Platz, S. & H. v Creatives Landscape Design Centre P/L
[1989] FCA 229
•12 MAY 1989
Re: STEFAN PLATZ and HELGA PLATZ
And: CREATIVE'S LANDSCAPE DESIGN CENTRE PTY LTD; ZINCO PTY LTD;
WILLIAM KOCHERGEN; AL KOCHERGEN and WILLIAM ALEX KOCHERGEN
No. 4 of 1987
FED No. 229
Trade Practices - Remedies - Interest
COURT
IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
Fisher J.(1)
CATCHWORDS
Trade Practices - misleading or deceptive conduct - person involved in contravention - whether knowledge of the essential facts. Trade Practices Act s.75B
Remedies - equity - contract voidable ab initio - rescission - time of rescission - whether subsequent affirmation - delay in electing to rescind - when evidence of misrepresentation first available - whether restitution possible - whether goodwill diminished.
Remedies - Trade Practices Act ss.82, 87 - retrospective variation of rental - valuation evidence - price paid for stock refunded less allowance for use.
Interest - compound interest not appropriate - simple interest allowed on refunded purchase price - no interest on excess rent.
Trade Practices Act ss.52, 75B, 82, 87.
HEARING
ADELAIDE
#DATE 12:5:1989
Counsel for the applicants : Mr. M. Hoile
Solicitors for the applicants : John Goldberg & Co.
Counsel for the respondents : Mr. J. Mansfield Q.C.
Mr. B.M. Bowler
Solicitors for the respondents : Hume Taylor & Co.
ORDER
The agreement between the applicants and the respondent Creative's Landscape Design Centre Pty. Ltd. dated 16 July 1985 be set aside as void ab initio.
Memorandum of Lease No. 6116715 and Memorandum of Underlease No. 6131602 both dated 16 July 1985 be set aside as void ab initio.
The first and third respondents do pay to the applicants the sum of $213,800.
The second and third respondents do pay to the applicants the sum of $100,000.
The claim against the fourth and fifth respondents be dismissed with no order as to costs.
The first, second and third respondents do pay to the applicants their costs of the proceedings, the same to be taxed if not agreed.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
JUDGE1
On 1 February 1989 I delivered reasons and made findings of misleading conduct and thus a contravention of s.52 of the Trade Practices Act 1974 on the part of the respondent Creative's Landscape Design Centre Pty. Ltd. ("Creative's"). I also found that the applicants Stefan Platz and Helga Platz ("Mr. & Mrs. Platz") relied upon that conduct in entering into an agreement for sale and purchase and two leases of a retail garden centre. I gave no consideration in my reasons to the nature and extent of the relief which was appropriate to order in favour of Mr. & Mrs. Platz and against which of the respondents. In the interim I have heard submissions from counsel on these topics on behalf of their clients. I shall deal in the first instance with the involvement of the various respondents, other than the respondent Creative's.
Zinco Pty. Ltd. ("Zinco") is the registered proprietor of the bulk of the land upon which the garden centre is situated. Creative's is the lessee of the balance of the land. On 16 July 1985 Zinco executed a lease at an annual rent of $71,750.04 and Creative's executed a sublease at an annual rent of $6,260.04 in each instance in favour of Mr. & Mrs. Platz. Zinco was incorporated by the Kochergen family to act as trustee of discretionary trusts and its directors at the relevant time were the same persons as were directors of Creative's, namely the respondents Mr. Bill Kochergen, Mr. Al Kochergen and Mr. William Alex Kochergen. From the outset Mr. & Mrs. Platz were informed, first by Mr. Middleton and subsequently by Mr. Bill Kochergen, that the rent payable for the garden centre was not negotiable and was $78,000 per annum together with outgoings. On neither of these occasions nor at any time thereafter was any step taken nor separate reference made to differentiate between the two companies and their separate existence as lessors. In this regard reference can be made to the advertisement of 2 June 1985, the valuation of 3 December 1984, the letter of intent of 6 June 1985 prepared by Mr. Middleton for signature by Mr. & Mrs. Platz and the letter of acceptance of 7 June likewise prepared by Mr. Middleton. In the latter document Zinco was stated to be "the Director's Nominee Company" which was selling the fittings and fixtures. However this statement was acknowledged to be inaccurate in that the fittings and fixtures were not owned by Zinco. At no time during the negotiations did Mr. Bill Kochergen indicate that he was speaking on behalf of one or the other company and in my opinion he must be taken to be negotiating as a director on behalf of each of the two companies. Sub-section 84(2) of the Act has relevance in this regard. Furthermore the misleading figures produced by Mr. Bill Kochergen at the second meeting were in response to the statement of Mr. Platz that they could not afford to pay the stipulated rent if turnover was as indicated during the first meeting. In my opinion I should find that Zinco contravened s.52 of the Act in that Mr. Bill Kochergen on its behalf made representations as to the turnover of Creative's for the purpose of inducing Mr. & Mrs. Platz to pay a very substantial rent for Zinco's property. Alternatively, Zinco by its director Mr. Bill Kochergen was knowingly involved in the contravention by Creative's within the meaning of s.75B of the Act. It follows that in either case a remedial order can if appropriate be made against Zinco and Mr. Bill Kochergen under s.87 of the Act.
In respect of Mr. Bill Kochergen there is no doubt, and there was little argument to the contrary, that he is a person involved as the director who perpetrated on behalf of Creative's the contravention. I have not overlooked the argument referred to in Yorke v Lucas (1985) 158 CLR 661 at 671 that a person by whose own acts a company incurs vicarious responsibility may not be properly described as an accessory to its contravention of the Act. However I accept Enzed Holdings Ltd. v Wynthia Pty. Ltd. (1984) 57 ALR 167 at p 178 and James v Australia and New Zealand Banking Group Ltd. (1986) 64 ALR 347 at 383 as authorities to the contrary. Most recently the High Court in Hamilton v Whitehead (1989) 63 ALJR 80 indicated that this was the correct view. In Wheeler Grace & Pierucci Pty. Ltd. v Colin Frederick Wright and Anor an unreported decision of the Full Court of this Court delivered on 13 April 1989 the reasoning in Hamilton v Whitehead was applied to the provisions of s.75B of the Act.
In my opinion Mr. Al Kochergen and Mr. William Alex Kochergen are in a different position. I cannot be satisfied that each of them was an intentional participant with the requisite knowledge in the contravention of the Act which I have found. I do not think the applicants have discharged the onus of showing that Mr. Al Kochergen and Mr. William Alex Kochergen were aware that the representations made by Mr. Bill Kochergen were incorrect. The High Court referred in Yorke v Lucas at 667 to para.(a) of s.75B and the fact that its terminology was taken from the criminal law. The point was made that to coincide with the requirements of that law participation in the commission of the offence must be intentional. The members of the Court remarked on that page that "to form the requisite intent he must have knowledge of the essential matters which go to make up the offence whether or not he knows that these matters amount to a crime". The requirements of para.75B(c) similarly require knowledge of the essential facts. On page 670 the Court said:
"In our view, the proper construction of para.(c) requires a party to a contravention to be an intentional participant, the necessary intent being based upon knowledge of the essential elements of the contravention."
The fact that Mr. Al and Mr. William Alex Kochergen were both directors who in normal circumstances probably should or indeed would have been generally aware of the turnover of various branches of their company's business is in my opinion not sufficient. My earlier reasons in this matter demonstrate the complexity of the accounts and financial affairs of Creative's and its businesses. It was therefore not apparent that the published accounts of Creative's, as opposed to the primary records of particular divisions of its businesses, revealed any information which would or indeed could have caused them to doubt or even suspect the accuracy of the representations made by Mr. Bill Kochergen. The administration of Creative's financial records and accounting was left solely to him as were the negotiations for the sale of one of its businesses and these facts were not the subject of significant challenge. I am not prepared to find that either of these respondents were persons involved in Creative's contravention. In making this finding I have not overlooked the fact that Mrs. Platz expressly questioned Mr. Al Kochergen concerning the turnover on a day subsequent to the two meetings.
Turning to the matter of the appropriate relief to be awarded, Mr. & Mrs. Platz contend that they effectively rescinded the agreement for sale and purchase and that "damages" should be awarded on this basis. They seek repayment of the price paid for stock and plant, with compound interest, and refund of the excessive rent which they contend they paid, again with compound interest. Counsel for the respondents submitted that rescission was not available to Mr. & Mrs. Platz, because from late 1985 or alternatively subsequent critical dates they affirmed the arrangements. Alternatively he contended that rescission was not available because restitution could not be made at whatever was found to be the relevant time.
There was no attempt by either counsel to refer to the alternative argument that it was open to the Court, if the circumstances be appropriate, to exercise its powers under s.87 unrestricted by the general law bars of affirmation, lapse of time and restitution. It can however be argued that these restrictions are not fetters on the exercise of the powers under the section but matters to be taken into account in the exercise of the Court's discretion, namely whether and in what manner the powers should be exercised. To my mind this more relaxed approach is preferable. I refer to the discussion of this topic by Lockhart J. in Henjo Investments Pty. Ltd. & Others v Collins Marrickville Pty. Ltd. (1988) 79 ALR 83 @ 102, Burchett J. at 106, Fitzgerald J. in Frith and Another v Gold Coast Mineral Springs Pty. Ltd. and Others (1982) 65 FLR 213 at 231, Pincus J. in Byers and Others v Dorotea Pty. Ltd. (1986) 69 ALR 715 at 730 Gray J. in Squibb & Sons Pty. Ltd. v Tully Corporation Pty. Ltd. and Another (1986) ATPR 47,587 at 47,606 and the Full Court in Munchies Management Pty. Ltd. & Another v Belperio and Another (1989) ATPR 50,026 at 50,038.
However on the basis of counsels' submissions, it is necessary at the outset to determine whether Mr. & Mrs. Platz are confined to damages in deceit or whether they are entitled to rescind. If the former case be applicable there is a deficiency in their case in that there was no evidence as to the true value of what they purchased from Creative's, see Pappas and Another v Soulac Pty. Ltd. and Another (1983) 50 ALR 231 @ 240. This evidence is necessary because the measure of damages in deceit is generally the difference between the price that they paid and the true value of what they purchased at the date thereof. Mr. & Mrs. Platz have however sought to avoid the purchase and rescind on the ground that the misrepresentations were made not in the terms of the agreement but rather in the formation of or "dehors" the agreement. In the latter case they contend, correctly in my view, that they are to be restored to the position they occupied before the contract was made. It follows in this matter that if Mr. & Mrs. Platz have effectively rescinded the contract, the appropriate order is such as was made by the High Court in Alati v Kruger (1955) 94 CLR 216 at pp 229-230 and by me in Yorke v Ross Lucas Pty. Ltd. (1982) 69 FLR 116 and as confirmed by the Full Court of this Court in Munchies Management Pty. Ltd. v Belperio (1989) ATPR 40-926.
Mr. & Mrs. Platz commenced proceedings by application dated 21 January 1987, which application was accompanied by a statement of claim. In their application they claimed relief under s.87 of the Act to vary the terms of the agreement and the two leases. They also claimed damages for fraudulent misrepresentation. These claims for relief were repeated in the statement of claim. However portion of this statement of claim was struck out because crucial aspects of their case were not pleaded but were particularised. An amended statement of claim was pursuant to leave granted on 7 April 1987 filed on 8 July 1987 wherein the relief claimed pursuant to s.87 specifically included a claim for rescission ab initio of the agreement and two leases.
On the following day a letter was written on behalf of Mr. & Mrs. Platz to the solicitors for the respondents:
"9th July, 1987
Messrs Hume Taylor & Co.,
Solicitors,
DX 183
ADELAIDE
Dear Sirs,
re: Platz -v- Creative's Land Scape Design Centre Pty Ltd and ors
We enclose herewith amended Statement of Claim by way of service. A copy has been filed in the Federal Court.
You will note that the primary relief which our clients now seek from the Federal Court pursuant to Section 87 is rescission of the agreement, the Lease and the Underlease, with consequential orders for the refund of all overpayments which our clients have made for stock, plant and rent. Until the resolution of the litigation, our clients will continue to operate the business but only as caretakers for your clients. We presume that you will now be attending to the filing of an amended defence and discovery. Yours faithfully
JOHN GOLDBERG & CO.
PER: (Signed)
JOHN R. GOLDBERG
Enc.
Copy to: Mr & Mrs Platz"
It is important to note the last sentence of the second paragraph of that letter, namely the fact that thereafter Mr. & Mrs. Platz would continue to operate the business but only as caretakers for the respondents. There was no evidence of any reply to this letter. The solicitors for Mr. & Mrs. Platz subsequently wrote three further letters in which they confirmed the attitude they took. The respondents' solicitors ultimately replied by letter dated 26 May 1988. These letters were in the following terms:
"11th May, 1988 BY HAND Hume Taylor & Co.
Barristers & Solicitors
Observatory House
84 Flinders Street
ADELAIDE SA 5000
Dear Sirs,
re: S. & H. Platz v Creative's Landscape Design Centre Pty Ltd & ORS.
On 9 July 1987 we wrote to you in this matter stating that the primary relief which our clients sought from the Federal Court was rescission of the Agreement, the Lease and the Underlease, with consequential orders for the refund of all overpayments made for stock, plant and rent. We said that until the resolution of the litigation, our clients would continue to operate the business but only as caretakers for your clients. Following a detailed examination of the recently discovered financial records of your clients, we are now satisfied that there have been very serious misrepresentations of the financial position of the business acquired and, in the circumstances our clients intend to vacate the business premises at 5.00 pm on Tuesday 31st May, 1988. At the trial commencing on 15th August, 1988, we will be seeking a declaration from the Court that our clients were entitled to rescind plus consequential losses according to the principles enunciated in Alati v Kruger 94 CLR 216 and similar cases.
At that time, the premises will be left in good condition and clean and tidy. The keys will be made available to your clients. Plant and equipment and stock will be left at the premises. From that date, we put your clients on notice that our clients no longer regard themselves at being at risk either for the premises or the plant and stock and it will be necessary for your clients to organise their own insurance.
In anticipation of leaving the premises, our clients are organising for the level of stock to be reduced and if your clients wish to continue the business they should make the necessary arrangements to build stock up to the level that they require. In particular, your clients may wish to take over our clients' existing orders of fruit trees and roses and our clients are happy to cooperate with information concerning this. As you are aware, our clients have been running a profitable florist operation from the premises, a business that was not being conducted at the time of takeover. Our clients are quite happy to leave behind the refrigerators and other plant associated with the florist operation and permit your clients to continue operating it as long as they are paid a fair value for the plant. If your clients are not interested, they should let us know so that the florist plant can be removed.
Our clients' staff will be notified at the same time as this letter is forwarded to you. In the circumstances, our clients would have no objection to your clients approaching any member of their staff whom they may wish to engage to continue working in the business. Our clients acknowledge their liability to pay all outstanding suppliers' accounts relating to the conduct of the business and we request that any accounts directed to the premises after our clients leave be forwarded to our office.
Our clients would have no objection to an inspection of the premises being arranged through your office before our clients leave so that they may be satisfied as to the state of the premises and so that they can plan for a smooth transition.
We acknowledge that it is our clients' duty to act conscientiously without detriment to the leasehold and the goodwill of the business being conducted there. We believe that this has been done. We also acknowledge that our clients must give your clients a reasonable opportunity to take back the business. We believe that this has also been done. Please be advised that our clients are ready and willing to assist your clients in every reasonable way to ensure that the transition can take place with minimum inconvenience. Yours faithfully
GOLDBERG & CO
Per: (Unsigned)
JOHN R. GOLDBERG"
"13th May, 1988
Hume Taylor & Co.
Barristers & Solicitors
FAX 2231601
Attention: MR TAYLOR
Dear Sir,
re: Platz v Creative's
We refer to our conference at your office on 11th May, 1988.
We confirm that settlement negotiations were not pursued because it was apparent that the parties are just too far apart both on the question of liability as well as the issue as to what can now be done about the situation.
We confirm that we have rescinded and that our letter of 11th May, 1988 sets out the course we will take. Please note that we will have to amend our pleadings, to seek a declaration that we are entitled to rescind instead of an order for rescission. Would you agree to this being done at trial, or do you wish us to take out an application and get the matter tided (sic) up sooner than that?
We gather from the conference that your clients' preferred position would be to get new tenants into the nursery. We advise that we are ready to assist in this regard. Our clients - and their books - are available at any time for inspection by any interested party. Consistent with our letter of 11th May, 1988, the stock and plant are (as of 31st May, 1988) yours to sell or lease on whatever terms you want.
We must point out that whilst our clients are quite happy to speak to prospective tenants, if the subject of rent comes up, our clients would have to say that the business could only provide a reasonable return if the rent were reduced by at least $50,000 per annum. Our clients might be prepared to stay on longer than the end of May if that would be of assistance to your clients. This would not in any way qualify the rescission effective as at the end of the month. If this were to happen, their status would be as employees only on terms to be mutually agreed. If you wish to follow up any of the matters we have referred to then please let us know. Further, if your clients have any suggestions of their own we would be pleased to hear them and consider them. As we tried to make clear at the conference, we have determined upon the course of action which we feel we must take, but the door is not closed to reasonable arrangements and adjustments designed to make the best of the situation from your clients' point of view as much as from that of our own.
Yours faithfully
GOLDBERG & CO
Per: (unsigned)
JOHN R. GOLDBERG"
"26th May 1988
Hume Taylor & Co.
Barristers & Solicitors
84 Flinders Street
ADELAIDE SA 5000
Dear Sirs,
re: Platz v Creative's Landscape Design Centre Pty Ltd & ORS
We refer to our previous letters to you dated 11th and 13th May 1988 and confirm that we have received no response, either formal or informal, to the matters raised therein.
We advise that our clients are in the process of completing arrangements for the relinquishment of the premises next Tuesday, 31st May. So as to keep you fully informed of these preparatory steps, we advise the following:
1. All staff have been told of the changeover. Mr. Roy Gardener and Mrs Berry Knight have said that they would be happy to continue working under the management of your clients. Your clients are invited to contact them directly at the nursery if they wish to do so.
2. As your clients have expressed no interest in the flower fridges, we assume that they are not interested in purchasing them. Our clients therefore intend to remove them next Tuesday. We remind you that the florist operation has proved to be quite profitable. If your clients wish to continue this aspect of the business, please let us know, because there is still time to negotiate a suitable arrangement.
3. Insurance for fire, theft and public liability is paid up until midnight on 31st May 1988. Thereafter it has been cancelled. If your clients want the premises and the stock and plant to be insured, they will therefore have to renew as and from that time. We can provide you with all relevant insurance details at short notice if requested.
4. Orders for fruit trees and roses have been cancelled. However, the suppliers have been advised that your clients may wish to reactivate these orders and it is not too late for them to do so. Again, please feel free to contact either us or our clients for details.
5. Arrangements have been made for mail to be redirected after Tuesday 31st May 1988. But the odd account may slip through the net. If any accounts do arrive after next Tuesday, please forward them to this office.
6. Arrangements have been made for the final readings to be taken of the telephone and electricity services. This will be done next Tuesday. When asked, our clients have informed the suppliers of these services that Creative's Landscape Design Centre Pty Ltd is the owner of the premises. Intimations from the suppliers are to the effect that, unless they receive advice as to who will be responsible for payment in the future within a day or two of the final reading, services may be shut off.
7. A final stock-take will be done next Tuesday. The nursery will be closed on that day for this purpose. We will forward to you the results of the stock-take as soon as they come to hand.
8. The property will be locked and secured by our clients are 5.00 pm on Tuesday. The keys will be delivered earlier to the premises of your clients at 808 Gorge Road at around 4.00 pm the same day.
9. As you know, the automatic watering system will take care of the outside plants and the shadehouse. Our clients will thoroughly water the indoor plants before they leave next Tuesday. But obviously, they will need attention thereafter. As mentioned in our letter of 13th May 1988, the fact that our clients have rescinded now rather than await the sanction of the Court to do so probably requires an amendment to the pleadings to reflect the current situation. Although we believe that paragraph 22(d) of the amended Statement of Claim (filed 8th April 1987) and our letter of 9th July 1987 make it tolerably clear that rescission plus consequential orders has always been the relief we seek, we feel that an amendment to the Application should be made, and we propose to do so by adding the following:
'2A. A declaration that the agreement between the applicants and the respondent Creative's Landscape Design Centre Pty Ltd dated 16th July 1985 in connection with the business known as "Evergreen Nursery and Garden Centre" as void ab initio and was validly rescinded by the applicants on 31st May 1988. 2B. A declaration that Lease No. 6116715 and Underlease No. 6131602 both dated 16th July 1985 are void ab initio and were validly rescinded by the applicants on 31st May 1988. 2C. That pursuant to Sections 82 and/or 87 of the Act the respondents pay by way of damages and/or refund of moneys such of the payments for stock, plant and rent as the Court deems just and equitable to compensate the applicants.' If you consent to this amendment being made at trial, could you please advise us accordingly, otherwise we will have to take out an application. Finally, we reiterate that our clients are prepared to do anything within reason to facilitate the changeover without detriment to the stock or the goodwill (such as it is) of the business. For this reason, our clients have not conducted a liquidation or closing-down sale, which would clearly have been in their interests, but might have had the effect of running down the stock and possibly even presenting an unfavourable impression to the public. If your clients have any particular difficulties that are capable of being ironed out by negotiation, then our clients are prepared to accomodate them if at all possible. Therefore, we invite you to let us know if there is anything more you think we can or should do.
Yours faithfully
GOLDBERG & CO.
Per:(unsigned)
JOHN R. GOLDBERG"
It is my opinion that the letter of 9 July 1987 to Hume Taylor & Co and the terms of the amended statement of claim amounted to an effective rescission provided there had not been a prior affirmation of the agreement. If the rescission was effective, which entails a finding that restitutio in integrum, as understood in equity, could be made, the property was thereafter at the risk of the respondents. I refer to Alati v Kruger at p 228 where Fullagar J. said:
"If he gave reasonable notice to the vendor offering to restore the property to him, I think the vendor would act at his own risk if he declined to take the opportunity offered to him, and he could make no claim for compensation if the purchaser then left the property and it were subsequently held he was entitled to rescind; cf. Maturin v Tredennick (1864) 10 LT 831 which is cited by Townley J. in his judgment."
In my opinion the letter of 9 July 1987 gave to the respondents an opportunity such as Fullagar J. was referring to. It is relevant to note that its terms were very similar to the letter in Munchies v Belperio which both the trial judge and the Full Court accepted as an effective intimation of rescission.
Mr. & Mrs. Platz amended their application on 8 August 1988 to claim rescission on 31 May 1988 and again amended on 28 November 1988 to claim rescission on 9 July 1987. Similar amendments were made on the same dates to the statement of claim.
Counsel for the respondents contended that the rescission was not effective because of prior affirmations and additionally that Mr. & Mrs. Platz could not comply with the requirement of adequate restitutio in integrum. The contrasting requirements of the common law and of equity in this regard are set out in Alati v Kruger at 223-224.
My explanation of the principles upon which affirmation or otherwise is to be determined as set out in Yorke v Ross Lucas at 134-135 was accepted by the Full Court in Munchies v Belperio. I said in the former case:
"As the authors of Cheshire & Fifoot Law of Contracts (4th Australian ed.) state at page 293: 'An election to affirm must be based on full knowledge of the material facts: see Waters Motors Pty Ltd v. Cratchley (1964) NSWR 1085; 80 WN (NSW) 1165 at 1176. The decisions of the High Court of Australia emphasise that the affirmation must rest on "unequivocal" acts, involving an election not to avoid the contract: Brown v. Smitt (1924) 34 CLR 160 at 167-168; Wendt v. Bruce
(1931) 45 CLR 245 at 261 and Larking v. Great Western (Nepean Gravel Ltd) (1940) 64 CLR 221 at 229.' The authors go on to make the point on page 294 that: 'The onus is upon the party alleging affirmation (e.g. the defendant to a suit for rescission) to prove unequivocal conduct on the part of the representee, from which an election to affirm can be inferred: see Kenny v. Fenton
(1971) NZLR 1.'
On the significance of lapse of time as being evidence of an affirmation they state that: 'Lapse of time without any prompt step towards repudiation being taken does not in itself constitute affirmation, but it is evidence of affirmation, and it was said in a leading case that when the lapse of time is great "it probably would in practice be treated as conclusive evidence" of an election to recognize the contract: Clough v. London and North Western Railway Co. (1871) LR 7 ExCh 26 at 35; (1861-73) All ER Rep 646. Everything depends upon the facts of the case and the nature of the contract.'"
In my opinion the respondents have failed to establish an unequivocal act of affirmation. Their counsel argued to the contrary, submitting that the conduct of Mr. & Mrs. Platz in continuing to run the business and pay the rent amounted to confirmation of the arrangements. He pointed to what he described as three crucial dates, the end of December 1985, January 1987 and 9 July 1987. He countered the contention of counsel for Mr. & Mrs. Platz that his clients on each of these dates did not have "full knowledge of the material facts" with the submission that there was a crucial difference between knowing a fact and having the means to prove it. He acknowledged that they did not have the means to prove at any of the specified dates and indeed not until discovery of accounting records had been made by the respondents.
Counsel for the respondents contended that at the end of December 1985, i.e. after about six months trading, Mr. & Mrs. Platz had a knowledge of the unreliability or incorrectness of assertions concerning turnover. However I would find on the facts that they only had a suspicion and were entitled to refrain from taking any steps until these suspicions had been verified. As Mrs. Platz said, at this time they had "no proof". They would not have been prudent to commence proceedings or elect to rescind at this stage. On 21 January 1987 Mr. & Mrs. Platz commenced proceedings by filing an application and a statement of claim. Counsel for the respondents drew attention to the fact that although they asserted the untruthfulness of the representations they made no claim for rescission. They did however claim relief under s.87 of the Act. They were given leave in April 1987 to amend their statement of claim because of disclosed deficiencies in the manner of their pleading. The amended statement of claim in which rescission was claimed was filed on 8 July 1987, and was followed by the letter of 9 July set out above.
In my opinion strong support for the contentions of counsel for Mr. & Mrs. Platz can be found in the decision of the Privy Council in Senanayake v Cheng (1966) AC 63. In that matter, which was a claim based on an innocent misrepresentation which induced a representee to buy a share in a partnership, the plaintiff brought an action which did not mention rescission. During the trial she applied to amend her claim, seeking a rescission, but this application was refused. The judgment of the Privy Council was delivered by Lord Morris who in his reasons made the following comments.
On page 77 he said:
"Upon the clear and definite findings that the defendant made a representation which was false and which, being material, did induce the plaintiff to pay $20,000 to the defendant, it would seem to follow that upon discovering the falsity of the representation the plaintiff was entitled to rescind, and therefore entitled to recover her money from the defendant unless for any reason it had become too late for her to rescind."
Later on in that page his Lordship said:
"The submissions advanced on behalf of the defendant (which were made on the basis of the findings of fact of Ambrose J.) would seem to resolve themselves into three main contentions. In the first place it is said that the plaintiff affirmed her contract with the defendant and elected to treat it as binding after she became aware of the misrepresentation. Secondly, it is said that in July it was too late for her to rescind because by then restitutio in integrum was not possible."
On the first of these contentions the plaintiff said in her evidence as stated by his Lordship on page 78:
"'I then became very suspicious. I realised that I had been tricked into the business. It was almost the end of June then. I waited till Goh's return. He returned about that time after an absence of a fortnight.' It would not have been reasonable for the plaintiff to act precipitately. It was prudent for her to await Goh's return."
His Lordship then set out further facts and continued later in that page-
"She then called for a meeting of the partners. Her action in so doing was eminently reasonable and could not be properly regarded as an affirmation of the contract."
On page 79 he said:
"It is said that by calling that meeting and by attending it as a partner the plaintiff precluded herself from avoiding and rescinding her contract with the defendant: it is further said that the indication was that she would have continued as a partner had the defendant at the meeting not stated that he proposed to withdraw his personal guarantee of the overdraft. Their Lordships consider, however, that she was entitled to make all inquiries and to endeavour to learn all the facts...
A consideration of the course of events leads their Lordships to the view that it is quite impossible to say that the plaintiff affirmed the contract or that she in any way precluded herself from taking the course that she adopted."
Their Lordships ultimately entered judgment for the plaintiff for rescission, a remedy which had not been specifically sought in the pleadings.
In my opinion these comments may well be applied to the circumstances here. In late December 1985 Mr. & Mrs. Platz became suspicious. But the evidence upon which they based their suspicions related to the volume of their sales since July of that year. This evidence did not relate directly to the representations made by Mr. Bill Kochergen, namely as to the volume of sales engaged by Creative's in earlier years. This information could have first become available to Mr. & Mrs. Platz if complete discovery had been made when the respondents were first directed to do so, namely by 28 October 1987. However the crucial evidence, namely that contained in Creative's Kalamazoo Journals, was not available to Mr. & Mrs. Platz and their advisors until supplementary discovery of these documents was specifically directed by this Court by order made on 13 February 1988. It was then for the first time that their suspicions were confirmed, and they learned the crucial facts.
I am of opinion that Mr. & Mrs. Platz were not precluded by affirmation from rescinding the arrangements on 9 July 1987.
It is also my opinion that, contrary to the submissions of counsel for the respondents, adequate restitution could have been made if they had accepted Mr. & Mrs. Platz's election to rescind on 9 July 1987 and a return of the assets subject to the arrangements. At that stage Creative's and Zinco could have regained possession of the leased property, accepted a return of the plant and taken possession of stock which at 30 June had a value for income tax purposes of $92,239. This figure represented a discount of 25% on the value of stock other than hardware, a discounting which I was informed was acceptable to the Commissioner of Taxation. It is therefore more relevant to assess the value of the stock on hand as being closer to $112,000.
Counsel for the respondents contended that in consequence of the inefficient manner in which the business had been conducted by Mr. & Mrs. Platz, the local goodwill attaching to the leased premises had been considerably diminished. There are a number of answers to this contention. Nothing was, other than perhaps the rent under the leases, expressly or impliedly agreed as a price to be paid for local goodwill. If, contrary to my opinion, local goodwill had been diminished, the diminution was a direct consequence of the difficulties sustained by Mr. & Mrs. Platz arising out of the contravention. Furthermore such an argument is denied by the evidence. The sales for the financial year preceding 9 July 1987 were $422,835, a considerable increase on those for the financial year prior to the purchase of the business. Mr. & Mrs. Platz made that year a gross profit of $208,670 and a net profit of $6,134. These figures are again a substantial advance on those achieved by Creative's if its stated turnover of the retail business is adjusted to $280,000. Furthermore the local goodwill of the site would have been enhanced by its increased patronage as a result of Sunday trading and the selling of cut flowers having been introduced by Mr. & Mrs. Platz. Finally as to the manner in which they conducted their business and the general state of the premises I prefer the evidence of Mr. Lasscock who went to 72 Gorge Road for the express purpose of comparing the nursery, along with other nurseries, systematically against his own nursery. His opinion was that Mr. & Mrs. Platz ran a good nursery, although not as good as that conducted by the respondents.
In my opinion, subject to the making of appropriate adjustments, relief can be granted on the basis that Mr. & Mrs. Platz effectively rescinded the arrangements on 9 July 1987 and thereafter their presence on the premises was as caretakers for Creative's. Happenings on the site from then on, provided no unreasonable action was taken by Mr. & Mrs. Platz, were at the risk of Creative's. I am satisfied that the arrangements offered by them in the correspondence of 11, 13 and 26 May 1988 were both fair and reasonable.
In these circumstances orders such as made in Alati v Kruger at 229-230, in Yorke v Ross Lucas and in Belperio v Munchies indicate the type of relief which is appropriate in this matter. Mr. & Mrs. Platz are entitled to have these orders in the sense that the orders will, in the context of s.87 of the Act, reduce the loss or damage which they have suffered. The fact that the contravention found can be equated to fraudulent rather than innocent misrepresentation is a significant matter in determining the appropriate remedy. I turn to consider the appropriate quantum of financial relief.
Counsel for Mr. & Mrs. Platz provided calculations based on his submissions as to the level of appropriate relief. In addition he sought orders setting aside the agreement for sale and purchase and the lease and sublease as well as retrospectively varying the rentals payable thereunder. I do not consider it necessary to consider any other possible heads of relief. The calculations were as follows:
" S. & H. PLATZ
CALCULATIONS
Purchase Price 153,273 Less Cost of use of plant between 15 July 1985 and 9th July, 1987
($22,560 @ 10% p.a. for 24 months) Total Deductions 4,512 Balance 148,761 Additional Amounts to be allowed
1. Interest on purchase price between 15/7/85 - 6/4/89 @ 15% p.a. compounded annually 1985/86 153,273 X 350 X 15% = 22,046 365
1986/87 175,319 X 15% = 26,298 1987/88 201,617 X 15% = 30,243 1988/89 231,860 X 280 X 15% = 26,680 105,267 365
2. Excess Rent
RENTAL ASSESSMENT RENT PAID R.J. TAYLOR EXCESS RENT 1985/86
(11 Payments) 71,500 23,719 47,781 1986/87 83,180 28,320 54,860 1987/88
(11 payments) 83,550 28,820 54,730 Interest on excess rent @ 15% p.a. compounded annually to 6/4/89 157,371 1986/87 47,781 X 25% = 7,167 1987/88 47,781
54,860
7,167
109,808 X 15% = 16,471 1988/89 109,808
54,730
16,471
181,009 X 15% X 280 = 20,828 44,466 307,104 TOTAL $455,865"
Having found that it was possible for Mr. & Mrs. Platz to make adequate if not complete restitution on 9 July 1987 they are entitled to a refund of the purchase price of the stock and plant less an appropriate adjustment at least in respect of their use prior to that date of the plant. In this respect I agree with the calculations of their counsel. There was a certain amount of stock on the premises when Mr. & Mrs. Platz left at the end of May 1988 which together with some plant was sold pursuant to a Court order. The proceeds of sale are held in the trust account of the solicitors for the respondents and Creative's should retain this amount. As Creative's, Zinco and Mr. Bill Kochergen refused in July 1987 to accept the return of the property sold to Mr. & Mrs. Platz or its in specie equivalent they accepted the risk of any subsequent deterioration of stock and plant as well as the risk that Mr. & Mrs. Platz might walk out of the premises. This in fact they did at the end of May 1988. In my opinion Mr. & Mrs. Platz are entitled to be repaid the price paid by them for stock and plant less the adjustment they suggest, namely $4,512 for their use of the plant. This figure of $4,512 is based on the evidence of a valuer, Mr. Braithwaite, as to the market value of the plant. I will look subsequently at the claim for compound interest.
I should note that there is no claim for trading losses. The accounts of Mr. & Mrs. Platz's business disclose the profits or losses thereof in the relevant years, but in each instance prior to any partner's drawings. Both of them worked full-time in the business. In the year ended 30 June 1986 there were sales of $386,741, gross profit of $175,916 and a net loss of $19,162. Depreciation, a non cash item, of $9,305 was included as an expense. In the succeeding year sales were $422,835, gross profit of $208,760 and net profit of $6,134 after a depreciation charge of $10,073. For the period ending 31 May 1988 the sales were $377,036, gross profit $177,693 and a net loss of $11,824 after charging $10,072 depreciation. To the extent that any order is made reducing the rent in each year and ordering a refund of the excess, the consequential adjustment will substantially increase the profitability of the business, leaving a margin to cover reasonable partnership drawings. It is therefore proper that no claim be made for trading losses incurred before or after rescission.
Mr. & Mrs. Platz also seek compensation for overpayment of excessive rent. In my opinion it is proper that such an order be made. There is no doubt on my findings that they agreed to pay the rent stipulated in reliance upon the representations as to level of turnover. It follows that an adjustment should be made of the the rents under the lease and sublease. An experienced valuer Mr. R.J. Taylor prepared an assessment of what he determined was the fair rental and Mr. & Mrs. Platz seek the adjustments set out in their calculations on this basis.
Mr. Taylor was specifically instructed to make his valuation on the basis that the turnover achieved by Creative's on the the site was $280,000 - $290,000 per annum. On this assumption he found that its retail nursery business was so unprofitable that it had no goodwill attaching to the property and rent should therefore be assessed on the basis of the capital value of the property. His finding was that the fair rent for the first year of occupation was $25,875, for the second year $28,320, and the final year $31,440. Mr. Taylor acknowledged that he had not taken into account the trading results of Mr. & Mrs. Platz. In my opinion, total reliance on the fair rent figures produced by Mr. Taylor's valuation would require too great an adjustment.
In the first place Mr. & Mrs. Platz, even though they were not "succeeding" to the business conducted by Creative's, were operating on the premises a business of the same nature. They were not required to commence from scratch a totally new business. Furthermore the evidence makes it apparent that the potential volume of business was greater than that achieved by Creative's on the site. For example, a retail business could be conducted on Sundays and the range of business, as illustrated by the cut flowers business introduced by Mr. & Mrs. Platz, could be expanded. Mr. & Mrs. Platz did quite substantially increase the volume of sales achieved by Creative's. Considerations such as these require, in my opinion, that Mr. Taylor's assessment of the fair rent be substantially increased. There is little if any material before me upon the basis of which I can calculate the reasonable amount of such increase except that Mr. & Mrs. Platz increased the turnover of business on the site by approximately 50%. In their statement of claim they sought a reduction of the rent to $45,000 which is in the vicinity of 50% more than Mr. Taylor's figures. I see much sense in adhering to this figure for each of the three years or portions thereof and ignoring the annual increases available under the leases. A fractional amount of this figure will be Creative's share thereof, namely $3,750, and the balance the fair rent payable to Zinco. On this basis the total overpayments to Creative's during the years in question is $8,858, which can be rounded off to $8,800. Likewise in the case of Zinco the overpayment of $101,872 will be rounded off to $100,000. Each of these companies is directed to refund the amount of its overpayment and a similar order must be made against Mr. Bill Kochergen as a person involved in the contravention.
In their calculations Mr. & Mrs. Platz claimed compound interest on each of the sums ordered to be paid to them. Support for interest calculated on a compounding basis was said to be found in the recent High Court decision of Hungerfords (Registered Firm) and Others v Peter Victor Walker and Others (1989) 84 ALR 119. In my opinion that decision does not authorise payment of compound interest in this matter. Counsel for the respondents submitted, and counsel for Mr. & Mrs. Platz ultimately conceded, that the interest ordered in that matter represented interest on damages for negligence, based on foreseeability and causation. Here any interest ordered will be in respect of amounts directed to be paid in accordance with s.87 of the Act.
In respect of interest on the amount of the purchase price which I have ordered to be refunded under s.87, in my opinion Mr. & Mrs. Platz are entitled to a simple interest on this amount. In Hungerford's case Mason C.J. and Wilson J. approved the approach of Fitzgerald J. when they said at page 129:
"Incurred expense and opportunity cost arising from paying money away or the withholding of moneys due to the defendant's wrong are something more than the late payment of damages. They are pecuniary losses suffered by the plaintiff as a result of the defendant's wrong and therefore constitute an integral element of the loss for which he is entitled to be compensated by an award of damages. Fitzgerald J. made this very point in Sanrod Pty. Ltd v Dainford Ltd (1984) 54 ALR 179 when he said (at 191):
'Whatever may be the position otherwise in respect of damages under the (Trade Practices) Act, I can myself perceive no difficulty in accepting that, when money is paid in consequence of misleading conduct, the loss suffered by that conduct includes not only the money paid but also the cost of borrowing that money or the loss from its investment, as the case may be: cf Frith v Gold Coast Mineral Springs Pty. Ltd (1983) ATPR 40-339; affirmed (1983) ATPR 40-394; 47 ALR 547. Interest awarded as a component of damages in such circumstances is not for loss of the use of the money awarded as damages, but for loss of the use of the money paid over in consequence of the misleading conduct and is directly related to the misleading conduct.'"
Furthermore I consider interest at the rate of 10% per annum, being the rate awarded on the purchase price by the Full Court of this Court in Belperio v Munchies, should be ordered in this matter. I calculate this amount as totalling $58,550, which must be added to the balance purchase price of $148,761. Rounding off the figures I order payment by Creative's to Mr. & Mrs. Platz of $205,000.
I did not consider it appropriate to award interest in the circumstances of this matter on the amounts of excess rent which I have ordered to be repaid. Mr. & Mrs. Platz have had the use of the premises during the period in question, and in consequence of the reduction of the rent, have conducted a business which has not been wholly unprofitable. This is particularly so as they have claimed depreciation on plant in each of the years in their financial statements, and these amounts together with the rents actually paid have been taken into account in assessing the profitability and thus any taxable income of their business.
I propose to order that Creative's and Mr. Bill Kochergen pay a total amount of $213,800 to Mr. & Mrs. Platz and that Zinco and Mr. Bill Kochergen pay the sum of $100,000 to them. Furthermore I order that the agreement for sale and purchase and the two leases be set aside as void ab initio. The respondents other than Mr. Al Kochergen and Mr. William Alex Kochergen must pay to Mr. & Mrs. Platz their costs of the proceedings. The proceedings against Mr. Al Kochergen and Mr. William Alex Kochergen are dismissed.
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