Politano v ACN 060 442 926 Pty Ltd

[2000] FCA 882

FEDERAL COURT OF AUSTRALIA

Politano v ACN 060 442 926 Pty Ltd [2000] FCA 882

TRADE PRACTICES – assessment of damages under s 82 of Trade Practices Act1974 (Cth) – misleading or deceptive conduct in contravention of s 52 of that Act, inducing company to buy a business – supply by or on behalf of seller of financial statements that included figures relating to a profitable part of the business that had in fact previously been sold – figures supplied portraying a profitable business whereas the part of the business remaining and the subject of the sale was trading at a loss – basis of assessment of damages – whether interest on amount borrowed to buy the business recoverable as well as pre-judgment interest under s 51A of Federal Court of Australia Act 1976 (Cth) – whether damages should be recovered for trading losses sustained by the purchaser and if so for what period of time.

Trade Practices Act 1974 (Cth) s 82

BRUNO AND MARIA TERESA POLITANO & ANOR v ACN 060 442 926 PTY LIMITED & ORS

NG 416 of 1998

LINDGREN J
26 JUNE 2000
SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 416 OF 1998

BETWEEN:

BRUNO AND MARIA TERESA POLITANO
FIRST APPLICANTS/SECOND AND THIRD CROSS-RESPONDENTS

FRESH ’N CLEAN PTY LIMITED (ACN 078 797 994)
SECOND APPLICANT/FIRST CROSS-RESPONDENT

AND:

ACN 060 442 926 PTY LIMITED
FIRST RESPONDENT/CROSS-CLAIMANT

JOSEPH MICHAEL JOHN FARRUGIA
SECOND RESPONDENT

SANDRA LEE FARRUGIA
THIRD RESPONDENT

JOHN CAINS
FOURTH RESPONDENT

GIUSEPPE POLITANO
FOURTH CROSS-RESPONDENT

JUDGE:

LINDGREN J

DATE OF ORDER:

26 JUNE 2000

WHERE MADE:

SYDNEY

THE COURT ORDERS THAT:

1.There be judgment for the second applicant against the first, second and third respondents for $441,380.16 including interest of $84,252.84 down to today’s date pursuant to s 51A of the Federal Court of Australia Act 1976 (Cth).

2.The first, second and third respondents pay the first and second applicants’ costs of the proceeding.

3.The applicants must not at any time recover, or have recovered, pursuant to the judgment referred to in para (1) in favour of the second applicant against the first, second and third respondents and the judgment given by consent on 16 June 2000 in favour of the applicants against the fourth respondent, a total amount in excess of the maximum amount that they or any of them are entitled to recover pursuant to either one of those judgments.

4.The applicants have liberty to apply on 24 hours’ notice generally, including in respect of the enforcement of the judgment referred to in para (1) and of the order referred to in para (2) above.

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

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 416 OF 1998

BETWEEN:

BRUNO AND MARIA TERESA POLITANO
FIRST APPLICANTS/SECOND AND THIRD CROSS-RESPONDENTS

FRESH ‘N CLEAN PTY LIMITED (ACN 078 797 994)
SECOND APPLICANT/FIRST CROSS-RESPONDENT

AND:

ACN 060 442 926 PTY LIMITED
FIRST RESPONDENT

JOSEPH MICHAEL JOHN FARRUGIA
SECOND RESPONDENT

SANDRA LEE FARRUGIA
THIRD RESPONDENT

JOHN CAINS
FOURTH RESPONDENT

GIUSEPPE POLITANO
FOURTH CROSS-RESPONDENT

JUDGE:	LINDGREN J
DATE:	26 JUNE 2000
PLACE:	SYDNEY

REASONS FOR JUDGMENT
(ex tempore)

Introduction

1. This proceeding arises out of a purchase by the second applicant company of a business of the first respondent company.  The first applicants were and are the directors of the second applicant.  The second and third respondents were and are the directors of the first respondent.  The fourth respondent (“Mr Cains”) was the accountant of the first, second and third respondents.  He furnished to the applicants and their accountant, Paul Finch, financial statements relating to the business on which the applicants claim to have relied and of which they make complaint.  However, the applicants’ claim against Mr Cains has been settled by the entering of judgment in favour of the applicants against him on 16 June 2000 by consent.  He has played no part in the present hearing.

2. There was a cross claim by the first respondent against the applicants and against Giuseppe Politano, the father of the first named applicant.  The cross-claimant has not appeared on the hearing and I have previously dismissed the cross claim with costs.

3. As a result of the matters mentioned above, the present hearing has been concerned only with the claim by the applicants against the first, second and third respondents.

4. At the time of the transaction that has given rise to this proceeding, the first respondent bore the present name of the second applicant, “Fresh ’N Clean Pty Ltd”.  At that time the second applicant bore the name “Brutess Pty Limited” which was derived from the first names of its two shareholder/directors, the first applicants, Bruno Politano and Theresa Politano.  Although it may seem odd, I propose, for, I hope, clarity, to call the second applicant “Brutess”.  Again, although it may seem odd, for the same reason I will call the first respondent “ACN”.  I will refer to the first applicants as Mr Politano and Mrs Politano respectively and to the second respondents as Mr Farrugia and the third respondent as Mrs Farrugia.

   General nature of background facts

5. As at 1996, ACN, the Farrugias’ company, carried on a business called “Fresh ’N Clean Service and Supplies”.  Although there was no formal or structural division in the business, it had two aspects.  One aspect was the servicing of clients’ bathrooms and other sanitary facilities according to which ACN would attend on a regular basis, checking and refilling dispenser units, sanitary disposal units and other sanitary units.  The other aspect was the wholesale and retail sale of cleaning products and paper products.  It is convenient to refer to the first aspect as the “hygiene” side of the business and the second aspect as the “retail” side.  The business was carried on in the Wollongong-Nowra region.

6. The present case arises out of the fact that when ACN sold its business to Brutess in 1997, it supplied or caused to be supplied to Brutess certain financial statements, leading Brutess and those associated with it to believe that the statements portrayed the profitability of the business being sold, but in truth, a few months earlier, in December of 1996, ACN had already sold the hygiene side of the business, so that the remainder of the business available to be acquired by Brutess, that is, the retail side, no longer reflected the profits of the hygiene side although the financial statements supplied did include those profits. 

7. It took some time for the truth to dawn.  Even when the truth dawned, Mr and Mrs Politano were in a very awkward situation.  If they were to abandon the business, their financier would be entitled to enforce its securities.  Apart from the likely liquidation of Brutess and the bankruptcy of the Politanos and sale of their home which was mortgaged by them to raise money in connection with the purchase, Giuseppe Politano, Mr Politano’s father, having also given a guarantee and mortgaged his home to assist his son and daughter-in-law, would be likely to suffer the enforcement of the guarantee and the sale of his home as well.  Accordingly, Mr and Mrs Politano have worked long hours in an attempt to keep the business afloat.  In fact, they have testified that in order to survive, in addition to taking a very low level of remuneration for themselves, they have been supported financially by friends and family, and have been able to keep their creditors at bay only by assuring their creditors that they hope to derive some money from a judgment in this proceeding.

8. The case has at least two unusual features.  The first is that Mr and Mrs Politano have, through Brutess, have continued to trade for a period of nearly three years following the purchase.  In the more typical case, a purchaser who is misled into buying a business by an overstatement of its level of profitability terminates the contract.  In such a case, any claim to recover trading losses is in respect of a closed period. This might, for example, be six to twelve months but is rarely as long as three years.  In the present case, the Politanos are still to this day conducting the business and apparently hope to continue to do so.

9. The second unusual feature is that the case is not being defended by ACN or the Farrugias.  Their solicitors filed a notice of ceasing to act and the Farrugias informed the Court that they would not attend to defend the proceeding.  This has resulted in a difficulty.  None of the affidavit evidence of the Politanos or of their witnesses has been tested in cross-examination and no affidavit evidence has been read in contradiction of it.  Moreover, I have not heard any oral elaboration of the affidavit evidence.

10. Although cross-examination is directed against the case in support of which the witness being cross-examined is called, it sometimes fills in gaps and in various ways assists the Court in assessing the testimony of the witness even in aid of the case in support of which that witness is called. 

11. Again, because ACN and the Farrugias have not been legally represented or appeared on the hearing, no objection has been taken on their behalf to parts of the affidavits which might not have satisfied the rules of evidence.  The affidavits include certain hearsay material and statements of conclusion, but no one has been present on behalf of ACN and the Farrugias to make any point of this.  If objections had been taken and upheld it may or may not have been possible or appropriate for the evidentiary deficiencies to be overcome by supplementary oral testimony. 

12. In relation to the issue of damages, in particular, all this has made my task very difficult.  The adversary system assumes contestants who are adequately challenging each other’s case and advancing their own, but that basic element has been lacking here.  Mr Lockhart of counsel for Brutess and the Politanos has, of course, been of considerable assistance.  When I have raised questions about matters referred to in the evidence adduced on behalf of his clients, he has taken up the issues raised with them and furnished such affidavit evidence as might be available with a view to satisfying my queries.  But as he has agreed, inevitably, that this is no substitute for the adversarial role assumed by counsel for an opposing side. 

13. In short, it is conceivable that if ACN and the Farrugias had been represented on the hearing to contest the case made against them, the result, particularly in relation to the quantum of damages, might have been different from that which I have arrived at.  It must be acknowledged, however, that it is often of assistance to applicants that the respondents should be legally represented because the respondents can then concede matters about which there is no substantial dispute.  I will be disallowing certain heads of loss, but if ACN and the Farrugias had been represented they may have conceded that there is no substantial dispute as to some of those matters.  The point is that although, generally speaking, it is in the interests of respondents and not those of applicants that respondents should be legally represented, in particular respects the opposite can be true.

    Liability

14. In early 1997 the Politanos were interested in acquiring a business.  In May of that year, Mr Beck of Direct Business Brokers, acting on behalf of the Farrugias in connection with their proposed sale of the business in question, provided the Politanos with figures relating to that business.  He did so in two stages. 

15. In April 1997 Mr Beck provided a trading statement and profit and loss statement and interim balance sheet for the 6 month period ending 31 December 1996.  This was, of course, the first half of the financial year ending 30 June 1997.  The figures for the six months included a column showing the figures for the preceding full year ended 30 June 1996.  I need not discuss the figures in detail.  The sales figures for the six months were shown as $525,015 and those for the full year ended 30 June 1996 were shown as $1,008,360.  In fact, ACN’s income tax return for that full year which was seen later showed the figure as being $987,234 – a discrepancy of $21,126.

16. Mr Beck later provided Mr Politano with figures for the three years ended 30 June 1994, 30 June 1995, and 30 June 1996 and income returns for ACN and for Mr and Mrs Farrugia. 

17. Mr Politano referred the financial documents to his accountant, Mr Finch.  Mr Finch communicated with Mr Cains and, on the basis of the figures for the supplied  three full years, estimated the value of the business offered at somewhere between $200,000 and $220,000.  Mr Finch has provided an affidavit stating why he relied on the figures for the full years, in particular, those for 1996 and how he arrived at the estimated value mentioned.

18. All of the financial statements provided with the sole exception of the six month figures to 31 December 1996, included figures for the hygiene aspect of the business which had in fact been sold in December 1996.  That sale was pursuant to an agreement dated 18 December 1996.  The business, the subject of it was described as “odor [sic] control and hygiene services”.  The total price for the business so sold was $140,000 and this was apportioned as to $92,752.50 to goodwill and $47,247.50 to fixtures.  As well, stock in trade was sold at valuation and the estimated value stated in the contract was $3,000. 

19. The purchasers, Barry Alan Watts and Todd Anthony Lester, undertook after completion not to sell any general cleaning products of any nature to the customers of the business.  No doubt that undertaking was designed to protect the retail aspect of the business being retained by ACN.  Similarly, ACN undertook to Messrs Watts and Lester not to sell or service air refresher units, soap dispensers, sanitary disposal units, urinal and WC sanitisers and urinal deep cleans, except to domestic clientele.  It is clear from these provisions and the comparatively low figure as the estimated value of stock in trade, that the part of the business sold was “equipment and labour based” rather than “stock based”. 

20. There was annexed to the agreement dated 18 December 1996, a draft profit and loss statement for the year ended 30 June 1996 which showed the income from the hygiene business (described in the document as “hygiene and sanitary”) as $176,963 and the net profit from that business as $110,642.

21. In fact, Mr Farrugia did tell Mr Politano that he had sold a “sanitary service” business but Mr Politano understood that the business to which Mr Farrugia was referring must have been a business quite distinct from the one covered by the financial statements supplied to him by Mr Politano.  That is, it was not made clear to Mr Politano that the “sanitary service” business to which Mr Farrugia referred as having been previously sold, had in truth been conducted by ACN as part of the one business carried on by that company, and it was not made clear to him that the financial statements being provided to the Politanos and on which they were invited to rely, had any connection whatever with the business which had been sold.

22. The 1994, 1995 and 1996 tax returns of ACN described its business as “health supplies” and referred to the business income as having been derived from “sales of goods and services”. Similarly, the column of figures for the full 1996 year was included, as I said earlier, on the very document that gave the Politanos the figures for the six months ending 31 December 1996. 

23. In sum, in my view there was no reason for the Politanos to think anything other than that the business they were invited to buy was the very business the subject of the figures for 1994, 1995 and 1996 supplied to them, rather than only a part of that business.

24. In late May 1997 the Politanos and the Farrugias reached an agreement in principle.  In negotiating with Mr Farrugia, Mr Politano relied on the advice given to him by Mr Finch, which, as I noted earlier, was based on the 1994, 1995 and 1996 figures supplied to him.  In his affidavit testimony Mr Finch has related how he arrived at his recommendation to Mr Politano which he expressed to Mr Politano in the following terms:

    “On the 1995/1996 tax return it’s worth somewhere between $200,000 and $220,000 because of the $20,000 discrepancy.  I have arrived at an adjusted profit of $54,000 for 95/96 using John Cain’s 25% factoring.  This shows a valuation of $216,000.  Just start with an offer of $175,000.  I need to look at customer lists, equipment valuations and a break up of salaries, without these expense items being confirmed my view is that it is valued between $200,000 and $220,000.”

25. In the negotiations Mr Farrugia was asking for $300,000.  At a meeting at the Farrugias' house on the evening of Friday, 23 May 1997 Mr and Mrs Politano and Mr and Mrs Farrugia agreed on a price of $250,000 plus stock at valuation. 

26. During June and July 1997 the Politanos applied for finance.  This was finally approved by Howard Pacific Finance and the actual lender was Permanent Custodians Limited.  The loan approved was $360,000, comprising the amount of $250,000 mentioned, $40,000 for working capital, and $70,000 to refinanced an existing loan secured over the Politanos house.  This existing mortgage had to be discharged so that a first mortgage over the Politanos’ home could be given to Howard Pacific Finance.  The sum of $250,000 comprised $32,096 for plant, fittings and chattels and $217,904 for goodwill.  This apportionment was expressed in the agreement for sale of business.  The Politanos also agreed to purchase stock at valuation and the estimated value was $125,000.  The Farrugias agreed to provide vendor finance in respect of that amount of $125,000.

27. The contract was entered into and the transaction was completed on the same day, 15 August 1997, when the following documents were executed:

    (a)Agreement for Sale of Business between ACN as seller and Brutess as buyer, reflecting the terms just mentioned.  ACN warranted that it had certain distribution agreements and certain customers but was not to be liable if they did not appoint Brutess as distributor in its place.  The agreement for sale provided that the amount to be determined for stock would constitute a loan by ACN to Brutess.  There is no evidence of stocktaking and apparently the parties have always treated the figure payable for stock as $125,000.  The term of the vendor finance of $125,000 was to be three years and it was to bear interest at the rate of 8.5 per cent fixed and monthly payments of principal and interest of $3,945.94 were to be made commencing on 1 January 1998.  In the event, Brutess made only the first payment of $3,945.94. (When the one and only monthly payment of $3,945.94 is applied first to interest and then to principal the result is that it paid $885.42 in interest and $3,060.52 off principal, leaving a balance of principal of $121,939.48 outstanding.)

    (b)A Deed of Assignment of Goodwill and Restriction on Trade.  In addition to the assignment of the business, this document also provided that ACN would pay all debts and liabilities outstanding as at its date and ACN undertook not to be engaged or interested, for three years, in the business of distribution of cleaning and other associated products within an area identified on a plan attached to the Deed.

    (c)A Loan Agreement between ACN as lender and Brutess as borrower in respect of $125,000.  This agreement provided for the giving of a fixed and floating charge by Brutess in favour of ACN and personal guarantees by Mr and Mrs Politano and Giuseppe Politano to secure performance of the obligations of Brutess to ACN.

28. The fixed and floating charge and personal guarantees were given, particulars of the charge being entered in the Australian Register of Company Charges and allotted number 605713 on 20 August 1997.

1. Distinct from the vendor finance of $125,000 was the finance provided by Howard Pacific Finance for which Mr and Mrs Politano mortgaged their home and Giuseppe Politano mortgaged his home as security. 

2. In August 1997, pursuant to a provision of the Agreement for Sale of Business, Brutess changed its name to “Fresh ’N Clean Pty Ltd” and ACN dropped the name “Fresh ’N Clean Pty Ltd”, retaining as its name only its Australian Company Number 060 442 926 as its name.

3. In fact the Politanos had been working in the business since 1 July 1997 pursuant to an informal arrangement with the Farrugias.  As at 12 August 1997, that is three days prior to the date of contract and of completion, they had been collecting the receipts for the business for about two and a half weeks.  They thought that the takings were less than they had expected on the basis of the financial statements provided to them but assumed that this might have been a result of their own inexperience.  As well, Mr Politano thought that he might not have been strict enough with the sales representatives.

4. At the beginning of September 1997 when he could retrieve the figures for the whole of August 1997 he became alarmed at the situation.  The Politanos tried to investigate but found that the records in respect of the period prior to July 1996 had been deleted from the computer.  They were able, however, to print out the sales figures for July 1996 and compare them with the July 1997 figures and also to work out the average monthly takings for the six months to December 1996.  Later they printed out various other figures by way of comparison and found that the takings since December 1996 had been very much less than those down to that month.  Of course, the explanation which suggests itself is that the profitable part of the business, that is the hygiene side, had been sold off in December 1996.

5. From about the end of August 1997 the Politanos received cheques drawn in favour of “Fresh ’N Clean Pty Ltd” which did not appear to be for sales made by Brutess.  After enquiries they discovered that the cheques had been intended for a business called “Fresh ’N Clean - Hygiene” in Wollongong.  In September 1997 Mr Politano contacted Mrs Liz Watts of that business and discovered that her husband and his partner were the men to whom Mr Farrugia had told Mr Politano he had sold a business in December 1996.  Mrs Watts sent Mr Politano a copy of the contract by which her husband and Mr Lester had bought that business from ACN.  That business was also receiving cheques which customers of Brutess had intended to go to that company.  The proprietors of the two businesses agreed to forward on to each other cheques received by one intended for the other. 

6. On 15 September 1997 the Politanos called on Mr Cains.  They asked him why he thought there was such a difference between the current level of sales and the level of the preceding year.  He replied to the effect that he could not understand it.  In the course of the meeting it suddenly occurred to Mr Politano that the explanation might be that the figures provided to him prior to his purchase included both figures for the hygiene business sold off in December 1996 and the business sold to Brutess in August 1997.  Mr Politano asked Mr Cains if he had ever separated the hygiene figures from the figures he (Mr Politano) was given.  Mr Cains replied that he had never done so, although he had separated Bomaderry and Wollongong figures.  Mr Politano’s affidavit continues:

   “It suddenly all made sense to me.  I got up off the chair and thanked John Cains and left his office.  That same day I made an appointment to see our solicitor, Mr John Hozack.”

7. The next day, 16 September, Mr Politano asked Mrs Farrugia whether she was sure that the hygiene business was not included in the financial statements that had been given to the Politanos.  She replied that she was sure and that she had kept both business completely separate. 

8. Mr Politano did not receive the figures relating to the hygiene business until the hearing of an application for interlocutory relief in this proceeding in 1998.  He states that if he had been given the correct figures, he would not have caused Brutess to acquire the business at all.  After allowing for the discrepancy of $21,126 mentioned earlier, Mr Politano had proceeded on the basis that Brutess was buying a business which, for 1996, had yielded a net profit of $20,043 ($41,169 shown in the 1996 column on the interim detail profit and loss statement for the six months ended 31 December 1996, minus the amount overstated of $21,126).  But according to Warwick Newton Dolman, an accountant who has been called on behalf of Brutess and the Politanos to give expert evidence, after the figures for the hygiene business (a copy of which was attached to the contract dated 18 December 1996) are subtracted, it is apparent that the remaining business sold to Brutess had been running at a loss of some $90,599 for the year ended 30 June 1996.

9. Affidavit testimony generally supportive of that given by Mr Politano was given by his wife.

10. Jennifer Anne Knapp had worked for ACN as from approximately 1994 until the sale of the hygiene part of the business in December 1996, from which time she had worked for the new owners, Messrs Watts and Lester.  Ms Knapp said that at no time when she was working for ACN did she know the business as “Fresh ’N Clean Hygiene Services” and that she had always known it as “Fresh ’N Clean Services and Supplies” and had fixed stickers bearing that name to the various dispensers and toilet doors advertising ACN’s services and products.

11. Similarly, Robert John Nottle provided an affidavit.  He had also worked for ACN and states that the business was known as “Fresh ’N Clean Services and Supplies” and that there was no division or section operating under the name “Fresh ’N Clean Hygiene”.  He managed the Bomaderry warehouse as from about February 1997 and before he began doing so, Mr Farrugia had told him that he (Mr Farrugia) had sold the hygiene side of the business.

12. I am satisfied

    ·    that the Farrugias and their company, ACN, intended that the financial statements be supplied by their broker to prospective purchasers of the business offered for sale;

    ·    that the broker in fact furnished the financial statements to Brutess and the Politanos as prospective purchasers;

    ·    that with the exception of the figures for the six months, the financial statements provided included sales, income and expenses relating to the composite business including the hygiene part sold in December 1996;

    ·    that neither the Farrugias nor ACN nor anyone acting on behalf of any of them, including the broker, Mr Beck and the accountant, Mr Cains, informed Brutess or the Politanos that the financial statements included figures in respect of the hygiene part of the business that had been sold or otherwise, did not represent reliable information concerning the business that was being offered to them;

    ·    that ACN and the Farrugias therefore represented to Brutess and the Politanos that the financial statements being provided were a fair representation of the performance of the business that was being offered for sale;

    ·    that the representations were misleading and deceptive;

    ·    that ACN and the Farrugias owed Brutess and the Politanos a duty of care to ensure that financial statements were accurate and safe to be relied upon and not misleading;

    ·    that the duty of care was breached;

    ·    that Brutess and the Politanos relied on the financial statements provided as truly representing the performance of the business being offered for sale; and

    ·    that the true position was that the value of the business being sold was very much less than the value to be deduced from the figures provided.

13. The amended statement of claim pleads, causes of action under the Trade Practices Act 1974 (Cth) (“the TP Act”) against ACN as principal and against the Farrugias as accessories; under the Fair Trading Act 1987 (NSW) against ACN and the Farrugias as principals; and in negligence against ACN and the Farrugias as principals. There is no difference in the approach that I would take to the assessment of damages on any of these causes of action. I find it convenient to proceed on the basis that ACN’s liability is under ss 52 and 82 of the TP Act and that the Farrugias are liable as persons “involved in the contravention” under those sections and s 75B of that Act. I find that ACN is liable as principal and that the Farrugias are liable as accessories accordingly.

    Damages

14. I now come to the difficult question of the quantification of loss. The question of the correct approach to assessment of damages under s 82 of the TP Act has often been discussed. The section refers only to loss suffered “by” conduct that contravenes the Act. Usually an approach akin to that taken in actions seeking to recover damages for tort is appropriate. I take the approach which would be proper in a case for fraudulent or, indeed, non-fraudulent but negligent misrepresentation.

15. Before I come to the detail of the amount to be awarded, I will make some general observations.  First, in submissions, counsel for Brutess took as a starting point the evidence of Mr Dolman that there was no goodwill associated with the business bought and he submitted that a starting point is therefore to identify the amount attributed to goodwill in the contract of purchase, namely, $217,904, as money thrown away in reliance on the misleading conduct.  I do not think that this is quite correct.  The correct approach is to identify the total purchase price paid and to deduct what was received in return.  This may not lead to a difference of substance, but the point to be made is that it may be that there is some advantage in, for example, the surrendering of the name “Fresh ’N Clean Pty Limited”, and in the undertakings given by the Farrugias not to compete.  I raised this matter with counsel for Brutess.  As a result, there has been filed today an affidavit by Mr Dolman who states that in his opinion the name had no value.

16. A second general matter is that I am not concerned here to assess damages for breach of contract.

17. A third general matter relates to an item of $27,010 which Brutess claims to have paid as “preliminary expenses”.  That is, Brutess suggests that it was induced when buying the business to pay away such expenses for no benefit.  At first, the only evidence relied upon to support the allegation that this amount had been paid was a one line entry in the profit and loss account of Brutess for the year ended 30 June 1998.  The entry stated:

    “Preliminary expenses                 27,010.18”

    I raised with counsel the question of the adequacy of this evidence to prove this head of loss, and he was able to tender a copy of an account from Mulholland Hozack and Clisdell, Solicitors, for a total of $4355.80 for fees on acting for Brutess on the purchase of the business, and also on the mortgage to Permanent Custodians Limited and on the discharge of the mortgage to Advance Bank.  He explained, however, that it had not been possible to locate records establishing that Brutess had indeed paid out $27,010 for preliminary expenses.  I would need to have further evidence if the whole sum of $27,010 were to be allowed.  Legal fees and stamp duty on the purchase itself total $11,025.80 and I will allow only that amount rather than $27,010.

18. A fourth matter concerns a claim for interest paid to Howard Pacific Finance.  As I said earlier, Brutess borrowed relevantly $250,000 to enable it to pay the price fixed in the contract and $40,000 for working capital.  But I do not think that Brutess is entitled to recover the interest paid to Howard Pacific Finance so long as it receives interest on the money that it paid away in the purchase.  There are various ways of stating my reasons.  Brutess has paid some three years’ interest to Howard Pacific Finance in order to have the use of the sum of $250,000.  But it has in fact had the use of the sum of $250,000 for that period.  Accordingly, the interest paid to Howard Pacific Finance has not been wasted it has procured exactly what it was intended to procure, that is, the availability of $250,000 for the last three years.  The real grievance of Brutess is that it was induced to pay away the sum of $217,904 for goodwill which Mr Dolman’s evidence shows to have been of no value whatever.  So, if Brutess recovers not only principal thrown away but also interest on it at court rates, it will be adequately recompensed.  To express the matter differently, if Brutess were to recover both the interest that it has been paying to Howard Pacific Finance and pre-judgment interest at court rates, there would be a double recovery.  Accordingly, I will not award damages for the interest paid by Brutess to Howard Pacific Finance.

19. Fifth, Mr and Mrs Politano have sought to recover compensation for loss of salary and wages.  The basis of this claim is set out in a report of Mr Dolman dated 7 September 1999.  He says of Mr Politano that he has worked fifty to seventy hours weekly since purchasing the business and that prior to the purchase he had a number of opportunities, including an offer to manage a pizza business earning $36,400 per year.  Mr Dolman states that Mr Politano had previous experience in owning and managing a pizza business for two years.  He states that Mr Politano had a reasonable expectation that he would earn more from the purchase of a new business than as an employee because of the salaries and profit earned by the previous owners.  The claim for Mr Politano is $36,400 per year which Mr Dolman says is conservative when one takes into account the hours he has worked in the business.

20. Mr Dolman states that Mrs Politano has worked forty to sixty hours per week since the purchase of the business and that her mother has had to look after the children when necessary. He states that in addition to working in the pizza business, she had previous experience working in the cash office of Kmart.  Mr Dolman says that he has used the 1996 average weekly female earnings of cashiers of $477.60 per week or $24,835 per year and points out that these figures are for a thirty eight hour week which is considerably less than the hours Mrs Politano has actually worked in the business purchased.

21. The two amounts of $36,400 and $24,835 total $61,235.  The claim is for that amount for, in substance, each of three years.  Mr Dolman states that he has not made any deduction for the amounts actually paid by Brutess to Mr and Mrs Politano which were $11,480 in 1998 and $10,943 in 1999, “because of the conservative basis” of his calculations. 

22. Apart from other difficulties that I have with this claim, I raised with counsel the total lack of evidence showing that the Politanos would in fact have been able to secure alternative employment.  Undaunted, Mr Dolman rose to the task and gave it as his opinion that there has been an acute shortage of skilled and semi-skilled workers in recent years due to “the buoyant economy” and that, while admittedly unemployment is higher in regional areas, Wollongong is close to the south and south western suburbs of Sydney and “motivated people” would not have any difficulty in obtaining work.

23. I reject the claim for compensation for loss of earnings by Mr and Mrs Politano individually as a claim that has simply not been proved on the evidence.  I readily accept that they have worked very hard in this business in a very awkward situation which has not been of their own doing, but if a claim of the kind mentioned is to be advanced, it must be supported by detailed evidence in proper admissible form, rather than by the hearsay evidence of any accountant who is clearly expressing opinions not based on his proven expertise.

24. The sixth and last matter warranting special mention concerns the claim for trade and losses.  My approach to this matter is that a buyer of a business who has been induced to buy by misleading and deceptive conduct, must think carefully before continuing in the business, at least if the buyer intends to seek to recover from the seller damages for ongoing trading losses.  To express the matter differently, one ordinarily expects a buyer to abandon a loss making business rather than to carry it on indefinitely, and to put it upon the seller to pay damages for ongoing losses. 

25. In the present case Brutess has sought to recover trading losses from the date of the purchase, 15 August 1997, down to the present date, 26 June 2000.  As I put it to counsel for Brutess, it is difficult to resist the impression that if this case had not come up for hearing for another twelve  months, Brutess would have sought to recover damages for trading losses for a further year, or if the case had come up for hearing twelve months earlier, it would have south to recover damages for trading losses only down to that date.  But the amount recoverable cannot vary according to the date of hearing; at least it cannot ordinarily do so. 

26. To put the matter differently, if it is true that Brutess is entitled to recover damages for continuing trading losses, why should the amount recoverable be assessed on the assumption that they come to an end as at today’s date?  If Brutess is going to continue to make trading losses for the next year or two or three, why should there not be included in the amount to be awarded today a sum to compensate for the future trading losses as well (a claim which Brutess does not make)?

27. Brutess has satisfied me by affidavit evidence that because of the difficult situation with which it was faced it was reasonable for it to continue to carry on the business.  It is hardly open to the deceptive seller to suggest that Brutess should have called it a day earlier, suffered liquidation, the bankruptcy of its directors and the sale of their homes and the home of the father, all in order to minimise the amount of loss payable by the seller.  There is affidavit evidence of pressure applied to Brutess and the Politanos by creditors and of requests for indulgence pending the hearing and determination of this proceeding.

28. Accordingly, although with some doubt, I think it correct that the Politanos have acted reasonably in, at least down to the present time, having continued to trade.  However, I do not think that they should recover trading losses for the last of the three years because these trading losses have not been proved.  As Mr Dolman put it in his most recent report, “actual losses for the period 1 July 1999 down to the present date have not been obtained as [Mr and Mrs Politano] cannot afford the accounting fees to prepare these figures.”  In substance what Brutess invites me to do is to assume that for the period from 1 July 1999 down to today’s date, Brutess has been suffering trading losses of the same dimension as it suffered in the year ended 30 June 1999.  But I cannot make that assumption in the absence of evidence.  Accordingly, there will be no award of damages for trading losses for the most recent of the three years but there will be such an award for the first two of those years.

29. In the result there will be an award of damages including interest “at court rates” down to today’s date, 26 June for a total sum of $441,380.16.  There will be annexed to these reasons for judgment a schedule setting out how that amount is arrived at.   As appears from that document, the starting point is the sum of $375,000.  That sum was paid for goodwill ($217,904), plant fittings and chattels ($32,096) and stock-in-trade ($125,000).  Then there is the amount proved to have been paid for “preliminary expenses”, namely, $11,025.80.  These items make a total of $386,025.80.  From those amounts must be deducted the value of plant, fittings and chattels which were in fact transferred to Brutess and have been treated as having a value equal to their assigned part of the purchase price, namely $32,096, and there must also be deducted the balance owing by Brutess for the purchase of the stock in trade, namely, $121,939.48.

1. When those deductions are made, one has a subtotal figure of $231,990.32. Those losses were suffered on 15 August 1997 and so there will be interest under s 51A of the Federal Court of Australia Act 1976 (Cth) the rates of interest set out in Schedule J to the Rules of the Supreme Court of New South Wales calculated from 15 August 1997 to 26 June 2000.

2. In relation to trading losses, I have taken the figures from an affidavit of Mr Dolman dated 20 June 2000 of $77,883 for the year ended 30 June 1998 and $47,254 for the year ended 30 June 1999.  As I said earlier, there will be no award in respect of the period from 1 July 1999 to today’s date, 26 June 2000.  The total, therefore, for trading losses if $125,137.  For the purpose of calculation of interest, I will treat the first year’s trading loss of $77,883 as having been suffered on 1 July 1998, and the second year’s trading losses of $47,254 as having been suffered on 1 July 1999.  Accordingly, there will be interest at the rates mentioned on those two amounts from 1 July 1998 and 1 July 1999 respectively to date.

3. The amounts of interest I have calculated as shown in the schedule annexed to these reasons for judgment.  As can be seen, the interest on the amount of loss suffered on 15 August 1997 of $231,990.32 is $64,795.21.  The amount of interest on the trading loss of $77,883 suffered on 1 July 1998 is $14,929.01.  The amount of interest on the trading loss of $47,254 suffered on 1 July 1999 is $4,528.62.  The total amount of interest which I will include in the judgment is therefore $84,252.84.

4. There will be judgment for Brutess, against the first, second and third respondents for $441,380.16 and there will be an order that the first, second and third respondents pay the costs of the first and second applicants of the proceeding.

I certify that the preceding sixty-one (61) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Lindgren.

Associate:

Dated:             29 June 2000

Counsel for the Applicant:	Mr J R J Lockhart
Solicitor for the Applicant:	Cara Marasco & Co
The 1st, 2nd and 3rd Respondents did not appear.
Date of Hearing:	19, 20 June 2000
Date of Judgment:	26 June 2000