Pier (WA) Pty Ltd as trustee for Isandi Trust v Jean Maurice Pty Ltd (in Liq) [No 6]
[2018] WASC 204
•2 JULY 2018
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL
CITATION: PIER (WA) PTY LTD AS TRUSTEE FOR ISANDI TRUST -v- JEAN MAURICE PTY LTD (IN LIQ) [No 6] [2018] WASC 204
CORAM: KENNETH MARTIN J
HEARD: 7, 8, 23 & 28 MAY 2018
DELIVERED : 2 JULY 2018
FILE NO/S: CIV 2935 of 2016
BETWEEN: PIER (WA) PTY LTD AS TRUSTEE FOR ISANDI TRUST
Plaintiff
AND
JEAN MAURICE PTY LTD (in liq)
First Defendant
SANCHO BAKERY PTY LTD
Second Defendant
FRANCK DUROLEK
Third Defendant
BELINDA DUROLEK
Fourth Defendant
Catchwords:
Practice and procedure - Assessment of damages - Contested - Default judgment obtained - Defences of defendants struck out - Misleading and deceptive conduct cause of action - Causation and reliance proving damage established - Rival experts - Judgment for plaintiffs
Legislation:
Nil
Result:
Judgment for plaintiff
Category: B
Representation:
Counsel:
| Plaintiff | : | Mr G R Ritter QC & Mr A Vinciullo |
| First Defendant | : | No appearance |
| Second Defendant | : | Mr C Williamson & Ms J M Somerville |
| Third Defendant | : | Mr C Williamson & Ms J M Somerville |
| Fourth Defendant | : | Mr C Williamson & Ms J M Somerville |
Solicitors:
| Plaintiff | : | HopgoodGanim Lawyers |
| First Defendant | : | No appearance |
| Second Defendant | : | ABMS Lawyers |
| Third Defendant | : | ABMS Lawyers |
| Fourth Defendant | : | ABMS Lawyers |
Case(s) referred to in decision(s):
Caffey v Leatt-Hayter [No 3] [2013] WASC 348
Davidson v Tulloch (1860) 3 Macq 783
Evolution Traffic Control Pty Ltd v Skerratt [2018] NSWSC 49
Gould v Vaggelas [1985] HCA 75; (1985) 157 CLR 215
Henville v Walker [2001] HCA 52; (2001) 206 CLR 459
Kizbeau Pty Ltd v WG & B Pty Ltd [1995] HCA 4; (1995) 184 CLR 281
Marks v GIO Australia Holdings Ltd [1998] HCA 69; (1998) 196 CLR 494
Morellini v Adams [2011] WASCA 84
North East Equity Pty Ltd v Proud Nominees Pty Ltd [2010] FCAFC 60; (2010) 269 ALR 262
Pier (WA) Pty Ltd As Trustee For Isandi Trust v Jean Maurice Pty Ltd [2018] WASC 22
Pier (WA) Pty Ltd As Trustee For Isandi Trust v Jean Maurice Pty Ltd [No 2] [2018] WASC 23
Pier (WA) Pty Ltd As Trustee For Isandi Trust v Jean Maurice Pty Ltd [No 3] [2018] WASC 24
Potts v Miller [1940] HCA 43; (1940) 64 CLR 282
Professional Services of Australia Pty Ltd v Computer Accounting and Tax Pty Ltd [No 2] [2009] WASCA 183; (2009) 261 ALR 179
Skinner v Redmond Family Holdings [2017] NSWCA 329
KENNETH MARTIN J:
Introduction: liability already established against all defendants
These reasons concern an assessment of damages hearing conducted in the aftermath of the plaintiff obtaining judgment against all defendants under the terms of springing orders which issued in the underlying action. The springing orders took effect under orders extracted on 10 October 2017. There ensued a subsequent application by the defendants to extend time to enable compliance with my original orders. That application failed. Moreover, the first (corporate) defendant was placed in liquidation some time thereafter.
The background to the somewhat unique underlying circumstances surrounding the present action can be ascertained from the content of my written reasons issued earlier: see Pier (WA) Pty Ltd As Trustee For Isandi Trust v Jean Maurice Pty Ltd [2018] WASC 22, Pier (WA) Pty Ltd As Trustee For Isandi Trust v Jean Maurice Pty Ltd[No 2] [2018] WASC 23 and Pier (WA) Pty Ltd As Trustee For Isandi Trust v Jean Maurice Pty Ltd [No 3] [2018] WASC 24 (all published on 25 January 2018).
The current position, by reason of the springing orders which have taken effect and have not been set aside or otherwise varied under any extensions of time to enable compliance, is that liability has been established against all defendants in respect of the causes of action as articulated under the plaintiff's Amended Statement of Claim (ASOC). Those causes of action as against the two corporate defendants (Vendors) include damages for breach of contract, and as against all defendants include common law damages for the tort of deceit by the making of fraudulent misrepresentations and statutory compensation for misleading or deceptive conduct in trade or commerce (or conduct likely to mislead or deceive) contrary to s 18 of the Australian Consumer Law resulting in financial harm to the plaintiff.
As my prior reasons explain, the underlying civil dispute was essentially a simple one. It arose over the acquisition by the plaintiff of two businesses from the Vendors. Settlement on that acquisition transaction saw the plaintiff acquire the two businesses from the Vendors for $1.8 million, paid over on 26 August 2016.
Although the plaintiff initially sought to rescind the transaction completely, a short time after paying over the purchase price, it ultimately retained the businesses and sold them off at a loss in 2017. Now it essentially seeks damages and/or statutory compensation for deceit and statutory misleading or deceptive conduct against the defendants for its losses. The present assessment exercise is directed at the plaintiff seeking to prove, as it must, that it has established its financial loss and damage on this transaction as a direct causative consequence of the defendants' wrongful conduct about which it complains. The plaintiff must also prove on the balance of probabilities the quantitative level of the financial loss it claims to have suffered upon these various causes of action as against all defendants.
The liability of the defendants arising from the judgment obtained against them by way of springing orders in October 2017 extends to encompass liability conclusions not merely that the wrongful (mis)representational conduct occurred (namely the knowingly false misrepresentations, alternatively characterised under the tort of deceit or as statutory misleading or deceptive conduct) but also:
(a)the representations complained of were falsely made;
(b)there was an affirmative and material degree of reliance by the plaintiff upon that (mis)representational conduct leading it, in effect, to first enter into the binding business purchase contact with the Vendors, and then to settle on that acquisition on 26 August 2018 by outlaying $1.8 million to the Vendors for the acquisition of the two businesses as were then sold to the plaintiff; and
(c)but for the representational conduct (established as falsified and materially relied upon), the plaintiff would not otherwise have entered upon this loss‑making business acquisition transaction. In other words, the plaintiff would otherwise have either kept its outlaid purchase funds in a bank or, alternatively, would not have borrowed that level of funds in order to outlay them as the purchase price on this transaction.
By the ASOC, which stands uncontradicted by any defence, those matters are established by the plaintiff from a liability perspective against the defendants.
What remains for active determination upon the present assessment hearing is whether or not the plaintiff has proven on the balance of probabilities that the (mis)representational conduct of the defendants upon which it has relied has caused it to sustain any level of financial loss or damage and, if so, how much in a dollar amount.
Overview of the pleadings
By the ASOC, the plaintiff puts six claims against the Vendors and four claims against the first to fourth defendants (all defendants). The claims are pleaded as against Mr Franck Durolek in his capacity as a director of the Vendors and against Mrs Belinda Durolek as a director of the first defendant.
I reiterate that liability and reliance in relation to these matters are established. The present issue is purely one of assessment of the damages suffered by the plaintiff (if any). For the purposes of that assessment, the most relevant representational conduct relates to the grievances over the understatement of wages and the overstatement of revenue by way of franchise fees (also referred to by the plaintiff as 'royalties').
Understated payroll expenditure (wages)
By the plaintiff's ASOC at par 7, it pleads the defendants made the following representations as regards wages:
(a)the Vendors' wages were about $64,276 per month (at that rate $771,309 per annum) in an email from Mr Durolek to Mr Buitendag of 17 May 2016;
(b)the Vendors' wages between 1 July 2015 and 13 May 2016 were accurately stated in MYOB activity summaries, which were provided to the plaintiff's accountant, Mr Mezger;
(c)the wages of the bakery were $128,551.41 between 15 March 2016 and 15 May 2016 (at that rate $771,309 per annum) in Jean Maurice Pty Ltd's MYOB Profit and Loss Statement for the same period;
(d)the wages of the Vendors' businesses were $688,967 between 1 July 2015 and 13 May 2016 (at that rate $787,391 per annum) in the Vendors' MYOB Payroll Activities Summaries for the same period; and
(e)the wages of the Vendors' businesses significantly decreased upon the sale of the Hay Street and St Georges Terrace franchises in three emails, namely: an email of 1 April 2016 from Mr Durolek to Mr Buitendag, an email of 6 April 2016 from the Vendors' accountant, Mr Alessandrino, to Mr Buitendag and an email of 21 April 2016 from Mr Durolek to Mr Buitendag.
At par 8 of the ASOC, the plaintiff pleads that, in effect, the true position not told to it was that the Vendors' wages were in fact running at over $100,000 per month after March 2016 (ie, over $1.2 million per annum). The plaintiff further claimed that the Vendors' wages for some individual employees were understated within lists as provided by the Vendors and partly paid by other companies controlled by the defendants, including by Pave Lillois Pty Ltd and Jean Pierre Bakery Pty Ltd. These (mis)statements are proven as being false under the liability judgment.
Overstatement of franchise fees as revenue
By the ASOC at par 7, the plaintiff pleads the defendants made the following (mis)representations as regards franchise fees:
(a)the Vendors' franchise system was operating successfully;
(b)the franchise fees were being paid by the franchisees when due and payable; and
(c)franchise fees amounting to about $280,000 per annum could reasonably be expected from the Vendors' existing franchise network in an email of 6 April 2016 from Mr Alessandrino to Mr Buitendag and emails of 14 April 2016 from Mr Durolek to Mr Buitendag.
At par 8 of the ASOC, the plaintiff pleads the Vendors' franchise system was 'collapsing'. Specifically, it pleads that:
(a)of the five franchises, one was closed and three of the remaining four were threatening to close;
(b)three of the franchises, Hay Street, Northbridge and North Perth, ceased and refused to pay franchise fees; and
(c)the St Georges Terrace franchise was receiving partial reimbursement of franchise fees.
The plaintiff further pleaded at par 8 that there were no reasonable grounds to justify a representation that franchise fees amounting to about $280,000 per annum could reasonably be expected from the Vendors' existing franchise network. These representations are pleaded as being falsely made and as having been relied upon. This is also established.
The position of the second, third and fourth defendants under counsel's written closing submissions of 30 May 2018
It is important at the outset to record how the assessment of damages hearing proceeded from the perspective of the second, third and fourth defendants by their participation in this assessment hearing. I take these observations from their written closing submissions filed 30 May 2018. I will explain the position of the first defendant (in liquidation), later.
Specifically at pars 2(a), (b) and (c) the second, third and fourth defendants by their counsel submit:
(a)This matter has not gone to trial as there has been a consistent failure by the Defendants, particularly the 3rd Defendant [Mr Durolek] who runs the financial affairs of the Durolek family, to comply with numerous orders made by Your Honour over many months. Consequently, the issues between the parties have not been tested in open Court. Such issues include, the value of the business and whether the Plaintiff was misled etc.
(b)Quite extraordinarily, during the course of the disclosure of assets, for some inexplicable reason the 3rd Defendant took it upon himself not only to lie to the Court about the existence of gold ingots, but he proceeded to arrange for the forgery of a bank letter stating that the gold ingots not only existed but were held by the bank on behalf of the 3rd Defendant. What he expected to gain from this deception can only be imagined.
(c)Eventually, this all inevitably led to a springing order, which again was not complied with, and which in due course having sprung, resulted in the entry of judgement against all Defendants by default of compliance and, additionally the Defendants' Amended Defence struck out. (my emphasis in bold)
At par 2(g) of those submissions, the second, third and fourth defendants also say through counsel with equal candour:
Notwithstanding the unforgiveable and egregious faults and failures of the 3rd Defendant, it is respectfully submitted that these faults and failures should not be taken into account on the question of assessment of damages. (my emphasis in bold)
I accept that submission. It is for a plaintiff to prove its damages and, as I will indicate, the plaintiff has approached that task on the proper basis that it carries the burden of proof on the balance of probabilities. In the end, however, I do conclude that the plaintiff has established that it suffered loss and damage in a quantifiable amount that is fully attributable to it being caused by the (mis)representations of the defendants as complained of and in respect of which judgment for liability was obtained by the plaintiff in October 2017.
Position of the first defendant (in liquidation)
On 22 March 2018, I granted leave for the plaintiff to proceed with this action (ie, in effect, the assessment of damages) against the first defendant, Jean Maurice Pty Ltd, albeit it was then in liquidation. In the absence of any affirmative opposition expressed from the first defendant's liquidators, who I am satisfied had notice of the application for leave, I considered it appropriate to grant leave to the plaintiff to proceed in circumstances where judgment for liability was obtained against all defendants in October 2017.
The exercise of quantifying the first defendant's exposure at the assessment of damages hearing (along with all other defendants) seemed to me to deliver no prejudice to the insolvency administration of the first defendants. I thought it may assist for the court to quantify the first defendant's exposure to the plaintiff from a numerical perspective as regards the liquidator's consideration of the plaintiff's claims in that insolvency administration. There was, however, no affirmative participation in the assessment of damages hearing by the first defendant or its liquidators.
Sources of evidence at the assessment of damages hearing
Most of the evidence led at the assessment of damages hearing was adduced by the plaintiff. The exception to that was the expert evidence report and testimony led from the accounting expert called for the second, third and fourth defendants, Mr Trevor Monaghan. There was also an ad hoc document or two tendered by counsel for the defendants in cross‑examination of the plaintiff's witnesses.
The evidence of Isak Buitendag
Exhibits 1, 2 and 3 comprise the three witness statements of the plaintiff's director, Mr Isak Buitendag. Those witness statements are of 24 July 2017, 17 August 2017 and 22 November 2017 respectively. Exhibit 1, Mr Buitendag's main witness statement, contains 108 different attached documents, being attachments IXB-1 to I-XB108, across some 907 pages.
Mr Buitendag's main witness statement relates that in December 2015, he noticed the two businesses operated by the first and second defendants, trading respectively as 'Jean Pierre Sancho' and 'Le Petite Pierre', were for sale. He (through the plaintiff) was interested. To the extent that it is not already clear, I reiterate that Jean Maurice Pty Ltd operated a French wholesale bakery business, producing bread products and patisseries, trading as 'Le Petite Pierre'. Sancho Bakery Pty Ltd operated as a master franchisor of six retail café/patisserie outlets trading as 'Jean Pierre Sancho'.
Mr Buitendag learned that whilst separate, the two businesses were closely interrelated. There was an overlap in terms of activities performed by common staff for both businesses. Jean Maurice Pty Ltd's bakery business supplied wholesale customers throughout Western Australia. It also supplied bread products to the retail franchise stores trading under the 'Jean Pierre Sancho' banner. Sancho Bakery Pty Ltd at the time of settlement on the acquisition transaction (ie, 26 August 2016) was operating the retail shop at Joondalup itself, in the apparent expectation that it would be sold off to a franchisee in due course.
Hence there were five franchise stores and a Joondalup store operated by Sancho Bakery Pty Ltd. The franchise stores were located in Hay Street and St Georges Terrace in the Perth CBD, Northbridge, Dalkeith and North Perth. These stores were expected to purchase their bread products from the French wholesale bakery business operated by Jean Maurice Pty Ltd trading as 'Le Petite Pierre'.
After a stuttering start and an extensive due diligence period, the plaintiff finally committed to the purchase of both businesses for the purchase price of $1.8 million. That was under a written agreement of 28 May 2016. Settlement in respect of those acquisitions took place on 26 August 2016. However, as related by Mr Buitendag, there were problems right from the start, particularly given an unexpected departure from Australia of Mr Durolek, who Mr Buitendag had been expecting to be physically present to assist him over the six-week period after settlement. I accept that to be the case.
Mr Buitendag's main witness statement commences with his introduction to the two businesses via the advertisement which he saw in The West Australian newspaper in December 2015 and his liaison with a sales agent for the Vendors, Mr Martin Smoothy.
In that statement Mr Buitendag says that some financial information was provided to him from 10 December 2015 onwards by Mr Smoothy concerning essentially the profit and loss of the two businesses. In particular, the income stream from 'royalties' (ie, franchise fee payments) was expressed as the attractive figure of $230,311.52 (see par 9).
Mr Buitendag's interest led to him being introduced to Mr Durolek in person in mid‑December 2015. There followed a visit to the bakery premises at Osborne Park.
During February 2016, Mr Smoothy provided Mr Buitendag with more financial reports for the financial year ended 30 June 2015. They had been prepared by Mr Durolek's accountant, Mr Alessandrino. There was also more financial information provided - in the way of a cash flow budget for 12 months for Jean Maurice Pty Ltd and some more information about 2014/15 production figures.
In February 2016, Mr Smoothy and Mr Durolek met again with Mr Buitendag (see par 15). At this meeting Mr Buitendag was told expenses and costs would reduce because two of the stores were being converted from owner‑operated stores to franchises in March 2016.
Further enquiries by Mr Buitendag leading to more meetings with Mr Smoothy and/or Mr Durolek ensued. Equipment lists were provided, along with information about the costs of that equipment. Further sales information was also provided in February 2016 for the Dalkeith, Northbridge and North Perth stores (see par 19).
Mr Buitendag said that he felt comfortable enough to 'proceed with due diligence' towards the end of February 2016 (see par 22). As part of his ensuing due diligence exercise, Mr Buitendag now engaged his personal accountant, Mr Brett Mezger.
On 24 February, Mr Buitendag and his wife, Mrs Tandi Buitendag, signed an offer document that they provided to the Vendors' agent. This was for the purchase of both businesses at an indicative price of $2.3 million. Shortly thereafter, there followed a counter-offer from the Vendors at $2.55 million. Back and forth negotiations then ensued before a purchase price of $2.45 million was conditionally agreed upon. Mr Buitendag describes this as the basis for him to commence 'formal due diligence' (see pars 24 ‑ 28).
Throughout March 2016, various further requests for information and responses passed back and forth between Mr Buitendag and Mr Durolek, including the providing to Mr Buitendag of unsigned versions of franchise agreements for the Dalkeith, Northbridge and North Perth stores. This process revealed that the franchise fees for Dalkeith and Northbridge were calculated at 5% of sales. But the rate for the stores at North Perth, Hay Street and St Georges Terrace were calculated at 7%. Discussions ensued about the performances of these stores and looming franchise arrangements then about to be perfected for the stores at Hay Street, St Georges Terrace and Joondalup (see par 34).
By mid‑March 2016 Mr Buitendag was unhappy. He complained by email to Mr Smoothy about his requested provision of financial and other information, and described the provision of this information as 'spasmodic and delayed' (see par 37). Mr Alessandrino had then provided some information to Mr Buitendag concerning BAS statements for the two businesses (see par 40). There was also discussion about a looming reduction in overhead costs for the bakery business. Issues such as payroll tax payable upon the staff were live. A revised version of franchise agreements and historic financial reports, including a depreciation schedule and BAS statements, was then provided (see par 43).
At the end of March 2016, Mr Buitendag was still unhappy. He had made his own financial calculations for the businesses. By reason of unresolved issues which he said he discussed with Mr Smoothy and Mr Durolek (see par 40), he was having concerns about the suggested profitability of the businesses upon the figures which he had then been given (see par 45).
More communications ensued during early April 2016. On 6 April 2016, Mr Alessandrino provided an assessment of projected income for the two businesses. It was based on information provided by Mr Durolek, who was then estimating an additional $40,000 of further franchise fees - to be added to his previous estimate of annual franchise fees at the level of $230,311 (see par 50). The estimate of expected profits in the order of $1,024,506 was now given and this figure was suggested as being capable of verification under Mr Alessandrino's email of 6 April 2016 to Mr Buitendag (see par 51 and attachment IXB‑30). That document was one of the few areas which generated any level of cross-examination of Mr Buitendag at the assessment of damages trial. On my assessment, Mr Buitendag's answers to questioning in respect of that 6 April 2016 email were plausible and I accept his evidence, as I do generally.
By mid‑April 2016, Mr Buitendag was, nevertheless, still concerned over the financials of the two businesses. In an email of 15 April 2017 he told Mr Durolek that the actual present and historical performance of the businesses was critical. In effect, he was telling Mr Durolek that future projections were all very well, but he was interested in the proven past trading performance of the two businesses (see par 55 and attachment IXB‑32).
The topic of likely future franchise fees for the Jean Pierre Sancho business became the subject to further projections made by Mr Durolek (see par 57). Much of the correspondence was now passing directly between Mr Durolek and Mr Buitendag via email. Those emails essentially speak for themselves in an uncontroversial fashion. Mr Buitendag's accountant, Mr Mezger, was now also involved (see pars 56 ‑ 65).
After a disclosure of further financial information in mid‑May by Mr Durolek, Mr Buitendag decided to 'renegotiate the terms under which I would purchase the Businesses' (see par 66).
More telephone and email communications ensued. By 28 May 2016, a new purchase agreement was circulated (see par 69 and attachment IXB‑44). Further due diligence enquiries ensued in accordance with the new proposal. In early June 2016, Mr Mezger examined the financial information on MYOB files provided by Mr Alessandrino after numerous requests.
On 9 June 2016, there were some further monthly sales reports for the businesses made available by the Vendors through Mr Smoothy which extended over a two‑year period (see par 76). Issues over reconciliation of the MYOB bank account records then emerged through Mr Mezger to be resolved. More financial information was being called for, again via email from Mr Buitendag to Mr Durolek (see par 80).
However, Mr Buitendag still had concerns over the financial information provided as at 20 June 2016 and he complained to Mr Smoothy about what he had received (see par 82).
More communications ensued from Mr Durolek primarily via email into late June 2016. The 2016 financial year had ended but Mr Buitendag was still seeking financial information about systems and employee arrangements on 11 July 2016. His focus was now turning to the employees of the businesses. Mr Durolek responded by email on 12 July 2016 about the number of employees, their standard shifts and the implications of all of that for the future (see pars 92 ‑ 93). Again, the employees are essentially the subject of numerous emails passing between the parties.
On 19 July 2016, upon request by Mr Buitendag, Mr Durolek provided the June 2016 figures for the level of franchise fees, coffee sales and overall bakery sales (par 99).
On 21 July 2016, Mr Buitendag received Mr Mezger's final due diligence report, indicating a net profit of $1,178,710, projected for the businesses. On 23 July 2016, an Excel spreadsheet was provided by Mr Durolek listing the plant and equipment for Mr Buitendag's information. More emails were exchanged (see par 103).
On 26 July 2016, Mr Smoothy indicated to Mr Buitendag that a Joondalup franchise agreement might not be in place in time for settlement. Nevertheless, Mr Durolek suggested new franchise opportunities for possible franchises at Hilton, Mandurah and a second shop at Joondalup. On 12 August 2016, Mr Durolek confirmed that the Hay Street franchise was 'up to date with their payment'. Mr Buitendag was also receiving through Mr Smoothy advice that the Vendors were pressing for a settlement towards the end of August 2016 (see pars 104 ‑ 108).
In due course, a settlement was fixed for 26 August 2016. Settlement and payment of the purchase price of $1.8 million for the two businesses duly ensued on that date. A stocktake followed.
On 28 August 2016, Mr Durolek requested that Mr Buitendag not contact existing franchisees until he had an opportunity to discuss the change of ownership with them. Mr Durolek said he planned to do so on the morning of 30 August 2016 and to then introduce Mr Buitendag that afternoon (see par 124).
However, on 29 August 2016, Mr Durolek sent an email at 10.02 pm to Mr Buitendag with a list of items to be attended to. The subject of the email was 'Important to do'. Most items were transition to ownership matters (see par 125 and attachment IXB-82). At 10.08 pm, Mr Durolek sent a further email stating that he had to rush back to France on account of the asserted illness of his father (see par 126 and attachment IXB-83).
Mr Buitendag was somewhat surprised by that advice but also by some further information in Mr Durolek's email concerning issues with the franchisees.
Almost immediately on 30 August 2016, when Mr Buitendag arrived at the bakery premises in Osborne Park, he noted emails received from the Northbridge franchise. Those emails were sent from Ms Manning to Mr Durolek the previous day advising that her shop was not making money (see par 128).
On that same morning, Mr Buitendag and his wife learned whilst at the bakery premises that apart from two staff, Mr Courty and Ms Hebert, the staff were yet to be told about a change in ownership of the businesses. A meeting of all employees present at the bakery was then convened and the change of ownership discussed (see pars 129 ‑ 130).
There followed a telephone call between Mr Buitendag and Mr Durolek on 30 August 2016. Apart from franchise problems as advised in Mr Durolek's emails, Mr Buitendag related that 'I was becoming aware that the franchise problems were far more extensive' and that 'I was also aware that there were serious discrepancies with payroll' (see par 132).
There followed a meeting in person as between Mr and Mrs Buitendag and the franchisees of the Hay Street store, Mr and Mrs Jonescue (see par 133). They were also not told of the change of ownership. They did not know of Mr Durolek's sudden trip to France. They appeared to be upset as arrangements they said they had made with Mr Durolek were said to have been thwarted. According to Mr Buitendag (see par 135):
They said that they had been misled by Mr Durolek when they were conducting due diligence with [a] view to taking up the Hay street franchise.
According to the Jonescues, their sales were lower than they expected and their costs were significantly higher. They also said that certain costs had not been disclosed to them. Mr Buitendag learned that the Jonescues communicated formally by a letter to Mr Durolek ‑ requesting an 'annulment' of their purchase of the Hay Street franchise on 14 June 2016 (see par 187 and attachment IXB‑86). They also advised Mr Durolek on 15 August 2016 that they intended to cease trading at the Hay Street store on 28 August 2016 (see par 188 and attachment IXB‑87, page 692). All of this was fresh news to Mr and Mrs Buitendag.
Also on 30 August 2016, Mr and Mrs Buitendag met with Mr Gerard, the franchisee of the North Perth franchise. Mr Buitendag learned from Mr Gerard that he was involved in a long-running dispute with Mr Durolek and, importantly, that the North Perth shop had been closed for about a month prior. Mr Buitendag presented Mr Gerard with an assignment of franchise document to sign but Mr Gerard said it was of no interest to him in those circumstances (see par 141). The next day, Mr Gerard circulated an email to others in the Jean Pierre Sancho franchisee group expressing his frustration with Mr Durolek (see par 142 and attachment IXB-88).
At the same time, Mr Buitendag's evidence is that business suppliers were now advising him that they were not willing to continue to supply unless unmet accounts of Mr Durolek's companies were settled. One of these agreed suppliers/creditors was a significant supplier of fresh produce. The others were the local agents for bakery equipment installed in the businesses (see pars 143 ‑ 144).
By 2 October 2016, Mr Buitendag says that various assets of the businesses were ascertained by him as not in good condition and that repairs were required to significant production assets. There were also problems with a deck oven that could not be used and the stone decks in other ovens were found to be cracked, preventing normal operation. Mr Buitendag had now received advice from a bakery machine supplier and servicer that the deck oven was unusable and not worth repairing (see par 149). Deficiencies were identified in further equipment, including the mixers and in the refrigeration function of further equipment. Other equipment was defective, broken or unusable, according to Mr Buitendag. Moreover, three vans included as acquired assets of the businesses were also ascertained to be in very poor condition due to lack of maintenance (see pars 150 ‑ 154).
Of particular concern to Mr Buitendag was the position with the payroll costs of the employees of the businesses. This led to Mr Buitendag seeking payroll information from Mr Durolek (see par 155). According to Mr Buitendag, after receiving some more information from Mr Durolek's bookkeeper, Ms Hebert, about pay rates for employees, he became 'shocked to be confronted with the prospect of having to pay wages at those rates, which equalled $111,518.12 for the month (of July 2016) (including superannuation), equating to $1,338,217.44 per annum (including superannuation)'. Mr Buitendag said he did not previously have access to these records to verify those rates (see par 156).
Mr Buitendag says he learned through Ms Hebert and Mr Courty that they and a number of other senior employees of the businesses had been paid partly in cash. They told him they expected to continue to receive the same net payments. An existence of a cash payments regime to employees had not been revealed during the due diligence process. Mr Buitendag was concerned about payroll irregularities and what looked to be an understatement in the level of wages as a result of cash components in them. He then expressed these concerns to his accountant, Mr Mezger (see pars 157 ‑ 158).
Mr Buitendag also communicated those payroll understatement complaints to Mr Durolek. He received back confirmation that cash payments had, indeed, been made (see par 161 and attachment IXB‑97). Mr Buitendag had now obtained access to further electronic information stored in a Dropbox folder containing more documents about the operation of the businesses, which he had not seen up to that point. The scale of the cash payments to employees extended beyond three people. The practice of paying cash was, as he said, 'far more widely used' (see par 163).
In the MYOB business records provided in the due diligence period as assessed by Mr Mezger, he assessed the wages prior to settlement were approximately $15,165.95 per week in the period from 1 July 2015 to 13 May 2016. In fact, the wages of existing personnel were, as was now ascertained by Mr Buitendag, in the much higher order of $24,732.71 per week (see par 164). Contrary to any looming reduction in wages, as had been suggested as likely before settlement, the position immediately faced by Mr Buitendag while in possession of the two businesses was the exact opposite, even without a salary recorded in the MYOB records paid to Mr Durolek (see par 165).
The position now encountered, as explained by Mr Buitendag in his statement at par 168 was in these terms:
Since taking over at the end of August 2016, we had to take steps to greatly reduce staff numbers and, consequentially, our wages' costs. At settlement, about 30 people who were employed at the bakery were taken on by us. The wages' crisis meant that my wife, Tandi, and I had to work in the business seven days a week. We have managed to run those numbers down and now operate with the 20 or so employees we have maintained since about March 2017 … Fortunately, Ms Hebert and Mr Courty had ceased working for us by the end of November 2016.
Mr Buitendag relates that after settlement he gained limited access to some further wages records for the bakery. These were in the nature of payroll activity summaries for the financial year ending 30 June 2016. He assessed them as confirming that the payroll information given to him in respect of the Jean Maurice Pty Ltd business was both understated and inaccurate (see par 169).
Mr Buitendag relates that there were also some additional wage payments to bakery staff not disclosed to him and made by two of Mr Durolek's other companies until they were both placed in liquidation, namely, the corporations Jean Pierre Bakery Pty Ltd and Pave Lillois Pty Ltd. He stated none of this was disclosed to him or his accountant prior to settlement. Again, I accept that evidence, as I do generally from him.
Having dealt with a serious understatement of wages issue that he faced immediately upon assuming control of the two businesses in late August 2016, Mr Buitendag then elaborates on the position concerning the other major problem encountered by the plaintiff after settlement ‑ concerning a lack of franchise fee revenue from any of the franchise stores, save for Dalkeith. He relates the problem at par 172 as follows:
We bought and expected to find a franchise network of 5 shops with another (Joondalup) to come on stream by settlement. Instead, we ended up with shops which were struggling to pay for the goods we supplied. None of the franchisees (with the sole exception of [the] Dalkeith store) can pay any royalties, and they do not. Although royalties are billed, unpaid and collectable royalties amount to $120,629 after 308 days trading, to the end of June 2017.
Mr Buitendag explained that the North Perth franchise store had, as mentioned, closed about a month before settlement and in the months before that had paid no franchise fees. The Hay Street store had stopped paying franchise fees in June 2016. As earlier mentioned, the franchisee of the Hay Street store, Mr Jonescue, was disgruntled and had stopped paying franchise fees as of June 2016 (see par 173).
On 30 August 2016, Mr Buitendag met with a franchisee of the St Georges Terrace store, Mr Dhawan. He learned from him that there had been a long-running dispute with Mr Durolek over allegedly misleading financial information. Mr Dhawan told Mr Buitendag that he was losing money in the business and was not in a position to go forward. At a subsequent meeting with Mr Dhawan and his co‑franchisee, Mr Taneja, in mid‑September 2016 (also attended by Mr Smoothy), Mr Dhawan told Mr Buitendag that Mr Durolek had been providing financial assistance to them prior to settlement. Some documents were provided to verify that assertion (see pars 179 ‑ 180).
There were also problems with the Northbridge franchise. Mr Buitendag relates it closed on 26 August 2016 and had not paid any franchise fees for about a year before that. The Hay Street franchise was also threatening to close. It had stopped paying franchise fees in June 2016. The St Georges Terrace franchise was operating under arrangements with Mr Durolek by which the franchisees had been receiving a reimbursement of franchise payments made at the rate of $1,000 per week. None of that was disclosed to Mr Buitendag prior to settlement or before Mr Durolek decamped for France. As mentioned, the Joondalup store had never become a franchisee (see par 181).
Mr Buitendag relates that both acquired businesses in practical terms ran at a loss since settlement on 26 August 2016. He and his wife worked more than full-time to manage both businesses and without salaries once they assumed control (see par 182). Taking account of depreciation (see par 183(3)), Mr Buitendag's evidence is that the financial scenario for the businesses after settlement was one of loss throughout the period to 30 June 2017.
Mr Buitendag said that he and his wife now found it necessary to sell their home to rid themselves of the borrowings they had undertaken to buy these two businesses (see par 184). An evaluation of the businesses' assets made by Gregsons Auctioneers and Valuers as at 10 June 2016 gave the assets an auction value of $183,000, or a market value of $323,100 (both GST exclusive) (see par 185).
As mentioned, Mr Buitendag provided two subsequent witness statements, which became exhibits 2 and 3. Exhibit 2 was his responsive statement prepared in response to exchanged witness statements of Mr Durolek, Mrs Durolek and Mr Alessandrino during the interlocutory phases of the action. However, as has been related, none of those persons in the end gave evidence at the assessment of damages hearing. Hence, it is unnecessary to relate the content of the responsive statement joining issue against evidence that was never led.
Exhibit 3, Mr Buitendag's supplementary (final) statement of 22 November 2017, did elicit some level of cross-examination as regards his attachment IXB-29A, which he referred to at par 14 in terms:
On 4 April 2016, I emailed Mr Smoothy and Mr Durolek a copy of the spreadsheet I had already provided to them in hard copy on 30 March 2016. That email is attachment IXB-29 in my Previous Statement. The attachment IXB-29 was incomplete and only shows one table. Attached hereto and marked 'IXB-29A' is a complete copy of the spreadsheet containing all tables.
Attachment IXB-29A was initially produced in such small print it was essentially unreadable. However, a larger copy was provided at the hearing and it became Aide Memoire 1. The document was the subject of questions to Mr Buitendag in cross-examination. None of that detracted from the overall force of Mr Buitendag's evidence, which essentially stands uncontradicted and, I reiterate, I accept as reliable.
The thrust of Mr Buitendag's evidence is in conformity with the two major fraud (ie, tort of deceit) and misleading and deceptive conduct representational grievances articulated in the plaintiff's ASOC. The first tranche of misleading representations concern an understatement of wages for the employees of both businesses. The second tranche concern the as foreshadowed future franchise fee revenue streams from franchisees - in circumstances where the reality, which must have been well-known to the defendants, was that only the Dalkeith franchise store was reliably remitting franchise fees.
None of that was revealed to the plaintiff prior to settlement, as it should have been. These were materially false misrepresentations deliberately or recklessly made or, as alternatively described by the ASOC, were conduct that was misleading or deceptive conduct (or conduct likely to mislead or deceive) in trade or commerce by the Vendors. Mr Durolek was knowingly concerned and party to the statutory misleading and deceptive conduct, and so was Mrs Durolek.
Furthermore, it is plain that the misleading and deceptive conduct had the effect of causing the plaintiff to enter into and then to complete upon this transaction at the eventual settlement on 26 August 2018. The plaintiff thereby suffered loss and damage at that date when, in fact, the true value of the businesses and assets acquired was likely to be well below the $1.8 million as outlaid by the plaintiff in their acquisition.
Prima facie, the correct measure of the plaintiff's loss is the difference as between the position it would have been in had it not entered this transaction and the position in which it ultimately found itself, after settlement on 26 August 2016.
Applying orthodox principles, the plaintiff's financial loss is the difference between $1.8 million less credit for the benefit of the true value of the businesses it acquired at that time. The true value was the subject of expert evidence at the assessment of damages hearing. It will be remembered that after running the businesses for some months, Mr Buitendag put them back on the market at the end of 2016 in an effort to recoup losses. In the end, the plaintiff ran the businesses for only 10 months. It then sold them for around half a million dollars in July 2017. I am of the view that the half a million dollars obtained in July 2017 supports a lesser true value of the businesses when acquired as at 26 August 2016. To those losses will be added any consequential losses and interest.
There was some brief cross-examination directed at Mr Buitendag concerning attachments IXB-29 (pages 419 - 420), IXB‑40 (pages 456 ‑ 457), IXB-97 (pages 717 - 719) and at IXB-106 (pages 870 - 871) (see also exhibit 7). However, none of the cross‑examination directed at Mr Buitendag detracted from the core fundamental facts as established at this hearing, namely:
(a)that false, misleading and deceptive (mis)representations as regards elevated business revenue (due to a predicted receipt of ongoing franchise fee payments which were in fact never going to be received) and understated wage commitments to the businesses' staff (which gave an understated impression to the plaintiff of the true level of the businesses' ongoing wages expense liability) were made to the plaintiff by the defendants;
(b)that the plaintiff through Mr Buitendag had relied upon those (mis)representations in the plaintiff's ultimate proceeding to enter into a binding contract to purchase the business and then to settle on that contract on 26 August 2016; and
(c)that the conduct above ultimately caused financial loss to the plaintiff, in circumstances where it is to be strongly inferred it would never have entered or completed upon this business acquisition transaction had it been properly appraised of the true position concerning likely levels of diminished revenue and elevated wages expenses. Instead the plaintiff would have kept its money in the bank or not borrowed in order to complete on this transaction.
The issue of substance that arises on the present assessment of damages is what was the true value of these two businesses at the time when they were acquired at settlement by the plaintiff on 26 August 2016. That true value amount as ascertained and quantified will be subtracted from the plaintiff's outlaid purchase price of $1.8 million. That in effect allows the appropriate credit for the true value of the benefit of the businesses as received by the plaintiff. What then is the dollar value of the plaintiff's financial loss?
Mr Buitendag was cross-examined about his supplementary witness statement of 22 November 2017 (exhibit 3) as regards its attachment IXB-29A (pages 11 - 14). He explained therein how he came to prepare that document (see par 14 of his statement). Mr Buitendag's document appears to be his effort in an attempt to satisfy himself about matters of revenue and expenditure during a pre‑settlement due diligence process ‑ prior to acquisition of the two businesses. Clearly, he is an experienced and sophisticated businessman who is familiar with the operations of small business and at times had considerable reservations about completing upon the two acquisitions. Yet he was misled. Again, the cross‑examination directed at Mr Buitendag about this document did not detract from any of the fundamental facts I identified above as being established.
Given that liability is established under my springing orders of October 2017, the thrust of the questions directed at Mr Buitendag in cross‑examination seemed to attempt to challenge him on the basis of his suggested non‑reliance upon false or misleading representations upon which the plaintiff's causes of action under its ASOC were grounded.
However, I am in the end, satisfied that the persuasiveness of the (mis)representations and their impenetrable pre‑settlement opacity were material influences upon which Mr Buitendag relied in his causing the plaintiff to ultimately settle upon these business acquisitions - a decision he clearly regretted in due course after settlement.
Exhibits 4 to 11 were further ad hoc exhibits tendered through Mr Buitendag during the course of the trial. Exhibits 10 and 12 were tendered by counsel for the second, third and fourth defendants during Mr Buitendag's cross-examination.
The evidence of Brentleigh Mezger
The second lay witness called on behalf of the plaintiff at the assessment of damages hearing was the plaintiff's accountant, Mr Mezger. His primary witness statement of 24 July 2017 became exhibit 13. His responsive witness statement of 17 August 2017 and supplementary witness statement of 21 November 2017 are exhibits 14 and 15, respectively. There was numerous documentation attached to Mr Mezger's primary witness statement under attachments BGM-1 to BGM-40 across 613 pages of evidence.
A brief cross-examination was directed at Mr Mezger concerning a report, which is attachment BGM-38 (pages 595 ‑ 597), and BGM-40 (pages 609 ‑ 613) of exhibit 13. It is unnecessary to recount that cross‑examination as it did not detract from the established underlying fundamental facts of the plaintiff's case identified above. I accept Mr Mezger's evidence in full.
The evidence of Paul Ward
A third lay witness called by the plaintiff was Mr Paul Ward. He was briefly cross‑examined on his witness statement of 24 July 2017 (exhibit 12). The thrust of Mr Ward's evidence was from the industry perspective of his engagement in the auction and valuation industry in Western Australia for some 35 years. He has been employed by Gregsons Auctioneers and Valuers since 1982.
Mr Ward was engaged by ANZ Banking Group on 6 August 2016 to provide a valuation report in relation to the bakery equipment and motor vehicles of the Jean Pierre Sancho bakery business in Osborne Park. He duly carried out an inspection of the assets and prepared an itemised valuation report of 8 August 2016. He attributed a gross auction value of $183,000 and a market value of $323,100, exclusive of GST, to the identified assets.
Mr Ward's evidence and opinions are, on my assessment, thoroughly reliable. His evidence is relevant to components of the plaintiff's accounting expert's report: see Ms Nadine Marke's expert accounting report of 8 March 2018 (exhibit 16).
The residual exhibits at the hearing (16, 17 and 18) comprise the expert reports of the parties' accounting experts. Their evidence was heard concurrently. I deal with that expert accounting evidence later in these reasons.
Assessment of damages
The plaintiff did not rescind
I reiterate the plaintiff's claim is for damages incurred in respect of the business acquisition transactions which it committed to by contract and then settled upon on 26 August 2016 with an outlay of $1.8 million in purchase price paid. At a point after 28 August 2016, it did then appear that the plaintiff had then sought to rescind the whole transaction. However, that did not occur.
The plaintiff pleads its reliance upon the identified (mis)representations (as defined under par 7 of its ASOC claim) under par 10. It then pleads generally at par 13 that by reason of preceding matters, including the falsified representations upon which it asserts it relied, that it suffered and continues to suffer loss and damage (par 13).
The basic facts concerning the plaintiff's conduct after 26 August 2016 relevant to its claim for damages are not in dispute. The following facts are established.
Once Mr Buitendag realised the magnitude of the businesses' problems after settlement, particularly the understated wages liability and a likely diminution of anticipated revenue from franchise fees paid by franchisees (save for Dalkeith), he took steps to cause the plaintiff to sell off the businesses from about December 2016.
Eventually, a conditional contract was entered for the sale of the businesses by the plaintiff. That was on 1 May 2016 (see par 48 and attachment IXB‑112 of exhibit 2). The on‑sale of the businesses was completed by a settlement effected on 31 July 2017. That event saw the plaintiff receive $520,000 - a sum inclusive of the stock of the businesses. After the expenses of sale in the amount of $14,459.15, the plaintiff would allow a credit to the defendants for a receipt of $505,540.85 at 31 July 2017.
In effect, the plaintiff says that the above realised figure is the result of a negotiated arm's length sale. Hence it is said to be a reliable guide to the true value of the businesses when the plaintiff acquired them by committing to the second purchase contract on 28 May 2016, or when it settled on that transaction at 26 August 2016.
The plaintiff says there is no evidence that the net sale price it received in 2017 was depreciated by subsequent or supervening events occurring after it had settled upon and taken possession of the businesses on 26 August 2016. As I will explain, notwithstanding that submission I have reached the view that Ms Marke's valuation calculation for the true value of the acquired businesses as at 26 August 2016, rather than the realised on‑sale price achieved in 2017, is the better valuation figure to use in this calculation of the plaintiff's damages.
Damages assessment principles
By selling off the acquired businesses in 2017, the plaintiff ultimately did not pursue rescission as against the defendants - no doubt for commercial reasons. It claims that the measure of its loss is the difference between the price it outlaid for the two businesses at settlement on 26 August 2016 (namely, $1.8 million plus stamp duty and conveyancing costs), less the true value of the businesses it acquired. The approach reflects a long established Potts v Miller approach to assessing damages: see Potts v Miller [1940] HCA 43; (1940) 64 CLR 282, where Dixon J, after referring to Lord Campbell's reasons in Davidson v Tulloch (1860) 3 Macq 783, 790, said at 297:
The measure of damages in an action of deceit consists in the loss or expenditure incurred by the plaintiff in consequence of the inducement upon which he relied, diminished by any corresponding advantage in money or money's worth obtained by him on the other side. Lord Campbell's statement means that where the corresponding advantage consists in shares their value should be ascertained as at the time of their acquisition.
Dixon J continued at 298:
The reason given for the rule is that, if, after the date of purchase, the thing which the plaintiff was induced to buy loses in value owing to accidental or extrinsic causes, that loss is not a reasonable consequence of the inducement.
'It is not enough to say that but for the misrepresentation or fraud the purchaser would never have bought, and therefore would not have lost the thing bought. To recover back the whole price, if the thing had any value when bought, he must be in a position to rescind the bargain and replace it, which here the plaintiff is not, as it is not in his power to make the company take back the shares, or in the power of the company to resume them.
If a man is induced by misrepresentation to buy an article, and while it is still in his possession it becomes destroyed or damaged, he can only recover the difference between the value as represented and the real value at the time he bought. He cannot add to it any further deterioration which has arisen from some other supervening cause.' (per Cockburn CJ in Twycross v Grant (1877) 2 CPD, at p 544.)
In assessing the true value of the assets or property acquired under the influence of the tort of deceit, or by statutory misleading or deceptive conduct, it is permissible to use facts or knowledge arising from subsequent events in that evaluation: see the observations at 299 - 300 in Potts v Miller and later, the High Court's decision in Kizbeau Pty Ltd v WG & B Pty Ltd [1995] HCA 4; (1995) 184 CLR 281, as explained by Beech J in Caffey v Leatt‑Hayter [No 3] [2013] WASC 348 [420] ‑ [426], and see also [365] - [368].
The Potts v Miller approach to the assessment of damages or statutory compensation in a misleading and deceptive conduct claim was applied very recently by McDougall J in the Supreme Court of New South Wales. See Evolution Traffic Control Pty Ltd v Skerratt [2018] NSWSC 49, where his Honour said at [106]:
Evolution's loss is, therefore, the sum of $10 million, less the true value of the shares at the time of their acquisition. In other words, I think, this is a case where damages fall to be calculated on the Potts v Miller basis, giving credit for any benefits gained after completion.
There must of course be some loss proved as suffered by the conduct complained of. In Marks v GIO Australia Holdings Ltd [1998] HCA 69; (1998) 196 CLR 494 the plurality (McHugh, Hayne and Callinan JJ) said this at [49]:
It is necessary, then, to determine whether the value of what was acquired is less than what was paid. How is the value to be assessed? It is to be assessed objectively, not according to what either or both the parties to the contract believe that it would obtain from the contract. That is, the value of what in fact was acquired is to be identified according to what price freely contracting, fully informed parties would have offered and accepted for it. It is only by comparison with the value assessed in this way that there can be an assessment of whether the party that is misled could have obtained some greater benefit or incurred less detriment. What is important is what that party could have done, not what it might have hoped for or expected. (my emphasis in bold)
Their Honours in Marks v GIO proceeded to provide examples to illustrate that point. They said:
[50]If a person agrees to pay $50,000 for goods which the vendor falsely represents are worth $100,000 but which are, in fact, worth $50,000, what loss has the purchaser who is misled suffered by agreeing to buy (assuming no more is known)? …
[51]The reason that neither of these persons suffers a loss is that viewed objectively each obtained rights having a value (a value determined objectively) at least equal to what is paid for those rights. It is only if some alternative (less detrimental or more beneficial course) were available, that it can be said that the contract which was made was less valuable to the party that was misled than had been represented - for it is only then that a comparison of value can be made. (my emphasis in bold)
For the present case, the plaintiff contends it suffered a loss because it outlaid $1.8 million to purchase the two businesses when their true value was substantially less. It relies on the ensuing on‑sale in 2017 of the businesses under a contract entered into in May 2017 (then settled in July 2017) as a reliable and true indicator of the real value of these businesses for when it settled on 26 August 2016.
On my assessment, an objective exercise is required for this plaintiff to prove the true value of the businesses it acquired. The exercise should first of all be temporally focused at the date of settlement (ie, 26 August 2016). It was on that day that the plaintiff outlaid its purchase price of $1.8 million. In return it then received the business assets acquired at that time. It is true that an ensuing on‑sale price obtained in 2017 for those business assets is one indicator of the true value of the businesses as at 26 August 2016. But there is also other evidence available to me from the plaintiff's expert accountant that is directed specifically at true value on 26 August 2016. I prefer that evidence, which indicates a slightly higher true value at the settlement date in 2016.
As regards the exercise of a plaintiff proving its loss and damage under a purchase transaction that has been influenced by misleading and deceptive conduct, I also note the following observations made by the plurality in Marks v GIO at [55]:
Ordinarily this will present the plaintiff with no difficulty. It would be rare that the difference between what was represented and what was given will not be reflected in some difference in value or other manifestation of actual loss to the party that was misled either now or in the future. But if it does not, we consider that neither s82 nor s87 relief is available. (my emphasis in bold)
See also the observations of Gleeson CJ in Henville v Walker [2001] HCA 52; (2001) 206 CLR 459 at [28], referring to and applying the earlier observations of Gibbs CJ in Gould v Vaggelas [1985] HCA 75; (1985) 157 CLR 215, 221 - 222. There it was said:
If the purchaser, besides paying more for the business than it was worth, has suffered additional losses which resulted directly from the fraud he ought to be compensated for them.
In Caffey v Leatt-Hayter [No 3], in applying the principles I have now canvassed for a misleading and deceptive conduct case, Beech J said at [363]:
Where the misleading conduct is found to have been a material cause of the acquisition of an asset by the plaintiff, a conventional measure of damage, perhaps the general rule, will be the difference between the price paid and its true value at the time of acquisition.
See also Professional Services of Australia Pty Ltd v Computer Accounting and Tax Pty Ltd [No 2] [2009] WASCA 183; (2009) 261 ALR 179 [101]; Morellini v Adams [2011] WASCA 84 [41]; and North East Equity Pty Ltd v Proud Nominees Pty Ltd [2010] FCAFC 60; (2010) 269 ALR 262 [136].
The parties' expert accounting evidence and expert reports
The plaintiff relied upon the expert report of Ms Nadine Marke of RSM Australia Pty Ltd of 8 March 2018. It became exhibit 16. The second, third and fourth defendants adduced two expert reports from Mr Trevor Monaghan of Climax Business Valuations (chartered accountants) of Charlestown, New South Wales. Exhibit 17 is Mr Monaghan's business valuation report of 3 May 2018. Exhibit 18 is a further report by Mr Monaghan also of 3 May 2018, under which he offers comments following his review of the report of Ms Marke.
The evidence of the parties' accountants was given and received concurrently on 23 May 2018. At the outset, I should say that I prefer the expert report and evidence of the plaintiff's expert, Ms Marke, as the more reliable. She, unlike Mr Monaghan, performed her calculation of a true value of the acquired businesses directed as at 26 August 2016. But Mr Monaghan did not attempt that exercise, considering that he lacked enough reliable data for it to be performed for the 2016 settlement date.
At par 6.74 of exhibit 16, Ms Marke concluded:
My assessed valuation of the business which Pier acquired at 26 August 2016 consists of the sum of parts valuation of the:
6.74.1Wholesale bakery business trading as 'Le Petite Pierre'; and
6.74.2Master franchise of 'Jean Pierre Sancho' with the following franchised outlets in operation:
•Hay Street (although I am instructed no royalties were being received);
•St Georges Terrace (although I am instructed no royalties were being received);
•Dalkeith; and
•Northbridge (which closed on or before 29 August 2016).
6.75My assessed value of the overall business at 26 August 2016, based on the reported net asset position of Jean Maurice at 31 December 2015, is in the range of $805,950 to $816,950 with a preferred midpoint of $811,450.
6.76My alternative valuation of the overall business as at 26 August 2016 based on the terms of the sale agreement is in the range of $473,100 to $484,100 with a preferred midpoint of $478,600.
Ms Marke's conclusion as to her valuation of the business sold at 31 July 2017, on a basis of net assets on a going concern valuation basis, was $513,650 (see par 7.39). That figure broadly aligns to the amount actually realised at the on‑sale (before expenses), namely, $520,000.
Ms Marke's report valued the wholesale bakery business as at 26 August 2016 at $670,951 on a net assets going concern basis (see pars 2.13 to 2.14 at pages 7 to 8). Her assessment of value of a capitalisation of earnings methodology was $nil. Her valuation of the franchise business was at $140,500 (see par 6.73 at page 31) deriving together the overall value of $811,450.
For the second, third and fourth defendants, Mr Monaghan was instructed to value the businesses 'at the date of settlement', namely 26 August 2016 (see pages 56 and 59 of exhibit 17). However, Mr Monaghan did not undertake such an exercise as he was of a view that his instructions did not provide him with sufficiently recent financial information on which he could rely to value the businesses at 26 August 2016 (see pages 3 to 4 of table 1, exhibit 17). Instead, he only provided a valuation of the two businesses at an enterprise value as at 30 June 2015. Using a capitalisation of earnings method, he had derived a figure of $2,139,382 (see page 3, table 1, and page 24, table 3 of exhibit 17).
Objection was taken against the receipt of Mr Monaghan's reports (exhibits 17 and 18) on the basis that his opinions were in part based upon facts that had not been established. There is substance to that criticism. Mr Monaghan seemingly obtained a considerable amount of information which he relied upon in preparing his report by way of direct instructions received from Mr Durolek. That was via a business valuation questionnaire and some answers and documents as referred to in that questionnaire (see pages 61 to 83 of exhibit 17). See further Mr Durolek's comments provided to Mr Monaghan under a heading 'Anything Else Relevant' at pages 84 to 86 of exhibit 17.
Mr Monaghan also appears to have been provided with extra information by his instructing solicitors, ABMS Lawyers (see their letter to him of 10 April 2018, reproduced at pages 56 to 60 of exhibit 17). But matters referred to in the second page of that letter under items F and G, for instance, were not established by evidence adduced at this hearing. That is a problem for his report.
Mr Monaghan also appears to have acted on some further assumptions not established by the evidence. For convenience, I refer to examples provided in footnote 133 of the plaintiff's outline of closing submissions of 6 June 2018 in that regard, namely that:
(a)he assumed that the wholesale business was not charging the retail stores for goods supplied (ts 492, 496 ‑ 497);
(b)he assumed that a buyer of the businesses could reverse structural changes by going back to running individual stores (ts 445 and 448);
(c)he assumed that Mr Durolek paid, or intended to pay, franchise fees for Joondalup (ts 533);
(d)he assumed that the Duroleks' business had a reputation in France (ts 436); and
(e)he assumed the Duroleks' business had a 'reputation that a lot of other businesses would kill for' and factored that into his capitalisation multiple (ts 538).
Fundamentally, I accept that Mr Monaghan's expert accounting report suffers two fatal flaws. First, it relies upon unreliable and unestablished evidence as was provided to him directly by Mr Durolek via the business valuation questionnaire. Second, it does not provide any valuation as at the required and most relevant valuation date, namely, as at 26 August 2016. In comparison, Ms Marke made assumptions that were fully established by the evidence. Ms Marke valued the two businesses at relevant dates including, most materially, as at 26 August 2016. She exposed the basis of her reasoning in reaching her valuation conclusions for the two businesses, which I accept as valid. Hence I prefer her evidence over that of Mr Monaghan.
Moreover, I find it was reasonable for Ms Marke to use the 15 March to 15 May 2016 MYOB accounts of the Vendors as part of her calculations and assessments. Those accounts came into existence when the businesses were being run by the defendants and at a point after the closure of retail shops that were effectively sold off to the new franchisees.
As Ms Marke said in response to an attempted criticism under cross‑examination for her having had regard to those MYOB accounts, they were the same financial documents as actually provided by the defendants to the plaintiff prior to the 2016 settlement. Since this was the defendants' provided financial information, there was no good reason for it to be ignored. I accept that reasoning. Ms Marke also properly took into account the actual resale price obtained when Pier WA resold the businesses in 2017 under the contract of sale that settled on 31 July 2017 as a relevant consideration (ts 460 - 461). Again, I agree.
Mr Monaghan provided his valuation as at 30 June 2015. But, by my assessment, the businesses as run by the defendants' Vendors fundamentally changed after that time, when franchise stores were sold off. Hence, a valuation done at 30 June 2015 is interesting, but not particularly helpful or insightful to an exercise of ascertaining the true value of the businesses as at 26 August 2016 (see ts 456 - 457 and ts 559).
In short, I prefer the reliability of Ms Marke's valuation approach and I accept and prefer her evidence over that of Mr Monaghan.
It remains then to assess the plaintiff's damages having regard to that evidence and my findings.
Calculation of plaintiff's damages
I am of the view that the exercise of ascertaining the true value of what was actually obtained by the plaintiff is to be undertaken as at 26 August 2016. Notwithstanding that I was urged by the plaintiff to primarily use the net sale price as was derived in June 2017 by the on‑sale of the businesses and a resulting figure of $505,040.85. I do not think that is the correct approach. Instead I am of the view that I should use the higher valuation figure derived by the plaintiff's expert Ms Marke of $811,450 (rounded), as it is more proximate in time to the settlement date than the amount as was realised in 2017 for the on‑sale of the businesses (although that figure is relevant to consider and does provide some support and affirmation for the end valuation amount as derived by Ms Marke at the earlier 2016 settlement date).
In short, the assessment of damages calculation should be as follows:
Purchase price of businesses outlaid by plaintiff as at 26 August 2016
$1,800,000.00
Add stamp duty
$ 84,297.50
Add conveyancing costs
$ 1,800.00
Total amount outlaid by plaintiff at settlement in August 2016
$1,886,097.50
Less the true value of businesses when acquired as at 26 August 2016 as ascertained by Ms Marke
$811,450.00
Subtotal
$1,074,647.50
Add conveyancing costs incurred on resale of business by plaintiff in July 2017 as direct consequential loss (exhibit 9)
Subtotal
$ 14,459.15
$1,089,106.65
Add statutory interest at 6% pursuant to s 32 of the Supreme Court Act 1935 (WA) running on the subtotal amount of $1,074,647.50 from 27 August 2016 and on the amount of $1,089,106.65 from 1 August 2017
To be calculated
These reasons will be provided to the parties. That will enable a final figure inclusive of the interest calculation to be reached and for issues of costs to be addressed.
Essentially, however, the plaintiff has succeeded at this assessment of damages hearing in establishing its entitlement to the amount of $1,089,106.65 as against all defendants. Extra interest pursuant to s 32 of the Supreme Court Act remains to be calculated. The plaintiff as the successful party should also receive its taxed costs of the exercise in establishing its damages in those amounts in the face of the resistance of the second, third and fourth defendants.
There was a closing submission made to me by senior counsel for the plaintiff concerning s 87CD of the Competition and Consumer Act 2010 (Cth) upon a late question of whether this was an apportionable claim as between the defendants (see ts 577). The submission was put by reference to the reasons of Gleeson JA (to which Barrett AJA and Macfarlan JA agreed) in Skinner v Redmond Family Holdings [2017] NSWCA 329: see [152] - [171]. However, for the present case, I conclude that the liability of all the defendants for the representations as pleaded in the ASOC is joint. In those circumstances, I would not attempt to distinguish as between the liability of any of the defendants within the present litigation.
I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
TG
RESEARCH ASSOCIATE TO THE HONOURABLE JUSTICES KENNETH MARTIN AND CORBOY2 JULY 2018
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