendant’s income for the 2005 financial year played any part in Mr Phillips’ decision to cause the plaintiff to enter into the agreement or the associated decision to enter into the guarantee. The price for the business was not calculated by reference to that figure. Mr Phillips had offered the price of $250,000 before the meeting of 21 July, and Mr Hammond had confirmed the appropriateness of the price using the 2004 profit and loss statements. Neither Mr Phillips nor Mr Hammond gave any specific evidence as to how they used the information as to the defendant’s income in 2005.

41 Mr Bellamy who appeared for the plaintiff, submitted that the importance of the $2,800,000 figure was that it showed that the defendant’s business was not comprised of the Bulga Coal contract alone. Rather, the income was made up from a variety of contracts. The business would be more valuable if its continued existence did not depend upon one contract alone.

42 However, the representation was as to income earned during the previous year. As Mr Phillips put it, between 31 July 2005 and the date of exchange and settlement on 5 August 2005, several employees had resigned and the Mount Owen contract had been lost. To use Mr Phillips’ words, “the business effectively halved in potential turnover in a matter of days”. In those circumstances, the earlier information as to historical turnover for the company as a whole ceased to be material. Mr Phillips nonetheless decided to proceed without amending his offer on price. In doing so he was not relying on the earlier representation as to the defendant’s income in 2005. For these reasons, Mr Gay’s statements at the meeting of 21 July 2005 did not cause or contribute to the plaintiff’s entry into the contract.

Representations of 3 August 2005

43 On 3 August 2005, Mr Phillips telephoned Mr Gay and expressed his concern about Mr Sansom’s departure (set out at [18] above). In response, Mr Gay said words to the effect:

“ Dan, I can understand your concern but Shane’s departure will make no difference to the business whatsoever. The core and profitable part of Ampcon is the Bulga contract and Shane’s departure will not affect that. Therefore even with Shane going and just based on the Bulga contract the business will still make $35,000 profit per month easy. I can send some figures through showing this. ”

Mr Phillips said:

“ OK Brian. I would like that. ”

44 That afternoon, Mr Phillips received a fax from Mr Gay which set out the daily wages and labour charges for nine employees at the Bulga Coal CPP. He calculated the labour charges at $3,572.15 per day. He multiplied that figure by 22 to give a monthly figure for labour charges of $78,587.30. He then divided that figure by four and stated the income to be $19,646.82 per week. Using the same figures he calculated the wages for 22 days to be $38,368 and gave figures for superannuation, fuel, car expenses, phones and “various” of $6,670 producing a figure of $45,038 for costs yielding what was called “profit” of $33,549 per month (the difference between the charge-out revenue for labour of $78,587.30 and the specified costs of $45,038). Mr Phillips said that had he been aware prior to signing the contract that the Ampcon business would make a loss of $63,000, instead of an amount of not less than $400,000 per year being $33,500 per month as represented to him by Mr Gay, he would not have entered into the contract and would not have agreed to pay more than $250,000 in total for the business.

45 Mr Hammond asserted that the business lost $63,000 in the first 12 months of its operation. This was not a loss incurred in performing the Bulga contract but a loss for the business as a whole. It was struck after bringing to account costs some of which were of a different kind or magnitude than those incurred when the business was conducted by the defendant. The loss of $63,000 reflected expenses for interest and bank charges of $45,000, an administrative expense payable to another company in the Phillips Group of $38,500, and advertising of $9,632. The wages expense was substantially higher as a proportion of sales and this was also reflected in higher on-costs. Given that the bulk of the income from the business, both before and after its sale, was derived by charging a 100 percent mark-up of direct wages before on-costs, the higher wage expense as a percentage of sales indicates that under the plaintiff’s ownership, wage expenses which could not be charged to the client were borne by the business.

46 The plaintiff pleaded that the fax from Mr Gay represented that wages and wage related expenses incurred in performing the Bulga Coal CPP contract would be $38,368 per month and that the defendant’s future profit in performing the Bulga contract would be $33,549 per month and $402,588 per year. The plaintiff alleged that these representations were misleading and deceptive or likely to mislead or deceive in that:

“ (i) Yensong wages and wage related expenses incurred the Bulga Coal CPP contract [sic] were between $50,925 and $54,051 per month;
(ii) The profit performing the Bulga Coal CPP contract was between $20,541 and $23,667 per month and $256,492 and $284,004 per year. ”

47 The plaintiff also alleged that the defendant impliedly represented that all information in the defendant’s possession material to the turnover, profit and goodwill of the business had been provided and there was no information known to it which was material to those subjects which tended to show that the representations were false, misleading or deceptive. The plaintiff alleged that those implied representations were misleading and deceptive because the representations made by Mr Gay in his facsimile of 3 August 2005 as to the profit from the Bulga Coal contract “failed to take into account indirect expenses unable to be fully offset against gross profit realisable from other turnover in the business”. In other words, the plaintiff says not only that the fax of 3 August 2005 was misleading because it misstated the expenses and gross profit of the Bulga Coal contract, but also that the defendant engaged in misleading conduct by failing to disclose that there were other indirect expenses not taken into account in calculating the gross profit from that business which would not be fully recouped from other parts of the business, so that the business as a whole would not generate future profit of at least $33,549 per month or $402,588 per year.

48 It is clear from a comparison between the profit and loss statements provided to the plaintiff and Mr Gay’s facsimile, that Mr Gay did not list indirect costs associated with the Bulga contract, nor all direct costs. Mr Hammond made an analysis between the expenses listed on Mr Gay’s facsimile and the expenses itemised in the defendant’s profit and loss statement and was well aware that the profit stated by Mr Gay for the Bulga contract was calculated by reference only to the direct costs and not to all costs that would be incurred in connection with that work. He advised Mr Phillips on the document. Mr Phillips appreciated that the list of expenses was not a complete list of expenses which would be incurred in performing the Bulga contract.

49 Mr Gay’s facsimile summarised part of the income to be derived from the Bulga contract, namely the income from the provision of labour. His calculation of that income was reasonably based on the number of employees then engaged at the site and the hours worked. After the purchase was completed, the plaintiff used the same employees and charge-out rates, with the same margin as had the defendant. In the following three months the plaintiff billed Bulga Coal Management Pty Ltd for more hours than had the defendant.

50 I do not consider that Mr Gay impliedly represented that indirect expenses not reflected in his calculation of profit from the Bulga contract could be recouped from other parts of the business. At the time both parties knew that there was a risk that other employees might choose not to work for the plaintiff and that other contracts would not be continued. In that state of uncertainty it is impossible to make any such implication. Nor was any such representation made expressly. Whilst Mr Gay spoke of the business making $35,000 profit per month based on the Bulga contract, his oral statement cannot be taken in isolation from his subsequent facsimile which showed that the estimated “profit” of $33,549 per month based on the Bulga contract did not include all relevant costs. He was not making a prediction as to the future profitability of the entire business, and I do not consider that Messrs Phillips or Hammond understood him to be doing so.

51 I accept the opinion of Mr Perry, an accountant who gave evidence for the defendant, that there are no grounds to claim that the turnover from the Bulga contract after the plaintiff’s purchase of the Ampcon electrical business was less than represented or materially less in net profit. Whilst Mr Gay’s statement of monthly expenses omitted certain direct as well as indirect costs, he also underestimated the income from the Bulga contract by not including overtime which had been charged on a regular basis. Mr Perry’s analysis, which I accept, shows that, once appropriate direct costs are taken into account, the monthly direct costs for performing the contract amounted to $53,193, but the corrected gross monthly income from the provision of labour was $86,797, yielding a monthly gross profit of $33,604. I do not consider that Mr Gay misrepresented the profitability of the Bulga contract.

52 For these reasons, I reject the plaintiff’s claim that the representations made by Mr Gay on 3 August 2005 were misleading or deceptive.

Conclusion on Plaintiff’s Claim

53 It follows that the plaintiff’s claim fails. I have found that the plaintiff did not rely on these statements in the portfolio document or on the statements made by Mr Gay at the meeting of 21 July 2005 as to annual turnover which were misleading and deceptive. Mr Gay’s oral and written representations on 3 August 2005 were not misleading or deceptive.

54 I was reminded that:

“ If a material representation is made which is calculated to induce the representee to enter into a contract and that person in fact enters into the contract there arises a fair inference of fact that he was induced to do so by the representation. ” ( Gould v Vaggelas (1985) 157 CLR 215 at 236.)

55 However, in this case the representation is rebutted for the various reasons given above. It is also relevant that the plaintiff entered into the contract which contained special condition 3 referred to above having taken legal advice. Mr Phillips was taken through the special conditions by his solicitor. As noted earlier in these reasons, in cross-examination Mr Phillips stated that what was acknowledged in special condition 3 was true. I do not accept that admission as being a complete statement of the truth. There were some materials provided to the plaintiff upon which it relied in entering into the agreement, but it did not rely upon those statements which have been shown to be incorrect.

Defendant’s Cross-Claim

56 Payment for goodwill was to be made by 12 monthly payments commencing on 1 November 2005. The debt was secured by a bill of sale. In the event of default, interest was payable at the rate of ten percent per annum. Proceedings were commenced on 13 December 2005 by the plaintiff to restrain the defendant from seeking to enforce the bill of sale or the personal guarantee given by Mr Phillips. Injunctive relief was given but on condition that the plaintiff pay into court the monthly instalments as they fell due.

57 It was submitted for the plaintiff that even if its claim failed, nonetheless it was not liable to pay $250,000 for goodwill by reason of special condition 15 quoted at [26] above. Mr Bellamy for the plaintiff submitted that the Bulga contract was not assigned to the plaintiff and that accordingly the value of that contract should be deducted from the amount payable for goodwill under the contract. The plaintiff submitted that the value of the Bulga contract was $190,000 and hence the amount payable for goodwill was $60,000.

58 I do not accept that any amount should be deducted from the price payable for goodwill pursuant to special condition 15. On settlement, the plaintiff received a letter of assignment. The contract was not capable of being assigned without the approval of Bulga Coal Management Pty Ltd. It is not clear that the plaintiff sought any formal approval to an assignment of the contract, although the purpose of obtaining the letter of assignment from the defendant was to obtain such formal approval. Be that as it may, the plaintiff has continued to provide the same services as had the defendant and has charged for those services on the same basis as the defendant charged. Bulga Coal Management Pty Ltd has accepted the plaintiff as the provider of those services in substitution for the defendant. Whether what has taken place amounts strictly in law to an assignment of the benefit of the contract or a novation is not to the purpose in construing special condition 15. It was not intended that the defendant would continue to perform the contract. The reference to the Bulga contract being “assigned” extended to a novation as the plaintiff was to assume the burden of performing the contract. The purpose of special condition 15 was that the price payable for goodwill should be reduced if the plaintiff did not obtain the benefit of the contractual arrangements between the defendant and Bulga Coal. The plaintiff has obtained that benefit. It would be absurd if the plaintiff were entitled to a reduction in the purchase price if it and Bulga Coal Management Pty Ltd agreed to enter into a new contract on the same terms as the contract between the defendant and Bulga Coal Management Pty Ltd as distinct from taking an assignment of the defendant’s contract.

59 In any event, the plaintiff was required to take all steps to cause the benefit of the contract to be assigned to it. As the contract could not be assigned without the approval of Bulga Coal Management Pty Ltd, the plaintiff was required to seek that company’s approval to the assignment. But it does not appear that any such step was taken.

60 For these reasons, the whole of the price payable for goodwill is payable to the defendant. The defendant is entitled to the payment out of the moneys paid into court and to any interest earned on those moneys. No submissions were made as to whether, if the interest earned is less than the contractual rate, the defendant is entitled to judgment for the difference. If there is a dispute about interest I will hear submissions when short minutes are brought in.

61 The defendant is entitled to its costs of the proceedings.

62 I direct counsel for the defendant to bring in short minutes of order in accordance with these reasons.