Scarborough v Klich - [2001] NSWCA 436

NEW SOUTH WALES COURT OF APPEAL

CITATION: SCARBOROUGH & ORS v KLICH & ORS [2001] NSWCA 436

FILE NUMBER(S):
40488/00

HEARING DATE(S): 3, 6 August 2001

JUDGMENT DATE: 06/12/2001

PARTIES:
Paul Kent Scarborough, Fernando Quiambo, Victoria Esperanza Quiambo and Thea Fardouly (Appellants/Cross-Respondents)
Karol Klich, Richard Adams-Dzierba, Ecrovest Pty Limited, Abaca Pty Limited and Abala Pty Limited (Respondents/Cross-Appellants)

JUDGMENT OF: Priestley JA Powell JA Studdert AJA

LOWER COURT JURISDICTION: District Court

LOWER COURT FILE NUMBER(S): DC 5212/98

LOWER COURT JUDICIAL OFFICER: Sidis DCJ

COUNSEL:
M L D Einfeld QC and T J Morahan (Appellants/Cross-Respondents)
M J Lawler (Respondents/Cross-Appellants)

SOLICITORS:
Jenkins & Associates (Bondi Junction) (Appellants/Cross-Respondents)
Jackson Smith (Respondents/Cross-Appellants)

CATCHWORDS:
DAMAGES - Tort - Fraud - Interest - Whether damages by way of compound interest appropriate
FRAUD - Deceit - Inducement to purchase property - Measure of damages
TRADE AND COMMERCE - Trade practices - Misleading and deceptive conduct - Measure of damages - No necessary analogy with contract, tort or equitable remedies

LEGISLATION CITED:

DECISION:
See paragraph 123

JUDGMENT:

IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL

CA 40488/00

PRIESTLEY JA
POWELL JA
STUDDERT AJA

6 December 2001

SCARBOROUGH & ORS v KLICH & ORS

Judgment

PRIESTLEY JA: I agree with Powell JA.

POWELL JA: This is an Appeal and a Cross-Appeal from a judgment delivered by Sidis DCJ, and a judgment entered and orders made by her Honour pursuant thereto on 30 May 2000.

In the proceedings with which her Honour was concerned to deal, the Respondents, who were the Plaintiffs before her Honour, sought, inter alia, to recover from the Appellants damages, the claims for which were based variously in tort – for alleged misrepresentations – pursuant to the provisions of s 42 of the Fair Trading Act 1987, in respect of conduct said to have been misleading or deceptive, and in contract for what were said to have been breaches of certain warranties entered into by one or other of the parties to the proceedings. In order that one might more readily understand how these various claims arose, I record that they related, ultimately, to three separate transactions they being:

(1)the purchase by the Third Respondent, Ecrovest Pty Limited (“Ecrovest”), a company apparently controlled by the First Respondent, Karol Klich (“Mr Klich”) from the Second Respondent, Fernando Quiambo (“Mr Quiambo”) of two businesses said to have been conducted by Mr Quiambo in the Sydney Metropolitan area, those businesses being known as “AAA Abest Cleaning”, or “AAA Abala Cleaning”, and “AAA Aba Pest Control” - the former being a carpet cleaning business and the latter being a pest control business – under an agreement for sale dated 31 October 1997, for the sum of $210,000 of which $150,000 was provided by Mr Klich, and the balance of $60,000 was by way of vendor finance;

(2)the purchase by the Fifth Respondent, Abala Pty Limited (“Abala”) from the First Appellant, Paul Kent Scarborough (“Mr Scarborough”), pursuant to an agreement for sale dated 15 February 1998, of a carpet cleaning business known as “AAA Abaca Cleaning”, conducted by Mr Scarborough in Melbourne, for the sum of $80,000, of which $30,000 was provided by Mr Klich, and the Second Respondent, Richard Adams-Dzierba, (“Dr Adams”), the balance of $50,000 being by way of vendor finance;

(3)the purchase by the Fourth Respondent, Abaca Pty Limited (“Abaca”), from the Third Appellant, Victoria Esperanza Quiambo (“Ms Quiambo”), Mr Scarborough’s wife and Mr Quiambo’s sister, pursuant to an agreement for sale dated 15 February 1998, of a business known as “AA Abala Cleaning”, conducted by Ms Quiambo in Brisbane, for the sum of $140,000, of which $90,000 was advanced by Mr Klich and Dr Adams, the balance of $50,000 being by way of vendor finance.

The misrepresentations of which the Respondents complained were said to have been made by Mr Scarborough – who, in addition to having been the vendor of the Melbourne business, was said to have managed the Sydney businesses on behalf of Mr Quiambo – and by the Fourth Appellant, Thea Fardouly (“Ms Fardouly”), a licensed Real Estate Agent, who claimed (Black AB 507) also to have been a Consultant with Sidney Raper Property Consultants, which was a licensed Business Broker. The representations made by Mr Scarborough were said to have been false to his knowledge, and therefore fraudulent.

The warranties, in respect of which damages and breach were claimed concerned, in the case of all businesses, the fee basis of those businesses and, in addition, in respect of the Sydney businesses, concerned the average income of the businesses in the three months preceding the date of sale.

In addition to defending the proceedings, each of Mr Scarborough, Mr Quiambo and Ms Quiambo brought a Cross-Claim seeking to recover the amounts which were outstanding under their respective Agreements for Sale.

Prior to June 1997, Ecrovest operated a contract cleaning, and property maintenance business, that business being managed by Mr Klich and, so he said, being successful.

In early 1997, Mr Klich and his wife, who had recently made a capital profit out of a property development, decided to invest that profit, which was of the order of $210,000, in a business. What Mr Klich had in mind was a business that would generate a good income, but which had a manager, as he (Mr Klich) did not think that he would have the time to manage a second business.

In June 1997 Mr Klich saw in the “Businesses for Sale” section of the “Sydney Morning Herald” an advertisement for a domestic carpet cleaning business, which advertisement stated that the business was under management, and which gave the name of Ms Fardouly as a contact.

Mr Klich telephoned Ms Fardouly and arranged to meet her. When he did so, so he said, she, in response to his request to have her tell him about the business, replied (Blue AB 2):
“This is a great businesses. This is a cash business. The owner will not need have anything to do with the business. It is run by management. The manager is very good. I have a summary of the details of the business here for you”.
In the “Summary of the Details of the Business” which were then handed to Mr Klich was a document of 7 pages (Blue AB 151-157), containing a number of representations as to the business. Among those representations were the following:
“Established:  2 YEARS
………………………………………………………
Description of Business:    Rapidly expanding carpet cleaning company run under management. Uses SIX (6) subcontractors who operate company vans and equipment. Subcontractors are paid a straight percentage of their individual weekly totals. Manager is office based and attends to initial phone contact with clients, organisation of subcontractors and day to day management.
………………………………………………………..
Value:  ……
Gross Sales:         $12,000-$14,000 pw
……
Gross Margin:70% (average)
………………………………………………………..
BRIEF HISTORY:                The business started over two years ago with just two subcontractors and has rapidly grown. A recent addition now brings the total of subcontractors up to 6. The owner of the business has no imput (sic) other than policy and direction and business is run by the manager with a part time assistant. Initially work came only from advertising but a strong repeat and word of mouth trade is now ongoing. This will gradually provide future growth.
Method of Sales Generation:
……………………………………………………………
Current advertising budget is $1,950 per week. This is spread over the Yellow Pages, and three newspaper groups, Cumberland, Fairfax and ESN. The latter covers 27 newspapers. Future entries for the Yellow Pages are booked and paid for and arrangements are underway for inclusion in the new publication called The Big Colour Pages. Also pamphlet distribution over the entire Sydney Metropolitan area is ongoing and current stock in advance is approximately $1,000,000.
Plant and Equipment:
The business is completely equipped including spare machinery to cover breakdowns and there is the usual office equipment including a computer system that tracks daily operations and posts all statistics and records. The sale price includes all plant and equipment.
Also given were ‘Details of Operational Expenditure’ of $2,600 per week and a ‘Weekly Summary’ showing a turnover of $13,000 less commissions, $3,900 less expenses of $2,700 and less wages $390, leaving a net profit of $6,010”.

After he had read through the document, so he said, Mr Klich asked Ms Fardouly the price which the vendor sought, to which she replied (Blue AB 3):
“The price is $210,000. The business is run under management. I will arrange a meeting for you with the Manager, Kent Scarborough. As you can see in the ‘Details of Business’ the Manager is getting 30% of the weekly net profit. This works out at about $2,000”,
to which he replied:

“Well that’s fine with me. If that means he is getting $2,000 that means I would be getting $4,000”.

A little later, there was a meeting between Mr Klich, Mr Scarborough and Ms Fardouly at a restaurant in Kensington. At that meeting, Mr Scarborough described in general terms how the business was conducted. In the course of the conversation Mr Scarborough said that he received 30% net profit of the business, and a little later that he wanted to stay with the business. He then indicated that, if Mr Klich wished, he could come to the office, which was at his home at Bondi, to “look at the set-up”.

On the following day, Mr Klich visited Mr Scarborough’s home, where the latter showed him the office which was in a garage that had been set up as an office. While he was there, Mr Scarborough explained to Mr Klich how the paperwork was handled, and how the data was entered into the office computer. Towards the end of the meeting, according to Mr Klich, Mr Scarborough handed to him a bundle of print outs showing gross takings, expenses and bookings for the previous three months – those documents can no longer be found. It was Mr Klich’s recollection that the documents recorded the gross takings of the business at about $14,000 per week, they being similar figures to those recorded in computer files which had been opened by Mr Scarborough for the purpose of showing Mr Klich the records which were kept on the business during the course of discussions on that day. According to Mr Klich, Mr Scarborough said (Blue AB 6):
“This is a great business. I set it up, it’s my creation, however the owner invested the money needed to set it up. It’s no use looking at our bank accounts to check the takings because it is a cash business and very little money goes through the bank account. All the cash is taken out by the owner. A lot of expenses are paid in cash too”.
According to Mr Klich, there was a further meeting between himself, Mr Scarborough and Ms Fardouly in early September 1997, in the course of which reference was made to a pest control business. At the time, so Mr Klich said, Mr Scarborough said (Blue AB 6):
“This is another business that I run from the same premises. This business is for sale as well. This business is run on the same basis as the carpet cleaning. I am paid 30% of the net profit. The usual takings are about $5,000 per week. The profit is about $2,500 and I get a third of that. The owner wants $140,000 for the pest control business. You can have both businesses for $360,000”.
Discussions as to the purchase of the Sydney businesses by Mr Klich, or by Mr Klich and a former partner, continued for some time. It appears to be common ground that, at one meeting, at which Mr Klich and his former partner were present, Mr Scarborough said that the turnover of the carpet business was about $13,000 per week, and that of the pest control business about $5,000 per week. It seems also to have been common ground that, during the course of these meetings, Mr Scarborough agreed that, if Mr Klich were to buy the businesses, he (Mr Scarborough) would stay on as Manager on the same terms, namely that he was paid 30% of the net takings. Mr Scarborough also claimed to have told Mr Klich that he would continue as Manager only if there was no interference with, or changes made to, his method of management.

Mr Klich said that in a conversation which he had with Mr Scarborough during September 1997 the latter said (Blue AB 8):
“The owner of the Sydney business also has similar businesses in Melbourne and Brisbane which are also run out of this office. They are also for sale. You should think about purchasing these businesses as well. They are very profitable”.
When he expressed some interest, so Mr Klich said, Mr Scarborough showed him spreadsheets of each of those businesses on the computer screen.

On 1 October 1997, Mr Klich received from Ms Fardouly, by facsimile, details of the pest control business and what were said to be copies of spreadsheets relating to the Trading Performance of that business (Blue AB 158-172). The “Weekly Summary of accounts” was said to include a Turnover of $5,500, less Commission of $2,430, less Advertising of $1,220, (Yellow Pages $280, Coupons $420, and Newspaper Advertising $520), leaving a Profit of $1,850.

It was at about this time when there was a further meeting between Mr Klich, Mr Scarborough and Ms Fardouly, during the course of which Mr Klich offered $210,000 for both businesses, on the basis of $150,000 in cash, the balance to be provided by way of vendor finance for one year interest free. In a later telephone conversation, Ms Fardouly indicated that “the owner” would accept that offer.

On a number of occasions in the following weeks, Mr Klich went to Mr Scarborough’s home to speak to him, and also to check on the takings of the businesses while an Agreement for Sale was prepared. On those occasions, Mr Scarborough showed him printouts as to Takings, Bankings and Expenses, the figures relating to the carpet cleaning business regularly showing Gross Takings of between $13,000 and $14,000 a week.

On 17 October 1997, Mr Klich received from Ms Fardouly by facsimile, further information as to the pest control business (Blue AB 173), which information included a statement that the Turnover of the business per week was $5,000.

It was at about this time when there were several meetings between Mr Klich and Ms Fardouly in relation to the Brisbane and Melbourne businesses, at the first of which meetings Ms Fardouly gave Mr Klich documents entitled “Details of Business – Melbourne” (Blue AB 174-179) and “Details of Business – Brisbane” (Blue AB 180-185).

The former document contained the following (inter alia) information as to the Melbourne business:
“Established:  1 YEAR
Current Owners: Founder
Description of Business:    Rapidly expanding carpet cleaning company run under management. Users four (3 carpet cleaning, 1 duct cleaning), subcontractors who operate company vans and equipment. Subcontractors are paid a percentage of their individual job totals. Manager is office based and attends to initial phone contact with clients, organisation of subcontractors and day to day management.
………………………………………………………..
Value:  ……
Gross Sales:         $5,500 - $7,000 pw
………………………………………………………...
Gross Margin: 70%
…………………………………………………………
BRIEF HISTORY:
The business started one year ago with just two sub-contractors and has rapidly grown. The owner of the business has no input other than policy and direction and the business is run by the manager. Initially work came only from advertising but a strong repeat and word of mouth trade is now ongoing. This will provide further huge growth in both the short and long term.
Method of Sales Generation:
…………………………………………………………..
Current Advertising Budget is $1,600 per week. This is spread over the Big Colour Pages and coupons. Current Stock Level:         1,000,000. Yellow Pages advertisement is due for exposure early November 1997 (carpet cleaning and duct cleaning)”.
In addition there was a “Weekly Summary” which revealed a turnover of $7,225, less Commissions of $2,095, less Expenses (including Advertising $1,600) $2,090, less Wages $340, leaving a Net Profit of $2,700.

The latter document included the following (inter alia) information:
“Established:      2 YEARS
Current Owners: Founder
Description of Business:    Rapidly expanding carpet cleaning company run under management. Uses three (about to be four) subcontractors who operate company vans and equipment. Subcontractors are paid a straight percentage of their individual weekly totals. Manager is office based and attends to initial phone contact with clients, organisation of subcontractors and day to day management.
………………………………………………………………..
Value:  ……
Gross sales:$7,000 - $9,000 pw
………………………………………………………………..
Gross Margin:70%
………………………………………………….…………….
BRIEF HISTORY:
The business started almost two years ago with just two subcontractors and has rapidly grown. The owner of the business has no input other than policy and direction and the business is run by the manager. Initially work came only from advertising but a strong repeat and word of mouth trade is now ongoing. This will provide further huge growth in both the short and long term.
Method of Sales Generation:
…………………………………………………………………
Current advertising budget is $1,600 per week. This is spread over the Yellow Pages, Big Colour Pages and the newspaper group Quest. The latter cover 18 newspapers. Current entries for the Yellow Pages and Big Colour Pages are booked and paid for in full. Brochure distribution also takes place. Current stock level 1,000,000.”
There was also included a ”Weekly Summary” showing Turnover of $8,100, less Commissions $2,430, less Expenses (including Advertising $1,600) $2,130, less Wages $390, leaving a Net Profit of $3,150.

The Agreement for Sale (Blue AB 186-196) of the Sydney businesses by Mr Quiambo to Ecrovest was signed and completed on 31 October 1997. For present purposes the following Special Conditions should be noted:
“3.         The Purchaser acknowledges that in entering into this agreement he has not relied on any statement, representation, warranty or condition other than as specifically contained herein, made or given by the Vendor or by any person or agent on the Vendor’s behalf. In particular the Purchaser relies on his own enquiries in relation to the fee base of the businesses which the Vendor warrants as being correct as at the date of this Deed (sic). The Vendor does not warrant or guarantee that the fees receivable from the clients will continue after the date of this agreement on historical levels or otherwise and the Purchaser shall purchase the clients’ goodwill without any such warranty or guarantee by the Vendor.
4.            The Purchaser acknowledges that:
(a)he has had full and sufficient opportunity of examining the business for himself and other than the limited warranties contained herein no other warranty or representation as to the business, the takings, any outgoings and any profit is or has been given by the Vendor;
(b)except as expressly contained in this Deed (sic) no representation in connection with the business has been made by or on behalf of the vendor.
…………………………………………….
6             This Deed (sic) is the entire agreement between the parties in respect of its subject matter.
……………………………………………………….
16          Income
The vendor warrants that the average income over the past three months of the businesses is approximately $16,000 per week”.
…………………………………………………………………….
19          Vendor Finance
The vendor agrees to advance to the Purchaser Vendor’s finance in the sum of Sixty thousand dollars ($60,000) such sum to be repaid by the Purchaser to the Vendor at the rate of Ten thousand dollars ($10,000) per month with the first payment payable one month from the date of completion of this Agreement. It is further agreed that if any monthly payment is in arrears for more than 7 days then the whole of the balance then outstanding will immediately become due and payable to the Vendor together with interest at the rate of 10% per annum. It is further agreed that the Vendor may take whatever action as is deemed necessary for the recovery of such sum as a liquidated debt due to the Vendor. The Purchaser agrees that if requested by the vendor the Purchaser will enter into a Trader’s Bill of Sale over the plant and equipment of the businesses to secure any such sum that may be owing to the Vendor”.

Despite the terms of Special Conditions (3) and (4) (a), (b), it was Mr Klich’s case that, in deciding to have Ecrovest proceed with the purchase of the Sydney businesses, he relied on the “Details of Business” document which had been given to him by Ms Fardouly in June 1997, the financial figures for the businesses provided to him by Mr Scarborough and Ms Fardouly thereafter, and the representations as to the performance of the businesses which were made from time to time by Mr Scarborough and Ms Fardouly.

In an Affidavit sworn by him on 7 December 1998, Mr Klich deposed (inter alia) as follows, (Blue AB 13-14):
“22. …
Following the purchase of the Sydney business in October 1997 (and apart from the usually quiet weeks of Christmas and New Year) the figures shown to me by Scarborough each week were very close to the figures promised to me. Scarborough continued to manage the business for me.
During November and December 1997 I collected from Scarborough the cash ‘profit’ of the business each week. All of this money was put back into the business. At the end of each of those months I gave Scarborough $10,000 to pay to the vendor. We had a conversation to the following effect:
KS: ‘Fernando has asked me to collect the payments due under the vendor finance arrangement for him’.
In mid November 1997 we purchased a vehicle for the Sydney pest control business. Another vehicle was purchased for the carpet cleaning business in January 1998. I understood the Sydney businesses to be generating profit in line with the representations in the detail of business … and the representations referred to above, but that this profit was being used to make monthly payments under the vendor finance arrangement and for the purchase of the new vehicles”.
Meantime, so it would seem, both Mr Scarborough and Ms Fardouly continued to encourage Mr Klich to buy the Brisbane and Melbourne businesses. By early, to mid, December the position had been reached where Mr Klich expressed an interest in buying the businesses and the question of price was discussed. However, the price suggested by Ms Fardouly was such that, if Mr Klich were to proceed, he would need another to join him in any purchase. Accordingly, he approached Dr Adams to ascertain whether he was interested in joining with Mr Klich and, when Dr Adams indicated that he was interested, Mr Klich paid a holding deposit of $12,000 for the two businesses.

In early January 1998, there was a meeting between Mr Klich, Dr Adams and Mr Scarborough at Mr Scarborough’s home, at which meeting, after Mr Scarborough had shown Dr Adams the layout, Mr Scarborough called up what was said to be spreadsheet files relating to the Melbourne and Brisbane businesses, and pointed to what were said to have been the takings for weeks in the preceding months – those takings were said by Mr Scarborough to have been, in relation to the Brisbane business, never less than about $7,000 per week, and, in relation to the Melbourne business, about $5,000 per week. At Dr Adams’ request, Mr Scarborough later produced what was said to be a bundle of printouts for each of both the Brisbane business (Blue AB 216-221) and the Melbourne business (Blue AB 198-215).

Eventually, Mr Klich negotiated with Ms Fardouly $140,000 for the Brisbane business and $80,000 for the Melbourne business, the vendor of each to carry $50,000 interest free payable at the expiration of 12 months, and the balance of the purchase price in each case to be provided by Mr Klich and Dr Adams – the $12,000 holding deposit which had earlier been provided by Mr Klich was to be appropriated equally to the cost of each business.

On the advice of accountants, Mr Klich and Dr Adams acquired shares in two shelf companies, one to be the purchaser in respect of the Brisbane business, and the other to be the purchaser in respect of the Melbourne business.

Agreements for the sale of each business were signed on 15 February 1998, the vendor of the Brisbane business being Ms Quiambo and the purchaser Abaca, and the vendor of the Melbourne business being Mr Scarborough and the purchaser Abala.

For present purposes, the following Special Conditions contained in the Agreement for Sale of the Brisbane business (Blue AB 222-232) should be noted:
“3.         The Purchaser acknowledges that in entering this agreement he has not relied on any statement, representation, warranty or condition other than as specifically contained herein, made or given by the Vendor or by any person or agent on the vendor’s behalf. In particular the Purchaser relies on his own enquiries in relation to the fee base of the business which the Vendor warrants as being correct as at the date of this Deed (sic). The Vendor does not warrant or guarantee that the fees receivable from the clients will continue after the date of this agreement on historical levels or otherwise and the Purchaser shall purchase the clients’ goodwill without any such warranty or guarantee by the Vendor.
4.            The Purchaser acknowledges that:
(a)         he has had full and sufficient opportunity of examining the business for himself and other than the limited warranties contained herein no other warranty or representation as to the business, the takings, any outgoings and any profit is or has been given by the Vendor.
(b)         except as expressly contained in this Deed (sic) no representation in relation to the business has been made by or on behalf of the Vendor.
………………………………………………………….
6             This Deed (sic) is the entire agreement between the parties in respect of its subject matter.
……………………………………………………………………..
17          The vendor agrees to advance to the purchaser Vendor’s finance in the sum of Fifty thousand dollars ($50,000) without interest, to be repaid by the purchaser to the vendor at the expiration of twelve months from the date of completion of this contract. The sum of $50,000 shall be deducted from the amount payable by the purchaser on completion. It is further agreed that if payment is not paid on or before twelve months from the date of completion of this contract, then the amount then outstanding shall attract interest at the rate of 10% per annum on and from the day 12 months from completion of this contract until the date of repayment thereof. It is further agreed that the vendor may take whatever action is deemed necessary for the recovery of such sum as a liquidated debt due to the vendor”.
In contrast to the Agreement for Sale of the Sydney businesses, the Agreement for Sale of the Brisbane business did not contain any warranty as to the average income over the three months prior to the Agreement for Sale being entered into.

The Agreement for Sale of the Melbourne business (Blue AB 233-244) contained Special Conditions which were identical in terms with those contained in Clauses 3, 4 (a), (b), 6 and 17 of the Agreement for Sale for the Brisbane business. As also was the case with the Agreement for Sale of the Brisbane business, the Agreement for Sale for the Melbourne business contained no Special Condition warranting the average income of the business over the previous three months.

According to Mr Klich, almost immediately after the settlement of the purchase of the Brisbane and Melbourne businesses, the income from all the businesses began to fall dramatically. He said that on several occasions, he asked Mr Scarborough why the takings of the businesses were down, and was told by Mr Scarborough that he had had to change some staff, and there had also been some problems with the distribution of coupons, but he was reassured that the businesses would soon get better.

By late February 1998, business was still slow, and Mr Scarborough told Mr Klich that he had renegotiated the monthly payments of vendor finance with Mr Quiambo. The renegotiated terms were set out in a letter from the solicitors for Mr Scarborough, Mr Quiambo and Ms Quiambo of 25 February 1998 (Blue AB 245-246), which also required that Mr Klich sign in favour of Mr Scarborough, Mr Quiambo and Ms Quiambo, a guarantee and indemnity (Blue AB 247-251) of the obligations of each of Ecrovest, Abala and Abaca for the balance of the purchase moneys.

In early March 1998, the office of the businesses was, at Mr Scarborough’s insistence, moved from his home at Dover Heights to premises at Kensington. When this was done the computer, which had been in the office in Mr Scarborough’s home, was also moved. According to Mr Klich, there appeared to be no financial records of any of the businesses on paper at the new office, the only such records which he could find being on the hard drive of the computer.

It was at about this time when Mr Scarborough telephoned Mr Klich and told him that he (Mr Scarborough) needed a holiday, and that one of the carpet cleaning contractors would be able to take over the management of the business while he was on holiday.

Mr Scarborough left to go on holidays in early April 1998, supposedly for a period of three or four weeks, but he never returned to take over the management of the business again.

After Mr Scarborough left, the takings of the three businesses continued to decline, so that they were either barely breaking even, or making losses.

Ultimately the Melbourne business was sold, an Agreement for Sale dated 16 March 1999 for a price of $29,000, the assets included in the price, including three Toyota Lite Ace vans, five carpet cleaning machines, four cleaning wands and two duct cleaning machines, including compressors. The Sydney and Brisbane businesses appear to have been closed down, not sold, but the materials which are before the Court do not disclose when that occurred.

Before the Melbourne business had been sold, and the Sydney and Brisbane businesses closed down, however, Mr Klich had discovered a number of documents relating to each of the various businesses, which documents led him to believe that spreadsheet files on the hard drive of the office computer falsified the takings of each of the various businesses.

It was Mr Klich’s case – and, thus, the case of all the Respondents – that, if he had been shown the true figures for the Gross Takings of each of the various businesses, he would never have agreed to the purchase of those businesses.

In addition to the materials which had led Mr Klich to believe that the spreadsheet files, which were on the hard drive of the office computer, falsified the takings of the various businesses, there were other materials tendered at trial, which cast more than a shadow of doubt over the accuracy of the various documents which had been given to Mr Klich by Ms Fardouly and Mr Scarborough, and as to the various oral representations, which they, or either of them, had made to Mr Klich.

Among those additional materials were Mr Quiambo’s Income Tax Returns for the Income Tax years 1995/1996 and 1996/1997, which revealed the following:

(a)The Income Tax Return for 1995/1996 (Blue AB 726-731) disclosed:

(i)that the Sydney carpet cleaning business commenced to operate during that tax year;

(ii)that the Gross Income of the business in that tax year was $10,528;

(iii)that the Total Expenses of that business, which expenses did not include any provision for Commission or Wages, amounted to $24,457;

(iv)that the Total Business Loss was $13,929.

(b)The Income Tax Return for the 1996/1997 year (Blue AB 732-739) revealed the following:

(i)that the Gross income from the carpet cleaning business for that year was $171,000 – a weekly average of a little more than $3,288;

(ii)that the Total Expenses for that year, which expenses made no provision for Commissions, but made provision for “Salaries, Wages” of $31,340 were $172,187 – a weekly average of a little over $3,311;

(iii)that the Total Business Loss from the carpet cleaning business was $1,187;

(iv)that the pest control business commenced during that tax year;

(v)that the Gross Income for that business for that year was $11,696;

(vi)that the Total Expenses for that business, which expenses made no provision for Commissions or Wages, amounted to $11,648;

(vii) that the Net Income from that business was $48;

(viii) that the Net Loss from both businesses was $1,139.

Also included among those additional materials were Mr Scarborough’s Income Tax Returns for the years 1995/1996:

(a) the Return for 1995-1996 (Blue AB 644-647):
(i) described Mr Scarborough as “Cleaner/Unemployed”;

(ii)disclosed Mr Scarborough’s Total Taxable Income for that year as $6,409, of which $4,095 was attributed to an employer described as “A A A Accurate Pest”;

(b) The Return for the Year 1996/1997 (Blue AB 648- 654):
(i) described Mr Scarborough as “Cleaner/Unemployed”;

(ii)disclosed the receipt from Mr Quiambo, as an employer, of $29,000, from which Tax Instalments of $6,453.60 had been deducted;

(iii)disclosed that Mr Scarborough was carrying on a cleaning business under the name of “Abaca Cleaning”, which business had commenced to operate during that year;

(iv)disclosed that the Gross Income from that business for that year was $9,019;

(v)disclosed that the Total Expenses of that business, which expenses made no provisions for Commissions or Wages, amounted to $27,303;

(vi) disclosed that the Total Business Loss was $18,284;

(vii)disclosed that Mr Scarborough’s Taxable Income for the year was $10,716;

(viii)disclosed that the Taxable Income of Mr Scarborough’s wife for that year was $17,243 – given the date on which the Brisbane cleaning business is said to have commenced, this Income may have represented income from that business.

Those additional materials also contained a Schedule (Blue AB 678) as to the various business names of which Mr Scarborough, Mr Quiambo and Ms Quiambo were from time to time registered. That Schedule disclosed:

(a)that 1 AAA ABest Cleaning (one of the business names for the Sydney carpet business), was first registered in July 1993, the original proprietor being Mr Scarborough’s mother, and Mr Quiambo being registered as the Proprietor for the period 26 February 1996 to 31 October 1997;

(b)that AAA Abala Cleaning (the other of the business names for the Sydney carpet business), was first registered on 15 May 1996, Mr Quiambo being the Registered Proprietor between that date and 31 October 1997;

(c)that AAA ABA Pest Control (the business name for the Sydney pest control business), was first registered on 4 April 1997, Mr Quiambo being the Registered Proprietor between that date and 31 October 1997;

(d)that AA Abala Cleaning Services (the business name for the Brisbane carpet cleaning business) was registered, at first in the name of Mr Scarborough, and, shortly thereafter, in the name of Ms Quiambo in July 1996, the business being said to have commenced to operate on 1 August 1996;

(e)that AAA Abaca Cleaning (the business name for the Melbourne carpet cleaning business, which business was said to have commenced to operate on 31 December 1996), was registered on 24 January 1997, Mr Scarborough being the Registered Proprietor from that date until 16 February 1998.

The details revealed by this Schedule would indicate that the history as to the various businesses, contained in the “Details of Business” documents handed to Mr Klich by Ms Fardouly in June and in September 1997, are inaccurate. Thus, to suggest, in June 1997, that the Sydney carpet cleaning business had been established for two years by the founder, when Mr Quiambo did not become registered as the Proprietor of the Business Names until February and May 1997, is clearly false. Further, to suggest, in September 1997, that the Brisbane carpet cleaning business had been established for two years by the founder, when the Business Name was not registered until 23 July 1996, and the business did not commence to operate until 1 August 1996, is clearly false. Further still, to suggest, in September 1997, that the Melbourne carpet cleaning business had been established for one year, when the business is said not to have commenced to operate until 31 December 1996, is equally clearly false.

Finally, the Financial Statements of both Abala and Abaca, although no doubt attracting the usual comment that the Income and Expenses of a successor in business do not necessarily provide any guide to what was the Income and what were the Expenses of the predecessor in that business, nonetheless provide some support for the other evidence suggesting that the information contained in the various “Details of Business” documents, and the representations made to Mr Klich by Mr Scarborough and Ms Fardouly, were false:

(a)the Profit and Loss Statement of Abala for the year 1997/1998 (Blue AB 628) – in which period Abala operated the Brisbane carpet cleaning business for only 19 weeks – discloses:

(i)Gross Fees and Charges of $79,385.75, a weekly average of a little over $4,178;

(ii)the Expenses for the same period, which expenses included advertising of $25,187.62, and provision for “subcontractors/wages” of $39,555.80, amounted to $86,680.52, a weekly average of a little over $4,562;

(iii) The Net Operating Loss was $7,286.12;

(b)The Profit and Loss Statement of Abaca for the same period (Blue AB 639) reveals:

(i)Fees and Charges of $74,821.85, a weekly average of a little less than $3,938;

(ii)the Expenses for the same period, which included advertising of $36,177.91, and Provision for Salaries of $1,200 and Sub-contractors of $31,726.33, totalled $90,624.91 – a weekly average of a little less than $4,770;

(iii) The Net Operating Loss was $15,794.11.

As will be seen, in each case the Gross Receipts are significantly lower than those contained in the “Details of Business” documents and the “Gross Margin” – the phrase which, in the context I have taken to mean that proportion of the income left after deduction of subcontractors’ commissions and, perhaps, wages, is, in each case, significantly less than the figure of 70% given in the “Details of Business Documents”.

In her judgment, Sidis DCJ, after recording the general nature of the proceedings, and after recording, in summary form, the history leading up to the proceedings, and the varying versions of what occurred, which were given by the witnesses called on each side, turned first to deal with what she described as “issues of credit”. In this respect she commenced that part of her judgment as follows: (Red AB 28-29):
“3.1 It is important in this matter to keep in mind that the plaintiffs claim false representations, misleading and deceptive conduct in respect of all defendants and, in addition, fraud in respect of Mr Scarborough.
There was much evidence, claim and counterclaim concerning conduct prior to and after the sales of the businesses, particularly that of Mr Klich and Mr Scarborough, which went to issues of credit but not to the extent to which representations made were untrue.
3.2 It is necessary to deal with the issues of credit before proceeding to the determination of the plaintiffs’ claims because there is a very strong conflict on the evidence between the parties. I therefore need to determine, if possible, as between them which version of events is to be accepted”.
Then, having dealt with each of the witnesses called on each side, in the light, in particular, of the various attacks which had been made upon one or other of them, her Honour concluded this part of her judgment as follows (RAB 38):
“3.9 Findings on Credit
Overall I have reached the conclusion that I can place no reliance on the evidence of the defendants and their witnesses. Their evidence left me with no doubt that there had been a conscious effort on the part of the defendants and their witnesses to deceive the Court as to the real facts surrounding the sale of the businesses.
I have therefore concluded that where there is a dispute on the evidence between the witnesses for the plaintiffs and those from the defendants, I should accept the evidence called for the plaintiffs”.

Having done so, Sidis DCJ then turned to deal with what she described as “the representations”, in this respect dealing separately with the representations claimed to have been made in respect of each of the four businesses the subject of the several Agreements for Sale.

In para 4.1 of her judgment, (RAB 38-40), her Honour identified the representations claimed against Mr Scarborough and Ms Fardouly, in respect of the Sydney carpet cleaning business, as being:
(1)          Gross Sales of at least $12,000-$14,000 per week;
(2)          Average Net Profit of at least $12,000-$14,000 per week;
(3)          The business was very profitable;
(4)          Future entries in the Yellow Pages were booked and paid for,
as she did so, recording the evidence which had been tendered in respect of each representation.

Having done so her Honour concluded (RAB 40 ):
“(5) Findings
I find that the representations referred to in paragraphs 4.1(1), (2) and (3) were made to Mr Klich by Mr Scarborough and Ms Fadouly. I find that those representations were false. I find that those representations were misleading and deceptive and made in breach of s 42 of the Fair Trading Act 1987.
I find that the claimed representation in respect of the future entries in the Yellow Pages has not been proved. For this reason this aspect of the plaintiffs’ claims fails.”
When dealing earlier with the representation identified as 4.1 (4), Sidis DCJ had written (RAB 40):
“The Contract for Sale of the Sydney carpet business deals with (sic) specifically with the position with the Yellow Pages advertising. In that respect, therefore, the contract superseded any verbal representations on this aspect. There is no evidence from which I could conclude that the contract did not accurately represent the position concerning the Yellow Pages advertising”.
The particular condition in the Sale Agreement relating to the Sydney businesses, to which her Honour thus referred, was as follows, (Blue AB 191-192):

“18 Yellow Pages

The Purchaser agrees that the Vendors (sic) has paid the first of five installment (sic) (5x $3,000) of the cost of the Yellow Page Directory ad for 1998. The Purchaser agrees that not withstanding (sic) any other provisions in the contract the Pucchaser (sic) will be responsible for the payment of the remaining installments (sic) when they fall due”.

In para 4.2 of her judgment, Sidis DCJ turned to the representations claimed in respect of the Sydney pest control business, which representations she identified as being:
(1)          Average Gross Sales of $5,500 per week;
(2)          Average Net Profit of $1,850 per week;
(3)          The business was very profitable;
(4)The financial figures provided by Ms Fardouly were true financial figures;
dealing, as before, with the evidence tendered on each side in respect of each.

Having done so, her Honour concluded this part of her judgment, as follows (RAB 42):
“(5) Findings
I find that the representations referred to in paragraphs 4.2 (1), (2), (3) and (4) were made to Mr Klich by Mr Scarborough and Ms Fardouly. I find that those representations were false. I find that those representations were misleading and deceptive and made in breach of s 42 of the Fair Trading Act 1987”.
Under a heading, “Additional Claim Against Mr Scarborough”, Sidis DCJ wrote (RAB 42-43):
“5.1 In addition to the claims referred to in paragraphs 4.1 and 4.2, it was claimed that Mr Scarborough made the representations knowing them to be false and therefore fraudulently.
In support of this claim the plaintiffs relied upon:
(1)documents, apparently records of the businesses located by Mr Klich in about June 1998; and
(2)the absence of evidence of any substantial cash flow to Mr Scarborough in 1997;
(3)the absence of evidence of any substantial cash flow to Mr Quiambo in 1997 or 1998;
(4)evidence of a downturn in the takings of the businesses immediately after the date of the sale of the Brisbane and Melbourne businesses”.
Under this heading, her Honour turned, first, to deal with one aspect of the material in relation to the Sydney pest control business, which had been supplied to Mr Klich by Ms Fardouly prior to the sale of the business. Included in that material were a number of spreadsheets (Blue AB 160-172) relating to that business, which spreadsheets indicated that, during the period 29 June-27 September 1997, there were two contractors working in the business, one Mark Daniel, being designated as the Blue Contractor, and one Gareth Pearce, being designated as the Red Contractor.

Records kept by Mr Daniel indicated that the spreadsheets overstated the returns to the business from Mr Daniel’s operations, while records kept by Mr Pearce established that he did not commence to work for the business until 6 September 1997.

In the light of the evidence given by Mr Daniel and Mr Pearce, her Honour wrote (RAB 44):
“Notwithstanding the suggestions that Mr Daniel and Mr Pearce should not be accepted I find that there is unchallenged evidence that until 6 September 1997 only one pest control van was operating and that the Sydney pest control business received no income from Mr Pearce as a contractor until that date. I also find that the figures provided to Mr Klich overstated the income received from Mr Daniel’s operations as a contractor to the Sydney pest control business”.
Sidis DCJ then turned to the Sydney carpet cleaning business, in respect of which she wrote (RAB 44-45):
“There were discrepancies between the materials contained in a folder titled ‘Past Daily Summary Sheets’ and spreadsheets retrieved from the computer which were identical to records contained in a box of records produced by Mr Scarborough.
The extent of the claimed discrepancies was set out in a compilation. These figures related to the period from 1 October 1997 to 1 November 1997. They therefore do not relate to the period shown in the Details of Business. However, they do relate to the period of turnover referred to in the warranty contained in Clause 16 of the Contract for Sale of the Sydney carpet cleaning business.
I have already rejected Mr Scarborough’s explanation of these discrepancies in paragraph 3.7 (5).
I find that those spreadsheets misrepresented those figures”.
The “compilation” to which her Honour referred was Exhibit S1 (Blue AB 604-608).

In respect of the Melbourne business, Sidis DCJ wrote (RAB 45):
“Mr Klich stated he located some of the historical records of the Melbourne business whilst packing in the course of moving the office. A second compilation was said to highlight the discrepancies between those records and the computer spread sheet representations of turnover provided to Mr Klich and Dr Adams in respect of the Melbourne business.
Some of the spread sheets comprising the historical records bear the heading ‘Melbourne’ in handwriting identified by Mr Scarborough as his own.
A banking book from Melbourne was claimed by the plaintiffs to demonstrate that the Gross Turnover of the Melbourne business was substantially below the $7,225 represented in the Details of Business. The book was consistent with a facsimile from a Melbourne employee to Mr Scarborough which gave details of the turnover for the week ending 8 February 1998, one week prior to the sale of the Melbourne business.
I find that this material evidences an over-statement of the takings of the Melbourne business in the materials provided to Mr Klich and Dr Adams prior to the purchase of that business”.
(The compilation referred to was Exhibit S2 (Blue AB 609-621)).

In relation to the Brisbane business, Sidis DCJ wrote (RAB 46):
“As with the Melbourne business, the job charts for the Brisbane business contained computer sheets which do not accord with the computer sheets given to Mr Klich and Dr Adams prior to their purchase of the Brisbane business.
Again, the discrepancies suggest inflation of the figures provided to them.
I find this material to be evidence of overstatement of the takings of the Brisbane business in the documents provided to Mr Klich and Dr Adams prior to the purchase by Abaca”.
When she turned to deal with Mr Scarborough’s cash flow, Sidis DCJ (at RAB 46), extracted from Mr Scarborough’s Tax Returns for the taxation years ended 30 June 1996 and 30 June 1997, the details to which I have earlier (see para 47 (above)) referred.

When she came to deal with Mr Quiambo’s cash flow, Sidis DCJ first (RAB 47) extracted the material from Mr Quiambo’s Income Tax Returns for the tax years ended 30 June 1996 and 30 June 1997, to which I have earlier (see para 46 (above)) referred, and then continued (RAB 47-48):
“5.8 It was claimed by Mr Scarborough that the Sydney carpet cleaning business returned no income in the 1996 and 1997 tax years because of set up costs and the need for expenditure on research. His assertion was that the profits were about to flow from the end of June 1997. This is, of course, contrary to the assertions contained in the Details of Business. It is also contrary to the evidence of Mr Quiambo, said to be the owner of the Sydney businesses, that the businesses returned a profit within a matter of weeks of being established.
5.9 Figures were produced which indicated a gradual decline in the takings of each of the businesses from 15 February 1998, more accelerated after Mr Scarborough left the Sydney businesses in April 1998.
In addition the plaintiffs pointed to the willingness of the vendors of the businesses to agree to a reduction in the amount to be paid in respect of the vendor finance. It is claimed that this is indicative of an acknowledgement by the vendors of a downturn in the takings of the businesses”.
(The figures, to which her Honour referred in para 5.9, are to be found in respect of the Sydney carpet cleaning business at Blue 445-446, and in relation to the Sydney pest control business, at Blue 447-448.)

Having dealt with the various matters upon which the respondents had relied to establish fraud on the part of Mr Scarborough, her Honour then turned to “The Law Relating to Proof of Claims in Fraud”.

Under a heading “Reliance”, her Honour wrote (RAB 48):
“I accept that it is essential that the plaintiffs establish that they relied on the representations claimed to have been made when they decided to proceed with their respective purchases.
It was argued that they had not in fact relied on these representations because, after receipt of the Details of Business and the computer printouts, further enquiries and observations had been made, particularly by Mr Klich.
The very purpose of those documents was to induce potential purchasers into proceeding to a contract. There is clear evidence that the representations made by Ms Fardouly and Mr Scarborough orally and through the documentary materials provided to Mr Klich induced him to go forward. There is no credible evidence that he was told in the course of negotiations that the figures were inaccurate in that they overstated the takings of the businesses.
In fact, Mr Scarborough claimed that to the extent that the representations as to the takings of the businesses were inaccurate, they understated them”.
Then, after a reference to what was said by Wilson J in Gould v Vaggelas ((1985) 157 CLR, 236; 56 ALR 31, 46; see to the like effect Australian Steel & Mining Corporation Pty Limited v Corben [1974] 2 NSWLR 202, 207-209, per Hutley JA), her Honour continued:
“I accept this as a correct statement of the law relating to reliance. I find that the plaintiffs relied on the representations in making their decisions to proceed with the purchases of the businesses”.
Under the heading, “Standard of Proof”, Sidis DCJ wrote (RAB 49):
“In suggesting that the claim of fraud had not been proved, it was pointed out by the defendants that the defendants’ figures represented in respect of the Sydney businesses were in fact maintained from 31 October 1997 until at least the end of December 1997 as evidenced by payments made to Mr Klich during this period.
Mr Klich agreed that, with the exception of the slow Christmas and New Year period, the takings of the Sydney businesses were in accordance with the representations up to the point of sale of the Melbourne and Brisbane businesses.
It was argued that the takings were never as great as represented but that Mr Scarborough in the course of a deliberate fraud had created the impression that of takings greater than were in fact received for the purpose of inducing Mr Klich and Dr Adams to proceed with the purchase of the Melbourne and Brisbane businesses.
It was argued by the defendants that a heavier onus of proof was imposed on the plaintiffs in respect of their claims of fraud against Mr Scarborough”.
Then, after a reference to various authorities, and, in particular, to the decision of the High Court in Neat Holdings Pty Limited v Karajan Holdings Pty Limited ((1992) 67 ALJR 170; 110 ALR 449), her Honour, after referring to a passage in the joint judgment of Mason CJ, Brennan, Deane and Gaudron JJ in Neat Holdings Pty Limited v Karajan Holdings Pty Limited (ALJR at 449-450), concluded (RAB 50):

“In summary, the law requires that:

(1)evidence on the question of fraud must be clear and cogent; and

(2)the Court should not lightly make a finding that, on the balance of probabilities, a defendant has been guilty of fraudulent conduct”.

Her Honour then recorded her “Findings on the claim of fraud”, as follows (RAB 51):
“I have already made findings in paragraphs 4.1 (5) and 4.2 (5) concerning false, misleading and deceptive representations.
In rejecting Mr Scarborough’s explanation and arriving at those findings, it is implicit that he knew that the representations made were false. Much of the material provided to Mr Klich and Dr Adams I find to have been deliberately falsified with a view to inflating the prices that could be commanded on the sale of the businesses.
The manner by which the takings for the first two or three months after the sale of the Sydney businesses were as recorded is irrelevant to the question of whether the materials provided to Mr Klich and Dr Adams concerning the historical records of the business had been falsified.
I find clear and cogent evidence of deliberate falsification of the records of the businesses. I find that those falsified records were supplied to Mr Klich and Dr Adams for the purpose of inducing them to proceed with the purchase of the businesses. I find that they relied upon them for the purpose of deciding to proceed with the purchase of the businesses.
I find the claim in fraud against Mr Scarborough proved”.
It should be noted here, that, when she dealt with the question of the representations – whether for the purposes of the provisions of the Fair Trading Act 1987, or the claim of fraudulent misrepresentation raised against Mr Scarborough – Sidis DCJ did not deal with the relevance, or otherwise, of the provisions of conditions (3), (4) (a), (b), and (6) of each of the Agreements for Sale. In their Notice of Appeal (RAB 67-71), the Appellants did not assert that her Honour erred in not holding that, by reason of the provisions of those conditions, the Respondents were not entitled to rely on any of the alleged misrepresentations. That fact notwithstanding, in their Written Submissions (Orange AB 12), the Appellants have sought to assert that “reliance upon the pre-contractual representations was disallowed by the purchaser when it acknowledged in cl 3 of the Sydney contract that it had not relied on any statement, representation or warranty other than as specifically contained in the Contract (RAB 51T). The Melbourne and Brisbane Contracts (signed on 15.2.98 contained identical clauses)” despite the fact that it would appear that no such submission was advanced on behalf of the Appellants at trial. It should, however, be noted that at common law, a plaintiff who, in deciding to enter into a contract, was acting upon a representation made by the defendant, which representation has been made fraudulently, is not to be held bound by a provision such as that contained in cl 3, 4 (a), (b) of the Agreements for Sale (S. Pearson & Son Limited v Lord Mayor &c of Dublin [1907] AC 351), and, further, that the courts have been consistent in ruling that attempts to exclude liability for breach of the Trade Practices Act 1974 (Cth) s 52, or its Fair Trading Act equivalents, will be unsuccessful. That this is so is demonstrated by the following passage in the judgment of Sheppard J, with whom Fox J and, in this respect, Jackson J, agreed in Clark Equipment Australia Limited v Covcat Pty Limited ((1986-1987) 71 ALR 367, 371)):
“Parties may agree that statements and representations made antecedently to their entering into a contract are not to form the basis of any remedy in the event of there being a subsequent disagreement. Except in cases of fraud, the common law will give effect to their contract. But the remedy conferred by s 52 of the Trade Practices Act will not be lost, whatever the parties may provide in their agreement. If a vendor of goods has engaged in misleading or deceptive conduct, the law makes him accountable for loss and damage suffered as a result of his unlawful conduct. That conduct will usually have been committed, as in this case, prior to the signing of any contract. If, as a result of the conduct, a person is induced to enter into a contract and suffers loss, an action to recover it lies. The terms of the contract are irrelevant. As Wilcox J said in Petera Pty Ltd v EAJ Pty Ltd (1985) 7 FCR 375 at 378:
‘Whatever may be the effect of cl 19 (the exemption clause in that case) in relation to an action brought in contract, in which reliance is placed upon an alleged warranty or condition not included in the contract of sale, that clause should not be allowed to defeat a claim based upon s 52. To permit such a clause to defeat such a claim would be to accept the possibility that a vendor might exacerbate his deception, as by actively misleading a purchaser as to the existence or nature of such an exclusion, and thereby ensure that he would escape liability’.
I refer also to Byers v Dorotea Pty Ltd (1986) 69 ALR 715; [1987] ATPR 40-760, per Pincus J at 48-230”.
So, too, in Henjo Investments Pty Ltd v Collins (Marrickville) Pty Ltd ((1987-1988) 79 ALR 83, 98-99), Lockhart J, with whom Burchett J and, on this aspect of the matter, Foster J, agreed, said:

“Irrespective of the construction of these two special conditions it does not matter ultimately whether the impugned conduct with which this case was concerned falls literally within them or not. Section 52 is a section in the consumer protection provisions of an Act concerned to protect the public from misleading or deceptive conduct and unfair trade practices which may result in contravention of the Act. It has been held that exclusion clauses of which Special Conditions 6 and 7 are examples, cannot operate to defeat claims under s 52. It may be, as the judgment of Sweeney J in P J Berry Estates Pty Ltd v Mangalone Homestead Pty Ltd (1984) 6 ATPR 40-459 at 45, 638 suggests, that such exclusion clauses will generally be ineffective because they cannot break the nexus between the conduct in contravention of s 52 and the making of the agreement in issue. Where the conduct of the defendant is alleged to be fraudulent in character, then an exclusion clause will be no more effective to defeat the action than it would be effective if the action were brought in the tort of deceit in relation to conduct antecedent to the contract: Commercial Banking Co of Sydney Ltd v R H Brown & Co (1972) 126 CLR 337, per Menzies J at 344; Petera Pty Ltd v EAJ Pty Ltd (1985) ATPR 40-605, per Wilcox J at 46, 887: see also Terry: ‘Disclaimers and Deceptive Conduct’ (1986) Australian Business Law Review p 478 at 486.

There are wider objections to allowing effect to such clauses. Otherwise the operation of the Act, a public policy statute, could be ousted by private agreement. Parliament passed the Act to stamp out unfair or improper conduct in trade or in commerce; it would be contrary to public policy for Special Conditions such as those with which this Contract was concerned to deny or prohibit a statutory remedy for an offending contract under the Act. There are various judgments of Judges of this Court where this approach has been adopted and they are collected in the judgment of the trial Judge, so I need not repeat them”.

Having dealt with the claims based on the provisions of s 42 of the Fair Trading Act 1987 and, in the case of Mr Scarborough, fraudulent misrepresentation, Sidis DCJ then proceeded to deal with the Respondents’ claims, in so far as they were based in breach of contract. In this regard, her Honour held (RAB 51-52), that in so far as, in special Condition 3 of each of the relevant Agreements for Sale, the relevant vendor warranted “the fee basis of the business” as “being correct as at the date of this Deed”, each of the relevant vendors had been guilty of a breach of contract. Although her Honour’s reasons for so concluding are not spelt out in this part of her judgment, it seems tolerably plain that her Honour proceeded upon the basis that the relevant “fee base of the business” was that which had been stated to be the “Gross Sales” in each of the relevant “Details of Business” documents. In addition, her Honour held that there had been a breach of Condition (16) of the Agreement for Sale of the Sydney businesses, which condition, as I have earlier (see para 26 (above)) recorded was to the effect that the average income over the proceeding three months was approximately $16,000 per week, a figure which, even if one aggregated the gross fees of the Sydney carpet cleaning business and the Sydney pest control business were not, in her Honour’s view, made out.

Her Honour, accordingly, held (RAB 52) on the claim for breach of contract:

(1)Mr Quiambo was in breach of the warranty set out in Special Conditions (3) and (16) of the Contract for Sale of the Sydney businesses;

(2)Mr Scarborough was in breach of the warranty set out in Special Condition (3) of the Contract for Sale of the Melbourne business; and

(3)Ms Quiambo was in breach of the warranty set out in Special Condition (3) of the Contract for Sale of “the Melbourne” (sic) business.

Sidis DCJ then turned to the question of the parties liable for damages, a question which, at least to some extent, seems to have arisen by reason of what appears to have been a submission advanced on behalf of the Respondents, that all the businesses were owned by Mr Quiambo, a submission which her Honour rejected by finding (RAB 52):

(1)That Mr Quiambo was the beneficial owner of the Sydney businesses;

(2)That Mr Scarborough was the beneficial owner of the Melbourne business; and

(3)That Ms Quiambo was the beneficial owner of the Brisbane business.

Her Honour then recorded her findings in this respect as follows (RAB 53-54):
“7.3       I find Mr Quiambo liable in damages to Ecrovest in respect of:
(1)false representations made on his behalf by Mr Scarborough and Ms Fardouly in the course of the sale of the Sydney businesses;
(2)misleading and deceptive conduct of Mr Scarborough and Ms Fardouly executed on his behalf in the course of the sale of the Sydney businesses; and
(3)breach of warranties contained special conditions 3 and 16 of the contracts (sic) for sale of the Sydney businesses.
7.4         I find Mr Scarborough liable in damages to Ecrovest, Abaca and Abala in respect of:
(1)false representations made by him and Ms Fardouly in the course of the sale of the businesses;
(2)misleading and deceptive conduct executed by him and Ms Fardouly in the course of the sale of the businesses; and
(3)fraudulent conduct executed by him in the course of the sale of the businesses.
In addition I find Mr Scarborough liable in damages in respect of the breach of the warranty contained in special condition 3 of the contract for the sale of the Melbourne business.
7.5         I find Ms Quiambo liable in damages to Abala in respect of:
(1)false representations made on her behalf by Mr Scarborough and Ms Fardouly in the course of the sale of the Brisbane business;
(2)misleading and deceptive conduct of Mr Scarborough and Ms Fardouly executed on her behalf in the course of the sale of the Brisbane business; and
(3)breaches of the warranties (sic) contained in special conditions (sic) 3 and 16 (sic) of the Contracts (sic) for Sale of the Brisbane business.
7.6         In relation to Ms Fardouly it was argued that she acted in good faith and was unaware that the representations made were false. It was claimed that she was merely passing on information provided to her by Mr Scarborough. I accept that there is no evidence to suggest that Ms Fardouly knew of the falsification of the materials provided to her by Mr Scarborough.
On this basis she will be held liable in damages only in respect of the breaches of the Fair Trading Act 1987”.
(I record, here, that her Honour’s finding, that Ms Quiambo was in breach of a warranty contained in Special Condition 16 of the Agreement for Sale of the Brisbane business, was clearly in error, as that Agreement did not contain any such Condition.)

Sidis DCJ then proceeded to deal with the question of damages. In this respect, having referred to some evidence which was tendered on behalf of the respondents, she continued (RAB 54-56):
“8.4       It is claimed that the Ecrovest accounts indicate that substantial losses were incurred by the Sydney businesses from the date of acquisition on 1 November 1997 up to 30 June 1998. An amount of $36,031 is claimed for this period.
A loss of $15,794.11 is claimed for Abaca to 30 June 1998 and $7,286.12 for Abala to 30 June 1998.
This is the extent of the evidence of damage suffered in respect of the businesses.
8.5         No valuations have been prepared of the true value of the businesses at the date of their acquisition. The reason for this, the plaintiffs argue, is that, in the absence of any accurate figures as to the turnover and net returns of the businesses, it is not possible to arrive at a true value.
Additionally they reason that the businesses never ran at a profit and therefore must be assessed as worthless.
They therefore argue that a broader approach to damages be taken, namely a finding that by reason of the fraud on the part of Mr Scarborough, the contracts for sale of the businesses be declared void.
They also seek the return of the purchase monies, the recovery of trading losses to 30 June 1998 and interest on a compounding basis.
8.6         Certainly the law allows for this approach. The question is whether it would be appropriate in this particular case. The difficulties which arise are:
(1)the Melbourne business has been sold with the plant and equipment;
(2)the Brisbane business has been closed down, with no evidence as to what has happened to the plant and equipment;
(3)it is now more than two years since the sale of the Sydney businesses; in that period changes have been made to the manner of operation of the businesses and to the plant and equipment used in them.
8.7         For these reasons I do not consider it appropriate to set aside the Contracts for Sale.
8.8         I do, however, accept that the evidence establishes that the value of the businesses was considerably overstated. The extent of the overstatement cannot be calculated because there are no records of the true takings and expenses of the businesses.
Those records that do exist indicate that there was no profit in the businesses. I consider that, in the absence of accurate records, I should draw the inference that there was never any profit in the businesses.
In those circumstances I propose to assess damages on the basis that the businesses were worthless.
8.9         Damages will be allowed as follows:
(1)the amounts shown in the contracts for sale of each business for goodwill will be allowed; no allowance is made for the plant and equipment purchased for the reasons set out in paragraph 8.6;
(2)the amounts claimed for trading losses to the end of June 1998 will be allowed; and
(3)interest on these sums will be allowed on a compounding basis”.
Although Sidis DCJ did not then record the bases upon which she proposed to allow interest on a compounding basis, in a judgment delivered by her on 30 May 2000 (Orange AB 44-47), she wrote (Orange AB 46):
“(6) The orders which I now propose to make include sums calculated on the basis of compound interest on the damages suffered by the third, fourth and fifth plaintiffs as a result of the breaches by the defendants of their various contracts. It was argued on behalf of the defendants that this Court does not have the jurisdiction to award interest on a compounding basis.
I have noted the provisions of s 83 A of the District Court Act 1973 in particular the provision of s 83A(2)(a). However, I have relied on the authority of the High Court in Hungerfords v Walker (1989) 171 CLR 125 to allow the payment of compounding interest to the plaintiffs as an additional head of damage, rather than as an award of interest under the provisions of the District Court Act, for the loss of the use of their funds arising out of the breaches by the defendants of their contracts”.
Sidis DCJ concluded her judgment as follows (RAB 56-57):
“(9)       Parties Entitled to Recover
9.1         Claims for damages are made by Mr Klich and Dr Adams in their personal capacities on the basis that they advanced funds to Ecrovest, Abaca and Abala for the purchase of the businesses.
9.2         Those advances are shown as loans in the financial accounts. They are the result of private arrangements between Ecrovest, Abaca and Abala and Mr Klich and Dr Adams.
9.3         I find therefore that Mr Klich and Dr Adams have no direct rights of recovery against the defendants.
9.4         Damages will be awarded to Ecrovest, Abaca and Abala on the bases set out in Sections 7 and 8 of these reasons.
10.         Cross-Claims
10.1       It follows that the cross-claims will be dismissed.
10.2       They are based on claims for sums due in circumstances where the contracts which give rise to the liability for payment were entered into following misrepresentations, false statements, misleading and deceptive conduct and fraud”.
In the judgment which she delivered on 30 May 2000, Sidis DCJ made the following formal orders (Orange AB 46-47):
“(1)       Verdict and judgment in favour of (Ecroves)t against Mr Scarborough, Mr Quiambo and Ms Fardouly for the sum of $177,867.72;
(2)         Verdict and judgment in favour of (Abaca) against Mr Scarborough, Ms Quiambo and Ms Fardouly for the sum of $83,535.82;
(3)         Verdict and judgment in favour of (Abala) against Mr Scarborough and Ms Fardouly for the sum of $23,392.58;
(4)         (The claims of Mr Klich and Dr Adams) are dismissed;
(5)         (The cross-claims of each of Mr Quiambo, Ms Quiambo and Mr Scarborough) are dismissed;
(6)         The defendants are to pay the costs of Ecrovest, Abaca and Abala of their claims against the appellants on an indemnity basis together with interest thereon pursuant to the District Court’s Act 1973;
(7) The respondents were to pay the costs of the plaintiffs on the cross-claims on an indemnity basis together with interest thereon pursuant to the District Court Act 1973;
(8)         Each of (Mr Klich and Dr Adams) and the defendants) were to pay their own costs of the claims (of Mr Klich and Dr Adams)”.
Provision for a Stay of Execution was also made.

In the Notice of Appeal (RAB 67-71), which was filed on their behalf, the Appellants took the following Grounds of Appeal, not all of which were persisted in on the hearing of the appeal:
“(1)       Her Honour erred in finding, against the weight of the evidence, that the Respondents relied upon the representations of the Appellants in deciding to purchase the business.
(2)         Her Honour erred in finding that the representations were deliberately falsified for the purpose of inflating the prices that could be commanded for the sale of the businesses when there was no evidence to support such a finding of such a purpose.
(3)         Her Honour erred in law in finding that there was clear and cogent evidence upon which a finding of fraud against the first Appellant could be made when there was no such evidence and consequently her Honour misdirected herself on the standard of proof which was required to find such a finding of fraud.
(4)         Her Honour erred in finding that the Appellants breached their contracts with the respondents when she erroneously constructed (sic) Special Condition 3 of the respective contracts.
(5)         Her Honour erred in law in finding that the businesses were worthless at the time of sale notwithstanding her finding that:
(a)         The Parties had agreed that the figures for the Sydney businesses in the first and second months after the sale appeared to be similar to those represented prior to the sale.
(b)         The First Respondent agreed that after the sale the takings of the Sydney business were in accordance with the representations which had been made.
(c)          Cash profits of the businesses were applied to payments of instalments of the outstanding purchase price and to the purchase of two new vans for the Sydney business.
(d)         There was a gradual decline in the takings of each of the businesses from the 15th February 1998.
(e)          No valuations had been prepared of the true value of the businesses at the date of their acquisition.
(f)           The Sydney businesses ran for more than two years from the date of sale.
(g)         The Brisbane business was closed down with no evidence as to what had happened to the plant or equipment or the goodwill.
(h)         Although the value of the businesses was considerably overstated, the extent of the overstatement could not be calculated because there were no records of the true takings and expenses of the businesses.
(6)         Her Honour erred in finding that the businesses were worthless when on the evidence of the First Respondent as to the takings and activities of the businesses after sale it was not open for her to do so.
(7)         Her Honour erred in law in awarding damages for the entire amount of the goodwill when the only evidence available was that the Sydney businesses were still trading at the date of trial, a competitor business had been set up by the first Respondent in Sydney and there was no evidence of what had happened to the goodwill of the Brisbane and Melbourne businesses after sale.
(8)         Her Honour erred in law in admitting into evidence Exhibits X1, X2, YY1, and YY2 being a tape recording and transcripts of that recording and other recorded meetings which were clandestinely recorded by the first Respondent without the knowledge of the Appellants.
(9)         Her Honour erred in the exercise of her discretion in failing to exclude the tape recording and transcripts from evidence because of the prejudicial nature of the material contained in those exhibits and the consequent unfairness which prevailed because of the use of that material in the course of trial.
(10)       Her Honour erred in law in dismissing the Cross Claims when there was no evidence to support such a dismissal.
(11)       Her Honour erred in awarding interest on the damages awarded to the respondents on a compound basis when such an award was contrary to section 83A (2)(a) of the District Court Act 1973 and further, there was no evidence to support such an award of compound interest.
(12)       Her Honour erred in ordering indemnity costs in the proceedings when there was no evidence to support the exercise of her Honour’s discretion in that way and no reasons were given by her Honour”,
and the Appellants sought the following orders:

“(1)       The Orders of Her Honour made on 30th May 2000 be set aside;
(2)         A verdict and judgment for the Cross Claimants on the Cross Claim;
(3)         A verdict and judgment for the Defendants; or
(4)         Alternatively to Order 3, the remaining proceedings be remitted to the District Court for a new trial;
(5)         The Respondents to pay the costs of this appeal and the proceedings in the Court below”.

In the Notice of Cross-Appeal (Orange AB 39-41), which was filed on their behalf, the Respondents raised the following Grounds of Appeal:
“(1)       Having found fraud, misrepresentation and misleading and deceptive conduct as set out in the judgment, the learned trial Judge erred in dismissing the claims of (Mr Klich and Dr Adams).
(2)         Having found fraud, misrepresentation and misleading and deceptive conduct as set out in the judgment, the learned trial Judged erred in ordering that each of (Mr Klich and Dr Adams) and the Defendants pay their own costs of the claims of (Mr Klich and Dr Adams) and should have ordered the Defendants to pay the costs of (Mr Klich and Dr Adams) of their claims.
(3)         Having found fraud, misrepresentation and misleading and deceptive conduct as set out in the judgment, the learned trial judged (sic) erred in failing to make orders pursuant to s 72 of the Fair Trading Act and s 135 of the District Court Act declaring void or varying the contracts involving (Ecrovest and Abaca), the subject of the proceedings, and consequently erred in the determining (sic) the quantum of damages payable to (Ecrovest and Abaca)”,
and sought the following Orders:

“(5) An order setting aside orders 5 and 6 of the orders made by the learned trial judge on 30 May 2000.

……………………………………………………………….

(6) An order that the Cross-Respondents pay the costs (of Mr Klich and Dr Adams) of the action before the learned trial judge.

(7) An order setting aside Order 1 of the Orders made by the learned trial Judge on 30 May 2000 and in lieu thereof:

(a)an order pursuant to s 72 of the Fair Trading Act declaring void the contract between (Ecrovest) and (Mr Quiambo) and/or an order setting that contract aside; and

(b)an order that (Mr Scarborough, Mr Quiambo and Ms Fardouly) pay to (Ecrovest) the sum of $267,583.67 together with interest thereon from 30 May 2000.

(8) An order setting aside order 2 of the orders made by the learned trial Judge on 30 May 2000 and in lieu thereof:

(a)an order pursuant to s 72 of the Fair Trading Act declaring void the contract between (Abaca) and (Ms Quiambo) and/or an order setting that contract aside; and

(b)an order that (Mr Scarborough, Ms Quiambo and Ms Fardouly) pay damages to (Abaca) the sum of $130,743.27 together with interest thereon from 30 May 2000.

(9) An order that the Cross-Respondents pay the Cross-Appellants’ costs of the appeal”.

In addition to filing a Cross-Appeal, the Respondents filed a Notice of Contention (Orange AB 42-43), which was in the following terms:
“(1)       Subject to the matters raised in their Cross-Appeal, the Respondents contend that the decision and orders of the (sic) Her Honour Judge Sidis should be upheld on grounds as well as those relied upon by Her Honour Judge Sidis, namely:
(a)Even if the tape recordings and the transcripts (and oral evidence relating to them) are disregarded entirely, the documentary evidence and the other oral evidence before Her Honour Judge Sidis demonstrated fraud on the part of (Mr Scarborough) and misleading and deceptive conduct on the part of each of the Appellants sufficient to found the orders made by Her Honour in favour of (Ecrovest, Abaca and Abala).
(2)         The Respondents contend that the decision and order of Her Honour Judge Sidis that the cross-claims of (Mr Quiambo, Ms Quiambo and Mr Scarborough) be dismissed should be upheld on grounds as well as those relied upon by Her Honour Judge Sidis, namely:
(a)On the evidence before Her Honour (Ecrovest, Abaca and Abala) were entitled to orders setting aside, declaring void or varying the contracts on which the cross-claims were founded with the effect of removing the contractual foundation for the cross-claims. Accordingly, the cross-claims were properly dismissed.
(b)         Alternatively, there was a set-off available to the respondents (being a set-off which is, for practical purposes, already reflected in the amounts awarded by her Honour) which would have resulted in net amounts (sic) due under the cross-claims being a nil amount. Accordingly, the cross-claims were properly dismissed”.

The net result thus was that, as a result of their relying upon the representations, Ecrovest, Abaca and Abala entered into Agreements for Sale in respect of businesses, the result of which fell far short of those which had been represented, and in doing so, both expended significant sums of money and committed themselves to pay further significant sums of money.

Although the attack made on Sidis DCJ’s finding that the claims under s 42 of the Fair Trading Act 1987 had been made out did not come next in the attacks which were made on her Honour’s judgment, the matters to which I have referred both, in my view, demonstrate that that attack has not been made out.

I turn next to the submission – which was not elaborated upon in any detail – that the Respondents’ claims in contract ought to have been dismissed.

Although, in the course of her judgment, Sidis DCJ did deal specifically with the Respondents’ claim that there had been a breach of the warranty contained in cl 16 of the Agreement for Sale of the Sydney businesses, she did not deal in any detail with the claim based upon what was said to have been a breach of the warranty contained in cl 3 of each of the Agreements for Sale. However, it seems to me, that it is implicit in her Honour’s conclusions that she found that, in each case, there had been a breach of that warranty, which warranty related to “the fee base” of the business which was said to have been correct as at the date of the relevant Agreement for Sale. It seems to me that “the fee base” of the relevant business was the Gross Sales of that business, calculated on an annual basis. If this be so, then it would follow from the findings made by Sidis DCJ in respect of each of the Agreements for Sale, that the fee base of each of the businesses, the subject of the relevant Agreement for Sale, was other than had been represented, it following that there had been a breach of warranty in each case.

The next attack upon Sidis DCJ’s judgment was that her Honour’s treatment of the question of damages was erroneous, a submission that was put in two differing ways:

(1)That the evidence, so it was submitted, dictated the conclusion that the Plaintiffs had failed to prove any loss arising from their acquisition of any of the businesses, the subject of the three Agreements for Sale as, so it was submitted, at the time of the acquisition of each business, it was trading successfully and thereafter it continued to trade successfully;

(2)In relation to each of the Brisbane and Melbourne businesses, the evidence which was tendered to establish damages suffered by Abaca and Abala, was of such quality that it ought not to have been relied upon as establishing damage.

So far as the first of these matters is concerned, what I have earlier written, in my view, is sufficient to demonstrate that it was open to Sidis DCJ to conclude that the Sydney businesses did not, after their acquisition by Ecrovest, generate profits which were, in fact, consistent with the representations which had been made, notwithstanding that, between 1 November 1997 and 1 April 1998 the businesses continued under the management of Mr Scarborough.

Further, it is to be noted that the few original business records relating to the Brisbane and Melbourne businesses, which were located by Mr Klich, relating to the periods prior to the giving of the Details of Business documents to Mr Klich, related to isolated weeks, and not to the whole period, it following that while those records were sufficient to demonstrate the falsity of the figures contained in the Details of Business documents, they did not permit a calculation across the whole period, it following that her Honour was correct when she said, in the course of her judgment, (RAB 55):
“The extent of the overstatement cannot be calculated because there are no records of the true takings and expenses of the businesses”.

In addition, there was the evidence of Mr Klich, that almost from the time of the acquisition of the Brisbane and Melbourne businesses, the figures which he was given as to the takings progressively declined below those which had been given in the Details of Business documents.

The evidence which had been tendered to establish the trading losses which were suffered by Abaca and Abala for the period to 30 June 1998 were Financial Statements, which had been prepared by an accountant, Mr Gulczinski. In their written submissions (Orange AB 17), the Appellants asserted that “the accounts were prepared from weekly summary sheets provided by Mr Klich … , the accuracy of which the accountant doubted”; in many cases these “didn’t add up”, and were “inaccurate”, a reference being given to the Accountant’s evidence at Black AB 407E, 408H. However, a reading of Mr Gulczinski’s evidence at those pages makes it abundantly clear that his comments were made, not in relation to the materials given to him by Mr Klich in relation to the Brisbane and Melbourne businesses, but in relation to Weekly Summary Sheets which had been prepared by Mr Scarborough in relation to the Sydney businesses, and while he was Manager. There is, in my view, no substance in this submission.

Even if there had been some substance in the submission however, it would, in my view, still have been open to Sidis DCJ to have regard to those Financial Statements when dealing with the question of damages. That this was so is, in my view, indicated by the following passage in the judgment of Handley JA, with whom Mason P and Beazley JA agreed, in Houghton v Immer [No 155] Pty Ltd ((1997) 44 NSWLR 46, 59):
“The defendants, having improved common property without lawful authority, and attempted to effect a fraud on the minority, are wrongdoers, and their failure to keep and produce proper accounts of their actual expenditure on the common property has made it difficult to assess the compensation due to the plaintiff; compare Armory v Delamirie (1722) 1 Stra 505; 93 ER 664. In my judgment the Court should assess the compensation in a robust manner, relying on the presumption against wrongdoers, the onus of proof, and resolving doubtful question against the party ‘whose actions have made an accurate determination so problematic’; see LJP Investments Pty Ltd v Howard Chia Investments Pty Ltd (1990) 24 NSWLR 499 at 508”.

Although, in their Notice of Appeal, the Appellants (Ground 7) asserted error on the part of Sidis DCJ in calculating the amount of the quantum of damages, and (Ground 10) asserted that her Honur erred in dismissing the Appellants’ Cross-Claims, in their Written Submissions, the Appellants addressed no submission to either of those Grounds of Appeal, the only submission directed to the quantum of damages being directed to the question of interest on a compound basis (Ground 10).

This notwithstanding, it seems appropriate to observe, first, that it seems to be accepted (Vadasz v Pioneer Concrete (SA) Pty Limited (1995) 184 CLR 102; Akron Securities v Iliffe (1997) 41 NSWLR 353; Esanda Finance Corporation Limited v Tong (1997) 41 NSWLR 482), that there is no single remedy which will always be appropriate in cases, such as this was, where relief is claimed, pursuant to such provisions as s 52 of the Trade Practices Act 1974 (Cth), or s 42 of the Fair Trading Act 1987; and, second, that where, in such a case, an award of damages is thought to be appropriate, there is no one correct method or formula for determining a quantum of damages (Marks v GIO Australia Holdings Limited (1998) 73 ALJR 12, 20-21 per McHugh, Hayne and Callinan JJ; see also Collings Construction Co Pty Limited v Australian Competition and Consumer Commission (1998) 152 ALR 510, 522).
The form of the orders proposed by Sidis DCJ in her principal judgment would tend to indicate that her Honour thought that the appropriate remedy to be made available to the Respondents was, first, an award of damages for such sums of money as they had actually lost as the result of entering into several Agreements for Sale, together with an order relieving them of the obligation to make further payments pursuant to the vendor finance provisions in each of the Agreements for Sale and, in the case of Mr Klich, the guarantee given by him when the vendor finance provisions were varied.

Although, in her principal judgment, Sidis DCJ (RAB 56) indicated that the damages to be allowed would be the amounts shown in each of the Agreements of Sale for goodwill, together with the amounts claimed for trading losses to the end of June 1998, together with interest on those sums on a compounding basis, and although, in her supplementary judgment (Orange AB 46), her Honour did deal with the question of the Court’s power to allow interest on a compound basis, it may be doubted whether the amounts finally awarded to each of Ecrovest, Abaca and Abala were calculated in accordance with the “formula” set out by her Honour in her principal judgment.

In her supplementary judgment, Sidis DCJ wrote (inter alia) (Orange AB 45):
“1.In this matter my reasons were issued on 17 March 2000.
2.The proceedings were then stood over to 23 March 2000 to deal with issues of interest and costs. The proceedings were further stood over to 13 April to finalise the orders after further written submissions.
3.On 13 April 2000 I gave certain indications as to the manner in which the plaintiffs’ damages were to be calculated and I ruled on issues concerning costs and the defendants’ request for a stay of proceedings.
The proceedings were further stood over to allow the parties to agree upon calculations of the quantum of damages to be awarded to the third, fourth and fifth plaintiffs so that final orders could be made in chambers.
4.The defendants did not accept the plaintiffs’ initial calculations for the reasons set out in the letter of the defendants’ solicitors dated 26 April 2000 addressed to my Associate. This letter did not attempt to re-calculate damages on the basis propounded by the defendants.
5.The plaintiffs, although not agreeing to the defendants’ propositions, recalculated damages on the basis put forward by the defendants as set out in a letter to the defendants’ solicitors dated 19 May 2000. I asked the defendants to respond to these calculations by 4 pm on 24 May 2000, failing which I would proceed to make final orders in Chambers. No response was received by the time stipulated and none has been received to the date of the final orders which I now propose to make”.
If the “formula” proposed by Sidis DCJ in her principal judgment had been adopted, the sums to be awarded by way of damages would have been:

(1)In the case of Ecrovest, $172,367 (Goodwill $136,336 plus Trading Losses to 30/6/98 $36,031) plus compound interest;

(2)Abaca $118,106 (Goodwill $102,312 plus Trading Losses to 30/6/98 $15,794) plus compound interest;

(3)Abala $45,929.12 (Goodwill $38,643 plus Trading Losses to 30/6/98 $7,286.12) plus compound interest.

These figures are to be contrasted with the respective amounts of damages awarded by Sidis DCJ which awards, said to include compound interest, were, as I have earlier (see para 81 (above)) noted, were as follows:
(4)           Ecrovest $177,867.72;
(5)           Abaca $83,535.82;
(6)           Abala $23,392.58.
Since the Appellants, although apparently in a position to do so, have not favoured us with any indication of how those three amounts were, or might have been, calculated, it is quite impossible to know what part of each amount represents compound interest.

That, notwithstanding such provisions as s 83A (2)(a) of the District Court Act 1973, it is open to a court, in an appropriate case, to allow damages by way of compound interest upon expenses incurred, or costs arising, (Hungerfords v Walker ((1998-1999) 171 CLR 125); Bushwall Properties Limited v Vortex Properties Limited ([1975] 1 WLR 1649)), it does not seem to me that the present was such an appropriate case. In Hungerfords v Walker ((supra) at 149-150), Mason CJ and Wilson J, after referring to the reluctance of the Common Law to adopt the Admiralty approach in awarding compensation for late payment of damages in the general run of cases, said:
“But we see no reason for allowing the reluctance of the common law to extend the cases where the defendant’s breach of contract or negligence has caused the plaintiff to pay away or the defendant to withhold money and, as a result, the plaintiff has been deprived of the use of the money so paid away or withheld. The recovery of compensation for the loss may be ascribed to the operation of the second limb in Hadley v Baxendale. However, we prefer to put it on the footing that it is a foreseeable loss, necessarily within the contemplation of the parties, which is directly related to the defendant’s breach of contract or tort.
On this footing the Full Court was correct in awarding damages for the added costs of funding the business with borrowed money as a result of the loss of the use of money overpaid in tax. The award of interest was of necessity compound interest. Simple interest would not reflect accurately the extent of the respondents’ loss. Simple interest almost always undercompensates the injured party’s true loss. Bowles and Whelan, ‘Judgments, Awards and Simple Interest Rates’, International Review of Law and Economics, vol 1, (1981) 111, at p 112 observe:
‘If the plaintiff was expecting payment for a consignment of goods, but did not receive his money, the extent of his loss could be measured approximately by the amount of income that he could otherwise have generated simply by putting the proceeds into a deposit account at a bank. Such a move would attract compound interest, since the bank would automatically add to the account any interest generated. Equally a plaintiff in a tort action can be thought of incurring opportunity costs best measured by compound rather than simple rates. Had he received his award immediately upon the damage occurring, it may be assumed that he would have invested it at compound rates in just the same way as would the plaintiff who is suffering from the breach of contract’.
The disdain of the common law for interest, especially compound interest, is a ‘relic from the days when interest was regarded as necessarily usurious’ (Ogus ‘Law of Damages’ (1973), p 98)”.
In a separate judgment, Brennan and Deane JJ, wrote ((supra) at 152):

“… there is no acceptable reason why the ordinary principles governing the recovery of common law damages should not, in an appropriate case, apply to entitle a plaintiff to an actual award of damages as compensation for a wrongfully and foreseeably caused loss of the use of money. To the extent that the recorded cases support the proposition that damages cannot be awarded as compensation for the loss of the use of a specific sum of money which the wrongful act of the defendant has caused to be paid away or withheld, they are contrary to principle and commercial reality and should not be followed”.

If, for the moment, one leaves to one side the question of interest, the amount of damages which Sidis DCJ proposed to award to each of Ecrovest, Abaca and Abala was the amount of the direct financial loss which her Honour considered that each had suffered as the result of entering into the relevant Agreement for Sale, such losses being the foreseeable consequence of the conduct on the part of the Appellants of which the Respondent’s complained. However, there does not appear to have been any evidence of any additional cost incurred, or loss suffered, by any of Ecrovest, Abaca or Abala which would have brought the case within the principle discussed in Hungerfords v. Walker (supra). This being so, while an award of simple interest on the several amounts of damages proposed for some period prior to Judgment could legitimately have been awarded, an award of compound interest would not seem to have been open.

I therefore conclude that, to the extent, if at all, to which the awards of damages include compound interest, but not otherwise, the Appeal should be upheld.

The final attack made by the Appellants upon Sidis DCJ’s judgment is that her Honour erred in making an award for indemnity costs.

I do not agree with that submission. It seems to me that there were two aspects of the present case which justified the award made by her Honour as I have earlier (see para 53 (above)) recorded. In her judgment Sidis DCJ wrote (RAB 38):
“Overall I have reached the conclusion that I can place no reliance on the evidence of the defendants and their witnesses. Their evidence left me with no doubt that there had been a conscious effort on the part of the defendants and their witnesses to deceive the Court as to the real facts surrounding the sales of businesses”.
Further, it is to be noted that the accusations made against Mr Klich (see RAB 29) – that he wished to deceive his wife and Dr Adams, that he was a womaniser – against Dr Adams (see RAB 30) – that he, too, was a womaniser, and that his interest in the business was directed at tax avoidance – against Mr Pearce (see RAB 30) that he was involved in tax avoidance, and in the deceit of the Child Support Agency – and against Mr Daniel (see RAB 30) – that he, too, was involved in tax avoidance, and Social Security fraud – all of which allegations were clearly intended to affect the credibility of the Respondents and their witnesses, all of which allegations required evidence to be led to meet them, and all of which allegations must be taken to have been rejected by Sidis DCJ, could not be regarded as anything but scandalous and deliberately indulged in an attempt to avoid liability on the part of the Appellants (see Degmam Pty Ltd (In Liq) v Wright (No 2) [1983] 2 NSWLR 354).

I turn then, but only briefly, to the Cross-Appeal.

Although, in their Notice of Appeal, the Respondents charged that Sidis DCJ erred in dismissing the claims of Mr Klich and Dr Adams, and the order that they pay and bear their own costs of those claims, and seek an order that Orders 5 and 6 made by her Honour be set aside, they do not seek any order for substantive relief in favour of Mr Klich and Dr Adams in respect of their claims, but seek only an order that the Appellants pay their costs of the trial.

I do not agree that Sidis DCJ erred in dismissing the claims made by Mr Klich and Dr Adams. In Gould v Vaggelas ((1983-1985) 157 CLR 215) Gibbs CJ said ((supra) at 219-220):
“The second question, whether the Goulds have established that they suffered damage because they acted in reliance on the false statements made by Vaggelas and, if so, what is the measure of their damage, is a more difficult one. The difficulty lies not in stating the legal principles which should be applied, but in applying those principles to the facts of the case. It is clear that it was not right to identify the Goulds with the company, Gould Holdings Pty Ltd ‘Gould Holdings’ , which the Goulds formed to make the purchase, notwithstanding that they were the sole shareholders. It is of course elementary to say, as was said in Prudential Assurance Co Ltd v Newman Industries Ltd [No 2], ‘that A cannot, as a general rule, bring an action against B to recover damages or secure other relief on behalf of C for an injury done by B to C. C is the proper plaintiff because C is the party injured, and therefore the person in whom the cause of action is vested’. Any loss suffered by Gould Holdings as a consequence of the fraud can be recovered only by the company itself. Even if the company had not commenced an action within the limitation period, its failure to enforce its own rights would not have enhanced the rights of the Goulds, see Prudential Assurance v Newman Industries [No 2]. However, although the Goulds cannot recover damages merely because Gould Holdings has suffered damage, and cannot recover damages which are merely a reflection of the loss suffered by the company, they may recover damages for the loss which they personally have suffered and which is separate and distinct from the loss suffered by the company. That this is so is clear in principle, but if authority is needed, the judgment in Prudential Assurance v Newman Industries provides it”.

The passage of the judgment in the Court of Appeal in Prudential Assurance Co Ltd v Newman Industries Ltd {No 2}, to which in his judgment Gibbs CJ referred, was as follows ([1982] 1 Ch 204, 222-223):
“In our judgment the personal claim is misconceived. It is of course correct, as the judge found and Mr Bartlett did not dispute, that he and Mr Laughton, in advising the shareholders to support the resolution approving the agreement, owed the shareholders a duty to give such advice in good faith and not fraudulently. It is also correct that if directors convene a meeting on the basis of a fraudulent circular, a shareholder will have a right of action to recover any loss which he has been personally caused in consequence of the fraudulent circular; this might include the expense of attending the meeting. But what he cannot do is to recover damages merely because the company in which he is interested has suffered damage. He cannot recover a sum equal to the diminution in the market value of the shares, or equal to the likely diminution in dividend, because such a ‘loss’ is merely a reflection of the loss suffered by the company. The shareholder does not suffer any personal loss. His only ‘loss’ is through the company, in the diminution in the value of the net assets of the company, in which he has (say) a 3 percent shareholding. The plaintiff ’s shares are merely a right of participation in the company on the terms of the articles of association. The shares themselves, his right of participation, are not directly affected by the wrongdoing. The plaintiff still holds all the shares as his own absolutely unencumbered property. The deceit practised upon the plaintiff does not affect the shares; it merely enables the defendant to rob the company”.
In the present case, as it seems to me, Mr Klich and Dr Adams failed to demonstrate that they had sustained a loss which was separate and distinct from the loss suffered by the companies in which they were interested.

This being so, it would follow that Mr Klich and Dr Adams were not entitled to an order in their favour for the costs of their personal claims.

Finally, the Respondents alleged that Sidis DCJ erred in failing to make orders pursuant to s 72 of the Fair Trading Act 1987 and s 135 of the District Court Act 1973, declaring void or varying the Agreements for Sale involving Abaca and Abala, and consequently erred in determining the quantum of damages payable to those two Respondents.

As I have previously (see para 106 (above)) recorded, there is no single remedy which is always appropriate in which claims for relief, pursuant to the provisions of s 52 of the Trade Practices Act 1974 (Cth), or s 42 of the Fair Trading Act 1987 is sought, and that there is no one correct method or formula for determining damage in cases in which an award of damages is thought appropriate. This being so, it is clear that, in determining what is the appropriate remedy in such a case, a trial Judge is exercising a judicial discretion, the exercise of which discretion may only be successfully challenged upon the grounds set out in the well known passage in the joint judgment of Dixon, Evatt and McTiernan in House v The King ((1936) 55 CLR 499, 504-505). In my opinion, the Respondents have failed to make out any case of relevant error on the part of Sidis DCJ.

In my opinion, except to the extent to which I have earlier indicated, (see para 112 (above)), the Appeal should be dismissed, the Appellants to pay the Respondents’ costs of the Appeal, and the Cross-Appeal should be dismissed, but that there should be no Order as to the costs of the Cross-Appeal. The Appellants and the Respondents should be required to bring in Minutes of an Order as to the amount of damages to be substituted for those awarded by Sidis DCJ in the event that those awarded include compound interest and, in the event that they are unable to agree, should be required to file Written Submissions in support of the figures which each side has advanced, the form of the award to be made in each case, in the event of disagreement between the parties to be determined on the Written Submissions.

STUDDERT AJA: I agree with Powell JA.

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LAST UPDATED: 07/12/2001