R.G. Maxwell & Associates Pty Ltd v Warner, M.M.
[1989] FCA 191
•3 May 1989
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JUDGMENT No .... .L:t .. Lz .. ~:J.,_
IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY QLD G1 of 1987 GENERAL DIVISION
BETWEEN: R.G. MAXWELL AND ASSOCIATES PTY. LTD. Applicant
AND: MARGARET MARY WARNER First Respondent
AND: ROBERT THOMAS ADCOCK Second Respondent
AND: HALLWICK PTY. LTD. Third Respondent
AND: BADETTE PTY. LTD. and
HALLWICK SERVICES PTY. LTD.
Fourth Respondents
AND: HALL CHADWICK & COMPANY Fifth Respondent
AND: DONALD WILSON LANGDON Sixth Respondent
$36,000;
MINUTES OF ORDER
RECEIVED
JUDGE MAKING ORDER: PINCUS J. - 4MAY1989 DATE OF ORDER: 3 MAY 1989 FEDERAL c
AUsr~8~T OF PRINCIPAl .l
WHERE MADE: BRISBANE REGISTRy / '- ,, :...:> THE COURT ORDERS THAT:
1. the first, second, third, fourth and fifth
respondents pay to the applicant the sum of 2. the first, second, third, fourth and fifth
respondents pay the applicant's costs of and incidental to the proceedings, to be taxed on the
basis of a five day hearing.
NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules .
IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY QLD G1 of 1987 GENERAL DIVISION
BETWEEN: R.G. MAXWELL AND ASSOCIATES PTY. LTD. Applicant
AND: MARGARET MARY WARNER
First Respondent
AND: ROBERT THOMAS ADCOCK
Second Respondent
AND: HALLWICK PTY . LTD.
Third Respondent
AND: BADETTE PTY. LTD. and
HALLWICK SERVICES PTY. LTD.
Fourth Respondents
AND: HALL CHADWICK & COMPANY
Fifth Respondent
AND: DONALD WILSON LANGDON
Sixth Respondent
PINCUS J. 3 MAY 1989
REASONS FOR JUDGMENT This is a claim under s. 52 of the Trade Practices Act
1974, and also in contract, relating to the purchase of a Brisbane business. The applicant is a company, the shareholders in which
are Mr and Mrs R.G. Maxwell, and the respondents are persons
associated with the vendors.
To be more precise, the first respondent was a director
of and shareholder in Morris Warner & Associates Pty Ltd, which
company conducted the business sold, as trustee for the fourth respondents. The third respondent was also a shareholder in Morris Warner & Associates Pty Ltd. The second and sixth respondents were partners in the fifth respondent (an accountancy firm) and directors of the third respondent and of one of the fourth respondents, viz. Hallwick Services Pty Ltd.
Mr and Mrs Maxwell, before the purchase of which they
complain, had some years' experience in running the applicant
company, which carried on business as an employment agency under
the name "Allstaff". They, and in particular Mr Maxwell, who was
the dominant figure in the applicant's business, were interested
in expanding Allstaff; in the two years before the subject
purchase, its revenue had grown considerably . The business purchased ("Morris Warner") was, in contrast, undergoing a sharp
decline and running at a loss; this situation had been regarded so
of simply closing the business down. The applicant's case is that seriously by some of the respondents that there was some thought it was induced (through the Maxwells) to buy the business by misleading statements as to the extent of the decline and as to
the extent of the client list of the business sold.I am satisfied that the applicant was misled as to the
current performance of Morris Warner, and that if the Maxwells had
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3.
known the truth, they would either not have bought the business at
all or would have paid substantially less for it. I have reached
t his conclusion although, as explained below, the Maxwells did not complain of having been misled as early as one would have
expected.
In addition to claiming the difference between the price
of the business and its value, the applicant seeks to recover large sums of money allegedly thrown away as a result of the purchase. I am not satisfied that any losses were incurred in
this consequential category which the applicant is entitled to
recover.
The principal witnesses were Mr and Mrs Maxwell and a
Mrs MacDonald for the applicant, and on the respondents' side, the
first respondent Mrs Warner and the second Mr Adcock. The most important of this group were Mr Maxwell and Mrs Warner, and of the
two, I thought Mr Maxwell the more reliable.
Mrs Warner had the day-to-day running of Morris Warner
and under her supervision records of its business activities were kept. More elaborate accounting records were kept by the Hall Chadwick computer.
The Negotiations
Mr Maxwell telephoned Mrs Warner in response to a
newspaper advertisement, placed in the Courier-Mail on saturday 14
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4.
September 1985, seeking a purchaser for an employment agency,
which was described as being "FOR SALE DUE TO ILLNESS". The
advertisement also said: "Business sufficient to maintain Manager
plus 2 Staff".
Mr Maxwell spoke briefly to Mrs Warner on the day he
became aware of the advertisement, Monday, 16 September 1985, and
went to see her the next day, accompanied by his wife, at the
Morris Warner premises. There is a dispute as to what was said about the quality of the business during the conversation which
took place there. Mrs Warner explained that she had diffi culties
with her health, and Mr Maxwe l l inquired, according to him, whether that had adversely affected the business. He alleged that
she said that the business had "declined a little over the last
six- eight months, but it is not serious".
If that was said, it was false. The Morris Warner
business had two aspects, temporary placements and permanent placements. The former were placements of employees who were made
available to Morris warner's customer-s for short periods of time
on the basis that the customer paid Morris Warner for their services. The permanent placements were, of course, people who were found by Morris warner to occupy positions on the basis that they would become employees of the customers who engaged Morris Warner to find them. The permanent placement work produced about three-quarters of Morris warner's gross income, by which I mean three-quarters of the amount left after taking away sums paid by
Morris warner to those placed temporarily from the total of receipts for permanent and temporary placements.
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5.
The main difficulty the Morris Warner business was in,
and the main reason why it had been put up for sale, was that
there had been a substantial fall in the receipts from permanent
placements. In the first five months of 1985, the total figures for permanent placements were much the same as for the corresponding period in 1984. The permanent placement figures then dropped considerably. In June and July (taken together), the 1985 figures were only about half as much as those for the corresponding period in 1984. It should be added that the figures
I am speaking of, recorded in exhibit 19, show returns on an
accruals basis; that is, exhibit 19 contains an entry for each
permanent placement made on the date on which the employee in question commenced work. Employees who began in a particular
month were included in that month's returns. However, commonly
Morris Warner's fee for making the placement was not received for
some weeks, or even longer.
In August 1985 only one permanent placement was made,
and there had been only one made in ·September up to the date of
the conversation between the Maxwells and Mrs warner, which I have
of August and September 1984, eight permanent placements had been just mentioned - i.e. to 17 September 1985. In contrast, in each made - that being about the monthly average for the period from the beginning of 1984 to May 1985. The business had continued, to September 1985, to
produce income from temporary placements at about the usual rate -
i .e. at about $3,000 or $4,000 a month. But, as I have explained,
most of Morris Warner's profits were derived from the permanent
placement activities, and it was the quick decline of the latter, as I infer, which had principally prompted the decision to sell the business.
The respondents' case was that the Maxwells were told
the business had declined, but were told absolutely nothing to indicate the extent of the decline. The difference in words
between Mr Maxwell's version and that of Mrs warner is not great,
but I am satisfied that Mr Maxwell's version is substantially
correct and that of Mrs Warner incorrect. The reasons for so
finding are, generally, that in a number of respects the applicant's witnesses appeared to be more accurate and, more
particularly, two factors I shall mention.
Firstly, Mrs Warner's having understated the extent of
the decline was, in my opinion, part of a course of positive
concealment. I am satisfied that Mr Maxwell asked Mrs Warner for
trading figures and she fobbed him off by saying that the records
were with the accountants, Hall Chadwick, and that she had no
up-to-date figures in the office.
The statements just mentioned were not candid, in that a
perfectly adequate idea of the volume of recent business being
done by Morris Warner could have been obtained from a brief
examination of exhibit 19. It showed the receipts from permanent placements back to the inception of the business in 1981, with
monthly totals, and further showed that, as I have mentioned,
there was only one placement in August and one in September up to
the 17th. It is true that, as Mr Douglas (counsel for the represented respondents) pointed out, the statement of claim makes no complaint that the Maxwells were deceived as to the
availability of books and records, but I am satisfied that they
were so deceived and that is consistent with Mrs Warner's having
minimised the extent of the decline in business.
My second specific reason for disbelieving Mrs Warner's
denials on this point is that it was, in the end, common ground
that she removed at least a substantial quantity of the records of
the business, including quite recent records, shortly before possession was given. I thought her explanation of the reason for doing this - namely an inconsequential conversation she had with Mr Maxwell - was untrue and that her substantial reason was a consciousness of having misled the Maxwells. Further, as I have
mentioned, I found Mr Maxwell to be, in general, a more credible
witness than Mrs Warner.
Looking at the matter more broadly, there can be no
doubt that the Maxwells inquired about recent returns from the business and it appears to be common ground that they were not
told what the recent returns were. Mrs warner referred the Maxwells to the accountants for that information - but why would
she have done so? The returns, at least in the sense of accruals,
were readily available to her.
Mr Maxwell says, and I accept, that he asked Mrs Warner
about Morris Warner's clients and that a list was produced. There
was no satisfactory evidence as to the way in which that list came into existence. Mrs Warner's version was that she described the
list as containing "the clients we have done business with since
the company commenced". It was not that, since many names were
omitted. According to Mrs Warner, the Maxwells merely glanced at
the list and handed it back - an odd response . Mr Maxwell said he
read the first two pages and scanned the rest, recognising many
significant companies on the list. He claims that Mrs Warner
described the list as being current. He says he asked Mrs Warner
whether she was receiving regular business from the firms on the
list and she replied that she was, "but in many cases it is only a
small proportion of the total business".
Mrs Maxwell's account of this incident was not precisely
the same as that of her husband, but was somewhat similar . On the
whole, I am satisfied that Mr Maxwell's recollection is
substantially accurate, as to the representations made by Mrs
warner about the client list .
Further, I am of opinion that Mrs Warner's statements
about the list produced were misleading . It is true that to
describe a client list as "current" is loose, because it leaves much room for argument as to whether people who have not been heard from for, say, six months should be, or have been, included; but the list produced included the names of people who had not dealt with Morris Wa r ner for years, and could not, if correctly
described, have been an appropriate list to produce in response to a request for a list of clients . I think Mr Maxwell was impressed with the client list
and that the names on it were a substantial inducement to him. While he still had the list, he inquired about price and was told
that the business was for sale at $40,000 on a walk-in, walk-out
basis. It was arranged that he would go to see the second
respondent Mr Adcock the following day, at the offices of Hall
Chadwick and Co. After some further discussions, the Maxwells
went back to their own office and Mr Maxwell wrote out a note
recording his conversations. It was suggested, on behalf of the represented respondents, that this note was not genuine. I am
satisfied of the contrary. Its content is broadly consistent with
the Maxwells' case.
On the following day, there occurred a meeting at Hall
Chadwick and Co., as previously arranged. There is no doubt that
the purpose of the meeting was to enable the Maxwells to study the
recent financial statements and other records showing the
performance of the business. There is also no doubt that, while
they were shown the position as at 30 June 1985, they were not told the receipts since 30 June, nor - the bookings since 30 June.
As I have mentioned, the latter were readily available in the office of Morris Warner. No satisfactory explanation for the Maxwells not having seen records of either the recent bookings or recent returns was advanced by the respondents. Mr Adcock's account of relevant events was, I thought, adversely affected by the circumstance that he seemed to have only a poor recollection of them. For example, in his affidavit evidence, Mr Adcock said that he went through the "debtors' printout" with Mr Maxwell and that that "covered the income figures for the period 1 July 1985
to about 18 September 1985" . He did not swear up to that account in oral evidence, and I find that it was untrue. In cross-examination by Mr O'Donnell, for the applicant, Mr Adcock denied that he had discussed with the Maxwells the level of income
from July to September 1985 . He claimed, implausibly, that it was agreed that Mr Maxwell would "talk to Margaret Warner about the income levels". Mr Maxwell's version of the conversation with Mr Adcock
was that statements were made to the same effect as those which
had been made by Mrs Warner the previous day - i.e. that the
"business hasn't slipped much at all". I think Mr Maxwell's
evidence is correct. Oddly, Mr Adcock said in his oral evidence
that he had "never looked on the permanent placements as being the
mainstay of the business", although they obviously were.
It was answers of that sort which have led me to the conclusion that Mr Adcock's evidence was of very little use to me.
On points where, it appears to me, he had little idea of what an
accurate answer would be, he answered .nevertheless, without having
careful regard to the necessity of ensuring that his evidence was
reliable. There was further discussion between the parties, which
does not need to be recounted, and Mr Maxwell made an offer of
$37,500, which Mr Adcock said would have to be discussed with his
partners.
Again, Mr Maxwell said that he wrote up an account of
the meeting in Mr Adcock's office later the same day, which account is broadly speaking in conformity with the evidence he gave; I accept that the aide-memoire is genuine.
On Thursday, 19 September, Messrs Adcock and Maxwell
agreed on the telephone to a price of $38,750 for the business,
and subsequently a written agreement for sale was made. Under it
the first and third respondents agreed to sell the share holdings
mentioned above and the fourth respondents sold their interest in
the trust.
Complaint is made by the applicant of misleading conduct
other than in the respects I have already found. In particular,
it is asserted that the advertisement was misleading in that the
business was insufficient to maintain a manager with two staff.
It was suggested during the hearing that if that was misleading,
it was ultimately of no consequence, because the Maxwells obtained
much more detailed information about the business before deciding
to buy. Although originally attracted to that notion, I have
come, in the end, to a conclusion favourable to the applicant on
the point. It is true that the applicant obtained detailed information as to the performance of the business to 30 June 1985,
but only a sketchy (and misleading) account of its subsequent
performance was given. Mr Douglas argued that I should hold, on
the evidence, that no employment agency could do with less than
three staff; I do not believe that to be so. No doubt a properly
run and set-up agency would have at least a manager with two
staff, but surely there are one-person and two-person agencies.
Apart from that, the advertisement did not say merely
that three people were working or could work in the business; it
said the business was "sufficient to maintain" a manager and two
staff. In my opinion it was not. Practically all that was left was the temporary placement business, with the potential or
possibility of regaining the virtually defunct permanent placement
activity. Whereas, in other circumstances, a broad statement of
the kind included in the advertisement could not be regarded as inducing, here it is my opinion that the advertisement played its
part in misleading the Maxwells as to the character of what was
for sale.
The other misleading statement alleged was that a former
employee had left in January 1985 and not taken any clients of the
business with her. I find it unnecessary to come to any
conclusion on that aspect because, even if the statement in
question was made, its inducing effect must have been minimal.
Loss
The contract was made on 25 September 1985, and the
Maxwells took possession on 26 September. In advance of taking
possession, Mr Maxwell was already making elaborate plans for the
amalgamation of the two businesses, including buying new equipment
to cope with the expanded workload, but his reorganisation plans
were severely set back by an absence of records. He says that
Morris Warner records of the work done for clients over the years, jobs available and the like, together with invoice books, group tax records, creditors' invoices, debtors' invoices, cash books,
cheque butts, bank statements and financial statements were all
missing. Even the list of clients which had been produced in the
course of negotiations was gone. Substantially, all that was left
was a collection of "client cards", which did contain enough
information.
Mr Maxwell needed the invoice books. According to him
it took "more than a week" to get the books.
Mrs Maxwell's version of what records were missing is a
little different from her husband's, but she agreed that theimportant records were missing. She telephoned Hall Chadwick, who
said they had no records. Mrs Maxwell particularly asked for the
invoice books and was told that Hall Chadwick did not have them.
When, after several attempts, Mrs Maxwell got in touch
with Mrs Warner, she was told that all the records were with Hall
Chadwick. Eventually the invoice books were said to be in Hall
Chadwick's office and after about "a week to ten days from my
initial telephone call" the invoice books came back. For the reasons I have explained above, the books were
of considerable importance, not only in enabling the Maxwells to
get on with the process of merging the two businesses, but also
because they disclosed who the current clients were and what business had been done with them. They showed, as I have pointed out, that only two permanent placements had been made from the
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14.
beginning of August to 17 September; there was a further permanent
placement on 25 September.
According to the applicant's case, the Maxwells did not
become unhappy with their purchase for months. I find this hard to understand. Their evidence was that the process of analysing the Morris Warner records involved giving close attention to the invoice books, and that was apparently given without its dawning
on anyone that there had been a substantial drop in the number of
recent permanent placements.
Mr O'Donnell argued for the applicant that no particular
point was made of this by counsel for the represented respondents,
in cross-examining the Maxwells. Mr O'Donnell added that perhaps Mrs Maxwell, being unaware of the financial implications of the invoice books, did not tell her husband about them.
In my opinion, that cannot meet the difficulty. The
three respects in which the applicant was misled - as to the
volume of recent business, the clients and the number of employees
the business would support all depended, in the end, on
knowledge contained in the invoice books and easily derived from them. The applicant's case is that it was misled on these three
subjects; but when detailed information (in the form of the
invoice books) was supplied to the applicant in readily accessible
form, showing precisely what business had been done and with whom,
it appears to me that the inducing effect was gone.
In actions of deceit a misrepresentee may be able to
recover consequential losses, in addition to the differencebetween price and value: Gould v. Vaggelas (1984) 157 C.L.R. 215. The High Court has held that ordinarily the measure of damages in
deceit is to be followed in s.52 cases: Gates v. The City Mutual
Life Assurance Society Limited (1986) 160 C.L.R. 1. It has been
suggested that the submission made in that case proceeded on an erroneous footing (Elna Australia Pty Ltd v. International
Computers (Australia) Pty Ltd (1987) 75 A.L.R. 271 at 282) but one
finds in the principal judgment the following:
"The Act does not prescribe the measure of damages recoverable by a plaintiff for contravention of the provisions of Pts IV and V. Accordingly, it is for
the courts to determine what is the appropriate
measure of damages recoverable by a plaintiff who
suffers loss or damage by conduct done in
contravention of the relevant provisions. Two established measures of damages, those applicable
in contract and tort respectively, compete for
acceptance. . .. " (p. 11) " The courts are not bound to make a definitive choice between the two measures of damages so that one applies to all contraventions to the exclusion of the other. However, there is much to be said for the view that the measure of damages in tort is appropriate in most, if not all, Pt V cases,
especially those involving misleading or deceptive
conduct and the making of false statements. Such
conduct is similar both in character and effect to
tortious conduct, particularly fraudulent
misrepresentation and negigent misstatement." (p.14) It is true that the expression "there is much to be said
for the view" is less than emphatic, but the decision, read as a
whole, is strongly in favour of applying the deceit measure of
damages in s.52 cases.
It is at least implicit in Gould v. Vaggelas (1984) 157
C.L.R. 215 that, prima facie, continuing losses can be no longer
laid at the door of the representor, once the truth is discovered:
see per Gibbs J. at 227, per Wilson J. at 244 and per Dawson J . at
p . 269-270. That was a deceit case, but it seems to me that the
same principle should be applied to the calculation of damages
under s. 52. Special problems arise when the representee has, before discovering the truth, adopted a plan of action not easily
discontinued; an example is, of course, the representee who has bought and undertaken the management of a business. He is likely to discover that he has been tricked fairly soon after taking
possession but may, and commonly does, recover losses incurred
well past that point. Here, on the evidence, I find that, even
before taking possession, Mr Maxwell had adopted at least a
provisional plan of action involving shifting his own business to
the premises which had been occupied by Morris Warner engaging
staff, and acquiring new equipment. But much or all of the
expenditure incurred in carrying out this plan could have been avoided if he had taken notice of the content of the invoice books. Even a casual perusal of the permanent invoice book would
have disclosed that, so far from holding up well, the permanent segment of the business had fallen away to almost nothing. Within a fortnight after possession was taken, according to Mrs Maxwell's recollection, the invoices for debtors for the month of September came from Hall Chadwick, as did the bank deposit book. In her evidence she complained of inability satisfactorily to reconcile the debtors and creditors with the invoice books and creditors' invoices.
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17.
It seems clear that the task immediately attempted by
Mrs Maxwell necessarily involved the study of the invoice books.
No explanation is advanced as to why the Maxwells did not promptly
complain that they had been misled, and that is a circumstance
that has concerned me; it supports an inference that the purchase
was not in truth induced by the statements I have found to have
been made . I have not drawn that inference against the applicant,
but am satisfied that they ere induced. However, the Maxwells' lack of reaction to the content of the invoice books appears to me
effectively to destroy the major part of their claim for damages.
If, as may perhaps be the case, the problem was that Mrs Maxwell did not concern herself with the financial aspects of the business
and failed to alert her husband to the implications of the entries
in the invoice books, still I am obliged to hold that the
applicant had information supplied to it, in readily assimilable
form, which was quite inconsistent with the assertions which I
have held induced the purchase. In my opinion, it cannot be held that steps taken by the applicant in response to the respondents' misleading conduct continued to be induced by that conduct after
early October 1985.
I am of the view, further, that, acting reasonably, the
applicant should have mitigated its loss by examination of the
records supplied to it in early October. At that stage the
applicant had no proper accounts recording the performance of the
Morris Warner business since 30 June 1985 and that was the subject
of complaints made by the applicant; but proper management of the business should have included prompt examination of the
comprehensive records of business done. If, as the applicant asserted, it continued to act on the assumption that the
respondents' general statements about the recent performance of
the business and about the client list were accurate, its having
done so was unreasonable and unnecessarily augmented its loss.
The damages claimed under this head are in the following
categories; I think it desirable to make some specific
observations about them, in addition to the remarks above .
1. Costs of leasing Morris Warner premises
Morris Warner was, at the time it was managed by Mrs
warner, a tenant of its premises from month to month, but the
landlord told Mr Maxwell it wished to lease the premises for a
term of two years and he agreed to that. The lease was executed
on 24 February 1986, backdated to 1 October 1985. If, as they should have done, the Maxwells had spent a little time considering the invoice books in October, they might well not have taken the
two year lease; their own lease did not expire until 31 March
1986. I can see no basis for treating the alleged extra cost of
the two year lease as recoverable. 2 . Costs of Move This includes two sub-categories. Some work was done on
the Morris Warner premises restoring and renovating furniture and
the like, and in addition money was spent in moving furniture from
the All staff office and changing the phone over. In my view, these claims fall with category (1), but some comments should be
made on the dates. Some of the expenses claimed for were incurred in February 1986 and some as late as April. I find it difficult
to see how any 1986 expense can be treated as having been induced
by the respondents' misleading conduct. The earliest invoices are
dated 7 November 1985 and were for furniture and painting. The
removalist's invoice was dated 16 November and that for installation of power points on 12 November. It may be possible
to infer from these dates that some sort of arrangement (binding or otherwise) was made early in November with the landlord, under
which, ultimately, the lease I have mentioned was executed. In my
opinion, these dates are too late for the applicant to succeed
under this head, as it had by early November ample opportunity to
assess the recent performance of the business and the scope and
identity of its clientele.
3. Purchase of Chattels
According to the applicant's case, it was induced by the
misleading conduct mentioned above to buy a new computer with associated furniture, a new photocopier and new switchboard - the total cost being over $35,000. Mr Maxwell gave evidence that the "true extent" of the
Morris Warner business did not justify the acquisition of this
equipment. The applicant's case was that it was bought at a time
when there was reason to think the Morris Warner business to be much larger than it was in truth, but undoubtedly the new
equipment was advantageous whatever the size of the Morris Warner
business. Mrs Maxwell said the new photocopier worked much faster
than the one the applicant had previously used. She agreed that
it had proved to be handy to have a big fast photocopier. She made somewhat similar remarks about the computer. It appears to me impossible to hold that the money spent
on this equipment was simply thrown away. I agree with the
contention advanced on behalf of the respondents that the
applicant's business was, under the guidance of Mr Maxwell, on an
expansive path, and I am unpersuaded that the purchase of this
equipment was solely caused by misapprehension about the size ofthe Morris Warner business. The dates of these purchases are not precisely established, but I gather that they were made in
November and December 1985; that was after the applicant had been
supplied with full information about the extent and nature of the
Morris Warner business, in the form of the invoice books.
4. Labour Costs and the Like
I include under this heading items (f), (g), (h) and (i)
in the amended particulars of damages delivered on 18 April 1989.
The theory on which these claims are based is that the money spent in integrating the two businesses was largely wasted, as was money spent in attempting to secure the business of people who were thought to have been Morris warner clients. It is my opinion that the Morris Warner business was not worthless, but had a connection
which was capable of being exploited . What had gone drastically
wrong - the virtual loss of the permanent placement business - was not incapable of remedy; indeed, the evidence shows that
substantially better results were obtained from the permanent
placement segment of the Morris warner business between the date of taking possession and the end of 1985 than had been obtained between the end of July and the date of possession. Insofar as the expenses claimed relate to activities undertaken on the assumption that certain former clients were still dealing with Morris Warner, that assumption was an unreasonable one. The
applicant does not claim to have gained any precise knowledge from
Mrs warner of the last date upon which the people on the client list she supplied had dealt with Morris Warner, and the obvious course to take was to get that information from the invoice books.
An illustration of the problem the applicant has in recovering
these expenses is in exhibit RGM47(2), which is an invoice dated 6
December 1985 for 500 letterheads. Mr Maxwell says that letters
and promotional material were sent to all supposed Morris warner
clients, but insofar as that was done in respect of clients who
had not dealt with Morris Warner for a long time, any waste
involved was easily avoidable.
5. Liability on Chattel Leases Similar considerations apply to this category as to
category no. 3 . The money spent went towards paying out debts on
Morris Warner equipment thought to be "in excess of the needs of the amalgamated business or incompatible with it". The only way in which recovery of these items can be justified is by holding that the expenditure would not have been made if the applicant had
realised the true history of the Morris Warner business. There is
no evidence upon which that could sensibly be found.
Breach of Warranty
The applicant makes a separate claim based on a warranty
in the contract of sale, under which the first, second and sixth respondents warranted that a balance sheet attached to the contract showed the financial position of the trust as at 20 September 1985. If the claim based on the warranty is made out and judgment is given on that claim, then that reduces the cost of the purchase and must bring the loss caused by the misleading conduct down by the amount of the award for breach of warranty -
at least if the breach of warranty judgment is satisfied.
Therefore, it may be thought that the breach of warranty clai m should be ignored, since anything awarded on that score will reap the applicant nothing, the damages for misleading conduct merely being reduced by the sum awarded in the other claim. There is,
however, a matter which may be thought destructive of this argument. The claim for breach of warranty damages is $31,029.35. If, in truth, the applicant's breach of warranty claim entitled it
to higher damages than those awarded under s.52, then the practical course would be to allow the breach of warranty claim
only, regarding the s.52 claim as being extinguished by its
allowance. The only disadvantage of doing so, from the
applicant's point of view, would be that giving an award on the breach of warranty claim produces a judgment against fewer
respondents than does the s.52 claim.
The largest item in the breach of warranty claim is a
sum of $19,638 due, at the date of sale, by the company to persons
interested in the trust. The respondents said, and I accept, that
there was never any intention of recovering that sum and some evidence was given by Mr Adcock of a conversation which was said
to effect a release of the liabilities mentioned. It appears to me implicit in the dealings between the parties that there should
be no obligation to repay moneys of the kind in question. Had the
matter been raised during the course of negotiations, there can be no doubt that the parties would have concurred in the view that the $19,638 was not intended to be recoverable . It was suggested
that consideration for the implicit agreement to release the loans
was lacking; but if one treats the release as a promise made to
the purchasers, there was good consideration for that promise. I
can see nothing artificial in implying a promise by the "internal"
creditors to the purchasers that they would not seek to recover
the sums in question.
Deduction of the sum of $19,638 reduces the claim for
damages for breach of warranty to $11,391.35. Assuming, in favour of the applicant that that is the proper sum, it is not
appropriate to make an award for damages. To do so would merely reduce the amount awarded under the head and create complications
as to the rights of the respondents inter se, for, as will appear,
the damages under s.52 are in a greater sum.
Value of Business
The applicant adduced expert evidence to show that since
the Morris Warner business was running at a loss, it had no value.
Mr Adcock, more plausibily, said he thought the business was worth
about $20,000. In my opinion it was not worthless.
One reason for thinking so is that the evidence from both sides suggested that the financial result of operating such a business tends to be depressed by tax considerations. An example
of this was the evidence of Mr Maxwell that a large sum for
"commission" was included in the Allstaff accounts to achieve a tax result, namely the absorption of losses. More generally, it is likely that the allocation of expenses between personal and business matters tends to be biased in favour of the latter.
Further, I am satisfied that even if Mr Maxwell had been
fully informed about the financial position of Morris Warner, he would have been likely to be interested in buying it. Although
the clients had been somewhat neglected in the months before the
sale, they were not necessarily and irretrievably lost. That is illustrated by the circumstance that the Morris Warner business
earned, under the new management, considerably greater sums from permanent placements in the two months immediately after the sale than it had in the two months immediately before; about six times as much was earned in the later months as in the earlier. Mrs McDonald appeared to be of the view that there could have been a definite improvement "with the right person in there" and thought
. '
25.
the business had a valuable connection. I am encouraged in
thinking that a buyer such as the applicant would not have been
entirely driven away by full disclosure of the financial results
by the circumstance that Mr Maxwell was prepared to pay $38,750
after he was told that the profit for the year ended 30 June 1985
was only $1,599 and that the business had declined since.
Assessing the value of the business involves some
consideration of its net asset position. According to the respondent, there was a small positive balance, but the applicant's case was that at the date of the sale Morris warner was some thousands of dollars in the red; I have elsewhere explained that in my view the applicant is wrong in treating the internal loans of $19,638 as a true liability.
To some extent, resolution of the dispute just referred
to depends upon matters of accounting practice. For example, a
substantial sum was due to Directories Australia, but it was
contended by the respondents, plausibly as it seems to me, that
since the sum due was payable in advance and it covered an entry
for a whole year, there should be an apportionment on a time
basis. It appears to be unlikely that a purchaser would, if fully informed, have bought on the assumption that there was a positive asset position; such a purchaser would have been inclined to assume that some few thousands of dollars in debts would, making all proper adjustments, have been left owing. Absolute precision is, on the evidence, impossible.
,..
26.
I estimate that the value of the business at the time of
the purchase was in the region of $15,000. That value would havebeen reflected in the price fixed for the shares plus the interest in the trust. Some allowance must be made for the fact that stamp
duty would have been somewhat less on such a purchase. The
primary damages will be assessed in the sum of $24,000, to which
will be added $12,000 in lieu of interest, pursuant to s.51A(1)(b)
of the Federal Court of Australia Act 1976. The total amount of
the judgment will therefore be $36,000. Judgment should go
against all the respondents except the sixth respondent, although
his exclusion is of symbolic significance only; he is a member of
the fifth respondent. It did not appear to be seriously disputed
(insofar as the point is not covered by admissions) that if the
first and second respondents were held liable, the third, fourth
and fifth respondents became liable also, as principals; in any
event, I so hold.
In the result, there will be judgment against a l l the respondents except the sixth in the sum of $36, 000, with costs taxed on the basis of a five-day hearing . I have 1 imi ted the
costs because of the view I have come to on the question of
damages. .t cerlJfy tnat this and the :23 preceding
pages are a trua copy of the reasons for
judgment herein of His Hz · n r
Mr. Justice Pin~us // -
~ . l./1/-J~ Associate
Dated 3 ~ !1f9.
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