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…
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- AGLC
- Scarborough v Klich [2001] NSWCA 436
- Case
- [2001] NSWCA 436
- Decision Date
CaseChat Overview and Summary
The primary legal issues before the court were whether the representations made by Mr Scarborough constituted fraudulent misrepresentation, and if so, what was the correct measure of damages. Specifically, the court had to determine if the damages awarded by the District Court, which included an element of compound interest, were appropriate in the context of a claim for deceit arising from misleading and deceptive conduct in trade.
The court found that the representations made by Mr Scarborough regarding the business's gross sales, gross margin, and net profit were indeed fraudulent. The evidence indicated a significant discrepancy between the projected figures and the actual financial performance of the business, which Mr Scarborough knew or ought to have known. The court applied the principle that in cases of fraudulent misrepresentation, the measure of damages should aim to put the misled party in the position they would have been in had the misrepresentation not occurred. However, the court also considered the nature of the claim, which involved misleading and deceptive conduct under trade practices legislation, and noted that this did not necessarily require an analogy with contract, tort, or equitable remedies.
The court ultimately determined that the award of compound interest by the District Court was not justified in this instance. While acknowledging that compound interest can be awarded in certain circumstances, it held that the specific facts of this case, particularly the nature of the fraudulent conduct and the absence of a clear basis for such an award, did not warrant it. The court therefore varied the order of the District Court by removing the component of compound interest from the damages awarded to Mr Klich.
Orders
Orders of the court
See paragraph 123
Background
Background to the litigation
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Evidence
Evidence Before The Court
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Decision
Reasons for decision
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Ratio Decidendi
Legal Principle Established
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: 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”.