Southern White Pty Ltd v Slinger & Slinger No. DCCIV-00-146

[2004] SADC 43

Southern White Pty Ltd v Slinger & Slinger
[2004] SADC 43

Judge Lee
Civil

1. This action concerns the purchase of a childcare centre by the plaintiff from the defendants in September 1997, and a claim for damages arising from representations about the centre allegedly made by the defendants to the plaintiff prior to and at the time of the sale. The plaintiff relies upon provisions of the Fair Trading Act 1987, Misrepresentation Act 1972 and Land and Business (Sale and Conveyancing) Act 1994.

2. At all relevant times prior to the sale, the plaintiff, through its sole director and shareholder, Mr Colin Ehmann, conducted a real estate business at Reynella, and the defendants were owners and proprietors of the properties and businesses of two childcare centres, namely Pied Piper Childcare Centre at Port Noarlunga and Christies Beach Childcare Centre at Christies Beach.

3. On 13 March 1997, the defendants executed a sales agency agreement (P5) appointing the plaintiff as agent for the sale of the property and business of Pied Piper.  At or shortly after that time, the defendants provided to Mr Ehmann three documents about the business.

4. The first was a five page document headed “Childcare Centre Purchase” (P1).  The purpose of the document was to assist the plaintiff to market Pied Piper to prospective purchasers.  On page 2 under the heading “Finance Repayability”, Pied Piper is described as a “stand alone expanding business”.  Then the following paragraph appears:

   “At its current weekly trading income, it is expected that the business will generate a gross income of approx of $240,000 for the current financial year, which is consistent with the last 4 years trading, since its expansion to 30 licensed places.”

5. The second document accompanied the Childcare Centre Purchase document.  It was a projection for the 97/98 year, with the heading “1997/98 Budget” (P3).

6. The third document was a Form 2 pursuant to s.8 of the Land and Business (Sale and Conveyancing) Act 1994 (P2). The Form 2 was signed by the male defendant as vendor on 3 April 1997. The asking price of the business was said to be $180,000.

7. On 16 June 1997, the defendants faxed to Mr Ehmann a document entitled “Pied Piper History” (P6).  The document details the financial performance of the business between 1991 and 1997.

8. On 1 July 1997, the sales agency agreement expired.  At some later time, Mr Ehmann decided that he wanted to purchase the Pied Piper business on the plaintiff’s behalf, and entered into negotiations with the defendants to that end.

9. In July 1997, Pied Piper’s licence for 30 places for children over the age of two was changed to 34 places, comprising 28 places for children two and over and six places for under twos.  The defendants elected to fill only five of the places for under twos.  Mr Ehmann made handwritten alterations to his copy (P8) of the Childcare Centre Purchase document.

10. On 7 August 1997, the defendants gave to Mr Ehmann a statement of projected income and expenditure for the year 1 July 1997 to 30 June 1998 (P10).

11. On 8 August 1997, the parties executed a contract for the sale of Pied Piper from the defendants to the plaintiff (P4).  The purchase price was $350,000, apportioned $180,000 to the business and $170,000 to the property.  The contract was subject to vendor’s finance of $65,000.  On the same date, Mr Ehmann completed the Form 2, or a copy thereof, and executed the document on behalf of the plaintiff.

12. Shortly before the execution of the contract, the defendants gave to Mr Ehmann a statement for the year 1 July 1997 to 30 June 1998.  At the top of the statement, the male defendant wrote “Worse Case Scenario”.  The purpose of the statement was to assist the plaintiff to obtain finance for the purchase.  The plaintiff eventually obtained a loan of $277,000.  The loan was secured across three properties.

13. Possession of the business and the property was given and taken on 29 September 1997.

14. It will be convenient at this point to use a table to summarise relevant material in the above and other documents.  Part 1 of the table deals with the documents which the defendants supplied to the plaintiff prior to the acquisition of the business, and part 2 deals with the documents which have been produced on various occasions since that time.

Description of document and periods Covered	Date	Exhibit no.	Childcare assistance from Cwlth Government	Fees from parents	Total receipts	Expenses	Profit
	(*excludes loan interest)
Part1
Form 2 94/95 year 95/96 year 7/96 – 12/96 6 months	executed by (1) male defendant on 3/4/97 (2) Mr Ehmann on 8/8/97	P2	$269,382 $247,977 $114,054	$156,972* $153,081* $78,966*	$112,410* $94,896* $35,088*
Childcare Centre Purchase 96/97 year (est.)	delivered by defendants to plaintiff in April 1997	P1	$48,000 x 4 = $192,000	$1,100 x 52  = $57,200	$240,000 $249,200
1997/98 Budget 9/97 quarter 12/97 quarter 3/98 quarter 6/98 quarter 97/98 year	dated 21/3/97	P3	$48,000 $48,000 $48,000 $48,000 $192,000	$12,000 $12,000 $12,000 $12,000 $48,000	$60,000 $60,000 $60,000 $60,000 $240,000	$48,295 $47,545 $48,505 $46,795 $191,140	$11,705 $12,455 $11,495 $13,205 $48,860
Pied Piper History 94/95 year 95/96 year 96/97 year (est.)	faxed on 16/6/97	P6	$269,382 $247,977 $245,000	$156,972* $153,081* $157,000*	$112,410* $94,896* $88,000*
Quarterly Financial Statement 9/97 quarter (est.) 97/98 year (est.)	dated 7/8/97	P10	$42,000 $170,000	$18,000 $70,000	$60,000 $240,000	$46,320 $181,910	$13,680 $58,090
Description of document and periods covered	Date	Exhibit no.	Childcare assistance from Cwlth Government	Fees from parents	Total receipts	Expenses	Profit
Worse case scenario 9/97 quarter (est.) 12/97 quarter (est.) 3/98 quarter (est.) 6/98 quarter (est.) 97/98 year (est.)	dated 7/8/97	P9	$32,000 $34,000 $32,000 $34,000 $132,000	$12,000 $13,000 $12,000 $13,000 $50,000	$44,000 $47,000 $44,000 $47,000 $182,000	$41,133 $40,140 $40,967 $41,086 $163,326	$2,867 $6,860 $3,033 $5,914 $18,674
Part 2
Defendants’ tax returns 94/95 year 95/96 year 96/97 year 9/97 quarter	P33 P34 D31 P32	$269,382 $247,370 $241,333 $22,743	$180,109 $189,961 $178,453 $62,997	$89,273 $57,409 $62,880 ($40,254)
Document headed ‘Transactions’ 9/96 quarter 12/96 quarter 3/97 quarter 6/97 quarter 96/97 year	3/6/98	P14	$34,470 $49,347 $63,419 $34,202 $181,438	$14,964 $14,423 $13,864 $17,494 $60,745	$49,434 $63,770 $77,283 $51,696 $242,183

1. It is apparent from the table that parents with children in day care receive substantial assistance from the Commonwealth Government.  The fee that the defendants charged for full-time care prior to April 1997 was $150 per week.  The government component of that fee for a parent who was eligible to receive maximum childcare assistance for one child in care was calculated by multiplying $2.30 per hour by the then allowable maximum of 60 hours per week by 83.48%, making $115.20.  So the gap payable by that parent was $34.80 per week.

2. On 1 April 1997, a decision by the Commonwealth Government in the 1996 Budget to reduce the allowable maximum for full-time care from 60 hours to 50 hours came into effect.  The percentage was also reduced from 83.48% to 83.04%.  This meant that the government component of the fee became $2.30 per hour times 50 hours times 83.04%, making $95.50, with a gap of $54.50.  The defendants responded to the decision by reducing the overall weekly charge for full-time care from $150 to $140, with the result that the gap was increased from $34.80 to $44.50 per week.  The defendants also increased fees for casual care by $1 per session.  The male defendant’s evidence was that in early April 1997 he explained to Mr Ehmann that the impact of the decision and his response would be an increase in takings in the vicinity of $5 to $10 per week.

3. The method by which the government made payments of childcare assistance is explained in the following paragraphs which appear in the Childcare Centre Purchase document under the heading Cashflow:

   “Childcare Assistance, which is fully funded by government, is paid in advance to each Centre, based on their previous level of need.

   Each quarter the Childcare Assistance advance is detailed for the quarter and 40% is paid on the 1^st of month 1, 30% is paid on 1^st of month 2 and 30% is paid on the 1^st of month 3.

   Current quarterly levels of childcare assistance at Pied Piper is approx $48,000.  This means that on a take over date of 1^st July 1997, a cash payment of $19,200 would be paid into the business account by the government, and month 2 and 3 would have a further $14,400 paid on the 1^st of each month.

   With parent gap payments of over $1,100 per week, cashflow is not an issue for the running of this Childcare Centre.”

4. With respect to, say, the September 1997 quarter, the defendants would have received a letter from the Commonwealth Department of Health and Family Services towards the end of the June quarter.  The letter would have been based upon a claim made by the defendants earlier in the June quarter for work actually performed or acquitted in the March quarter.  The letter would have detailed the payment to be made in the September quarter, with an adjustment for over or under payments in the March quarter.

5. The letters in exhibit P24 show that, in the case of Pied Piper, this six monthly rolling reconciliation and adjustment process led to the following result:-

Quarter	Assistance advanced subject to adjustment	Assistance claimed	Surplus (shortfall)	Adjustment	Net payment
September 1995	$46,803	$52,884	$6,081	n/a	n/a
December 1995	$48,157	$46,429	($1,728)	n/a	n/a
March 1996	$52,884	$43,677	($9,207)	$6,081	$58,965
June 1996	$46,429	$47,888	$1,459	($1,728)	$44,701
September 1996	$43,677	$53,548	$9,871	($9,207)	$34,470
December 1996	$47,888	$41,045	($6,843)	$1,459	$49,347
March 1997	$53,548	$35,148	($18,400)	$9,871	$63,419
June 1997	$41,045	$33,174	($7,871)	($6,843)	$34,202
September 1997	$35,148	$31,334	($3,814)	($18,400)	$16,748
December 1997	$33,174	n/a	n/a	($7,871)	n/a

1. Since the shortfalls with respect to the June and September 1997 quarters were not due to be adjusted until after the plaintiff took possession of the business on 29 September 1997, the Department wrote to the male defendant on 10 November 1997 seeking to recover $12,163, being the total of $7,871 and $3,814, together with a variation to the assistance claimed in the September quarter of $478.

2. The defendants’ tax returns for the years 94/95 to 96/97 confirm that the figures supplied to the plaintiff prior to the contract were accurate to within a few dollars.  The figures show in broad terms that the business was consistently achieving a turnover of no less than $240,000 per year.  But those figures were supplied for a purpose which went beyond mere expression of historical fact.  They were supplied to demonstrate to a potential buyer the extent of the future profitability of the business.  They indicated to a potential buyer that the business was capable of maintaining, perhaps even improving upon, a turnover of $240,000, or $60,000 per quarter.  Since figures prepared on a cash receipts basis, rather than on an accrual basis, may not disclose the true financial viability of the business, they have the potential to mislead.  Especially is this so in the childcare industry, where receipts in each quarter are subject to a rolling reconciliation six months later.

3. In the case of Pied Piper, not only did the figures have the potential to mislead, they were misleading in fact.  With respect to the second, third and fourth quarters of the 96/97 year, assistance advanced exceeded assistance claimed by a significant margin.  So the assistance being provided or acquitted was trending down in that year, but the cash receipts nature of the accounts coupled with the rolling reconciliation and adjustment process had the effect of masking the trend for some months.  Nevertheless, by the end of the June 97 and September 97 quarters, the defendants must have known that adjustments for earlier shortfalls would be made in the September 97 and December 97 quarters of $18,400 and $7,871 respectively.  Indeed, the evidence shows that they made cash advances to the bank account of the business of $10,000 on 7 July 1997, $9,000 on 5 August 1997 and $5,000 on 10 September 1997.  The defendants made further advances to the bank account after the contract, and doubtless that was in part to facilitate payment of their debt to the Department of $12,163 in February 1998.  Overall, cash advances between July 1997 and February 1998 amounted to $40,300.

4. In the final analysis, the defendants were responsible for misleading and deceptive conduct in the form of omission rather than commission.  The omission was the failure to update to the time of the contract the figures disclosed to the plaintiff before the contract.  The profit and loss statements in the Form 2 did not go beyond 31 December 1996.  The history in the Pied Piper History did not go beyond the March 97 quarter.  Only projections were provided in the ensuing months, notwithstanding that the defendants were in possession of information that showed that in fact the business was in decline at that time.

5. Especially relevant to the profitability of the business in the June and September 1997 quarters was the fact that net government advances fell from $34,202 in the June quarter to $16,748 in the September quarter.  The low advance in the September quarter would have been foreshadowed by the Department to the defendants in late June 1997, and well before they prepared and provided the “Quarterly Financial Statement” (P10) to the plaintiff on 7 August 1997.   The projection in that statement of childcare assistance of $42,000 for the September quarter was clearly misleading.  Moreover, as we now know from the defendants’ tax return (P32), total receipts of $22,743 in the September 97 quarter led to a loss of $40,254 in that quarter.

6. If accounts for the 96/97 year were to be prepared to show the actual performance of the business, rather than merely the cash that it received, the following would be the result:-

Quarter	Assistance acquitted	Fees from parents	Total
September 1996 December 1996 March 1997 June 1997	$53,548 $41,045 $35,148 $33,174	$14,964 $14,423 $13,864 $17,494	$68,512 $55,468 $49,012 $50,668
$162,915	$60,745	$223,660

1. This table shows that the performance of the business in terms of assistance acquitted was trending downwards throughout the 96/97 year.  Prior to the contract, the figures in the table, and the direction that they were taking, were known only to the defendants.  All that the plaintiff knew was the projection in the defendants’ documents that quarterly turnover would be in the order of $60,000 and annual turnover would be in the order of $240,000.  By the time that the contract was signed, there was no reasonable prospect that these projections would be achieved, at least in the short term.

2. Mr Ehmann disavowed any reliance upon the Worse Case Scenario (P9), and he was right to do so.  As I have said, the purpose of that document was to assist the plaintiff to obtain finance for the purchase.  As far as the viability of the business was concerned, the only meaningful document at that time was the Quarterly Financial Statement (P10).  In any event, childcare assistance of $32,000 in the Worse Case Scenario for the September 97 quarter is approximately double the $16,748 actually received.

3. Mr Ehmann also did not attach any weight to the figure of $3,830 stated in the contract to be gross weekly takings for the previous six weeks.  He said he did not annualise the figure, and that in any event by the time he was given the figure to include in the contract he had already made up his mind to buy the business.

4. The question which now arises is whether the plaintiff purchased the business in reliance upon the defendants’ misleading and deceptive conduct.  I hold that it did.  I accept Mr Ehmann’s evidence on that topic.  He would not have purchased the business if the actual trading position had been made known to him.

5. In the result, the defendants are in breach of ss.54 and 56 of the Fair Trading Act 1987, and the plaintiff is entitled, pursuant to s.84 of that Act, to recover the amount of its loss from them. As well, the defendants are in breach of s.7 of the Misrepresentation Act 1972, and are liable to pay damages to the plaintiff.

6. The plaintiff also relies upon the provisions of the Land and Business (Sale and Conveyancing) Act 1994. The Form 2 (P2) which the defendants executed and delivered to the plaintiff in April 1997 was a form prescribed by the Regulations under the Act. The form requires the provision of trading statements for the previous three financial years, whereas the statements provided by the defendants covered a period of 2½ years to 31 December 1996.

7. The more important point, however, is that Section 10 of the Act provides:-

   “(1) A vendor’s statement must be accurate as at the date of service on the purchaser.

   (2) If after the service of a vendor’s statement but before the purchaser signs the contract circumstances change so that if a fresh statement were to be prepared there would have to be some change in the particulars contained in the statement, then the vendor’s statement will be regarded as defective until a notice of amendment is served and when such a notice is served it will be presumed that the vendor’s statement was served, as amended by the notice, on the date of service of the notice.”

8. The Form 2 did not comply with that section.  There was a significant change of circumstances between the service of the document in April and the execution of the contract in August.  The Form 2 should have been amended to reflect that change, but it was not.  It is no answer for the defendants to say that they did not see the document after April.  The plaintiff is entitled, pursuant to s.15(1) and (2)(b) of the Act, to an award of damages for the loss which arose from the defendants’ non-compliance.

9. The plaintiff seeks an award of damages under two heads.  The first is the difference between the price paid for, and the market value of, the business at the date of acquisition.  The second is the loss of profit which the plaintiff sustained thereafter in the conduct of the business.  I will deal with each of these heads in turn.

10. As for the first, the opinion of Mr Crase, an accountant called by the plaintiff, is that the market value of the business was represented by net tangible assets of $10,321.  The plaintiff does not allege any loss of profit beyond the 21 month period between the date of acquisition and 30 June 1999.  Mr Crase said that an allowance for goodwill would only be appropriate, and could only be assessed, in the event that the business was achieving maintainable profits over that period.  Given his view that the business sustained a loss in that period, Mr Crase excluded goodwill from his valuation.

11. To arrive at the price paid for the business, Mr Crase added $11,611 for stamp duty and other costs to the contract price of $180,000.  So the loss which Mr Crase assessed under the first head is $181,290, being the price paid and associated costs of $191,611 minus the market value of $10,321.

12. As for the second head, the loss of profit claimed is represented by the difference between the performance projected by the defendants and the performance actually achieved by the plaintiff over the 21 month period.

1. With respect to the performance of the business projected by the defendants, it will be recalled that documents supplied by the defendants before the contract projected profits in the 97/98 year of $48,860 (1997/98 Budget) and $58,090 (Quarterly Financial Statement).  These figures are inclusive of interest as an item of expense.  The Pied Piper History projected profits for the 96/97 year, exclusive of interest, of $88,000.  The Form 2 shows that profit, exclusive of interest, for the six month period to 31 December 1996 was $35,088.

2. With respect to the performance actually achieved by the plaintiff over the 21 month period, the plaintiff continued to run its real estate business during that period, and the accounts that were presented to Mr Crase made no distinction between the childcare business and the real estate business.  The plaintiff was the trustee of the Slater Family Trust, and the tax returns of the Trust (P18) show that the real estate and childcare businesses achieved a combined profit in the 97/98 year of $14,308 and a combined loss in the 98/99 year of $3,694. 

3. In Appendix K to his report (P28), Mr Crase apportioned the combined profit and loss of the businesses in the following manner:

Year	combined	childcare	real estate
97/98 (9 months)	$14,308	($68,758)	$83,066
98/99 (12 months)	($3,694)	($23,617)	$19,923

1. In Appendix I to his report, Mr Crase summarised the childcare income and expenses extracted from Appendix K.  Mr Crase excluded interest on borrowings and abnormal losses attributable to a write-off of plant and equipment, and added notional proprietor wages, to arrive at “adjusted net income”.  The following was the result:

Year	income	expenses	net income	adjusted net income
97/98 (9 months) 98/99 (12 months)	$193,243 $189,985	$262,000 $213,602	($68,758) ($23,617)	($32,234) ($64,731)
$383,228	$475,602	($92,374)	($96,965)

1. Mr Crase’s ultimate conclusion was that the plaintiff’s loss of profit falls in the range between

   ·     $198,465, being the difference between an actual net loss of $96,965 and a projected net profit of $101,500, the projected net profit being $58,000 divided by 12 months and multiplied by 21 months

   and

   ·     $250,965, being the difference between an actual net loss of $96,965 and a projected net profit of $154,000, the projected net profit being $88,000 divided by twelve months and multiplied by 21 months.

2. The defendants called Mr Southwick, who specialises in the valuation of commercial and industrial property including childcare centres.

3. Mr Southwick used three approaches to arrive at his opinion of the value of the property and the business at the time of the contract.  He described them as the summation, income and comparable sales approaches.

4. In the summation approach, Mr Southwick assessed a market rental for the property and capitalised that rental at 13% to arrive at a rounded value of $180,000.  He deducted the imputed rent from sustainable net income to arrive at a leasehold net income of $69,497 per annum.  He capitalised that income at 35% to give to the business a rounded leasehold value of $200,000.  He then combined the property and business values to produce an overall market value of $380,000.

5. In the income approach, Mr Southwick took the net profit of $62,880 from the defendants’ 96/97 tax return, added back depreciation and interest, and arrived at a sustainable net income of $93,630 per annum.  He then capitalised that income at 25% to arrive at a value of $375,000 for the business and the property.

6. In the comparable sales approach, Mr Southwick relied upon limited evidence of other sales which suggested to him a range of rates per childcare place between $9,500 and $10,500.  He then adopted a rate at the top end of that range to arrive at a rounded value of $355,000.  The principal sale relied upon by Mr Southwick was the sale by the defendants of the Christies Beach Childcare Centre in July 1997.

7. Mr Southwick concluded that the lowest figure produced by the three approaches, namely $355,000, would be the most appropriate, given that a prudent buyer would have been concerned by falling turnover and profitability and could have been concerned at the possible impact of the Government decision to cap full-time childcare places at 50 hours per week.

8. For reasons which follow, I am unable to accept either of the opinions of Mr Crase and Mr Southwick without substantial qualification.

9. In isolating the income and expenditure of the childcare business for the purpose of his appendices K and I, Mr Crase assumed that most of the expenses that the plaintiff incurred in the combined businesses was attributable to the childcare business.  In the nine months to 30 June 1998, the division was $262,001 to childcare and $17,240 to real estate, and in the 12 months to 30 June 1999, the division was $213,602 to childcare to $14,742 to real estate. 

10. One at least of those assumptions has been shown to be incorrect.  I refer to the expense mentioned in each year for advertising.  Mr Ehmann acknowledged in evidence that that expense was incurred in the real estate business.  Some of the other assumptions made by Mr Crase were and are difficult if not impossible to test.

11. Mr Crase was cross-examined about the plaintiff’s expansion of the business to a site on the other side of the road in about April or May 1998, and an increase in approved childcare places from 34 to 64 at about that time.  Although he did not agree that the expansion and the increase would have had any adverse impact upon net profit, it may be that extra revenue generated by the expansion would have lagged behind the immediate cost of the expansion.  Appendices I and K show that the cost of classroom supplies was $11,501 in 97/98, but only $3,359 in 98/99.  The cost of repairs and maintenance was $11,898 in 97/98 and $15,583 in 98/99, whereas the figure for that item in the defendants’ tax return for 96/97 (D31) was $3,512.  The figures of $1,750 and $5,000 for accounting and legal fees in 97/98 could have included one-off expenses of start-up and expansion.

12. Moreover, to arrive at the figures for adjusted net income, Mr Crase allocated notional wages to Mr Ehmann and his partner, as an item of expense, of $45,000 for nine months in the 97/98 year and $60,000 in the full 98/99 year, making a total of $105,000.  The evidence does not enable me to find what time was spent by those persons in the business and what value should be assigned to that time.  In any event, I do not consider that it would be appropriate to include notional wages as an item of expense.  The defendants worked in the business as well, but made no allocation for notional wages in their projections.

13. A further problem with Mr Crase’s opinion is that he appears to have overstated the figure of $193,243 in the appendices as the income of the childcare business for the nine month period to 30 June 1998.  Notwithstanding that that is the figure in the Slater Family Trust tax return for the 97/98 year, the letter dated 25 June 1998 from the plaintiff’s solicitors to the defendants (P21) asserts that the figure is $138,337.60.  Mr Ehmann’s evidence was that the difference is represented by cash injections that he made in the period from the real estate business.

14. I go back to Mr Crase’s exclusion of goodwill from his valuation of the business at the date of sale. Although it is true that the business did not achieve any profit in the quarter that immediately preceded the sale, the authorities show that, in the valuation of some businesses, for legal if not accounting purposes, hindsight is a legitimate consideration. Especially is this so where damages are recoverable for misrepresentation. Section 7(1) of the Misrepresentation Act provides that damages for misrepresentation are recoverable in all respects as if the misrepresentation had been fraudulently made. Ted Brown Quarries v General Quarries (1977) 16 ALR 25 shows that the normal measure of damages in an action for deceit where the plaintiff has been induced by the fraudulent misrepresentation of the defendant to enter into a contract of purchase is the difference between the price paid and the fair or real value of the property at the time of purchase, but that events after that date are relevant to the extent that they throw light on the value at the date of purchase.

15. By hindsight, I mean hindsight beyond the short-term.  In the case of Pied Piper, we know that the business was profitable after that time.  Mr Southwick seemed to make a valid point when he said at page 9 of his written report (D30):

    “What Mr Crase then effectively does is to place a value on the business to the purchasers, based upon their actual performance after buying the business.  A child care centre is a specialist business and it is not surprising that a purchaser with no experience found it difficult to maintain the same level of profitability as the vendors who had run this business for seven-years prior to sale.”(his underlining)

16. In Commissioner of Taxation v Murry (1998) 193 CLR 605, the High Court was concerned with the meaning of “goodwill” in the Income Tax Assessment Act. After observing that the Act does not define goodwill, the majority in a joint judgment canvassed a number of authorities on the meaning of the term. The following paragraphs from the judgment deal with two of those authorities:

    “16. One of the most cited definitions of goodwill for legal purposes in the Anglo-Australian legal world is found in the speech of Lord Lindley in Inland Revenue Commissioners v Muller & Co's Margarine Limited where his Lordship said:

    "Goodwill regarded as property has no meaning except in connection with some trade, business, or calling. In that connection I understand the word to include whatever adds value to a business by reason of situation, name and reputation, connection, introduction to old customers, and agreed absence from competition, or any of these things, and there may be others which do not occur to me. In this wide sense, goodwill is inseparable from the business to which it adds value, and, in my opinion, exists where the business is carried on. Such business may be carried on in one place or country or in several, and if in several there may be several businesses, each having a goodwill of its own."

    ….

    19. An equally useful judicial definition of goodwill is to be found in Haberle Crystal Springs Brewing Co v Clarke, a United States case, where Judge Swan pointed out that:

    "A going business has a value over and above the aggregate value of the tangible property employed in it. Such excess of value is nothing more than the recognition that, used in an established business that has won the favor of its customers, the tangibles may be expected to earn in the future as they have in the past. The owner's privilege of so using them, and his privilege of continuing to deal with customers attracted by the established business, are property of value. This latter privilege is known as good will."”

17. I go back also to the future maintainable profits approach to the valuation of a business.  The principles of this approach appear in the following extract from The Law Book Company’s The Laws of Australia Volume 17 para [55], and I have underlined what seem to me to be key words for present purposes:

    “For industrial and commercial entities, it is generally assumed that they will have an almost infinite life.  It is also considered too difficult and subjective to make forecasts of future cash flows for any more than a small number of years in the future.  In the alternative, even if this information is available for the entity being valued (such entities are usually companies, but may include trusts, joint ventures, partnerships etc), it is normally very difficult to obtain cash flow information for other entities for the purposes of comparison.  Therefore, it is usual in valuing an ongoing entity to estimate a figure for future maintainable profits (FMP) as a surrogate for the future cash flows and to multiply this earnings figure at an appropriate price earnings ratio (PER).  This process of multiplication is called the “capitalisation” of FMP.

    The risk and real growth prospects associated with the FMP are taken into account in setting the PER.  The appropriate PER is normally based on industry norms in the marketplace, adjusted to reflect the unique circumstances of the company or business that is being valued.

    Where the assessment of the fair market value (see [23]) of an entity is undertaken by reference to the capitalisation of its underlying profitability, this will initially entail the valuer determining the core underlying profits or FMP of the entity.  These profits do not necessarily represent either the latest historical or immediate forecast earnings.  For example, a company may be in a position of short-term decline, either as a result of industry pressures, or internal managerial difficulties, and it is therefore important that a long-term view be adopted that discounts any short-term irregularities in profitability.  In valuing on the basis of the capitalisation of FMP, the value of the underlying net assets will also be reviewed, although this is normally only to ensure that the profitability of the entity will be maintained in the future and to assess the implied value of goodwill.

    The capitalisation of FMP is very widely used as a valuation method.  This is primarily because of the widespread availability of information about (broadly) comparable transactions.”

18. I do not think that the fact that the business here was in decline at the time of the sale should be the overwhelming factor.  The earlier profit history of the business had been good, and a prudent purchaser would have given weight to two factors bearing upon the future of the business.  The first was the likelihood that the Commonwealth Government would continue its financial support of the childcare industry, and the second was the chance that the impact of the April 1997 decision would be relatively short-term.  A further point is that a prudent purchaser, with the plaintiff’s lack of experience in the childcare industry, would not have expected to achieve the vendor’s projections in full in the settling-in period immediately following the take-over of the business.  And, as it turns out, the business experienced an almost complete turnover of staff by the end of 1998.

19. As for Mr Southwick’s opinion, he readily conceded under cross-examination that his valuation, and I took him to be referring to each of his three approaches, is substantially undermined by the fact that the business lost $40,254 in the September 97 quarter.  He used the defendants’ tax return for the 96/97 year to calculate sustainable net income, but he did not have access to the defendants’ tax return for the following year (P32) at the time he wrote his report.  He was unaware of the detail of Government adjustments at that time.  It seems he was also unaware of the cash injections that the defendants made at and about that time.  As for the adding back of depreciation in the income approach, Mr Crase seemed to have a point when he said that, as the real cost of wear and tear of plant and equipment, depreciation should not be excluded as an expense of running the business.

20. Given that I am unable to accept either of the opinions of Mr Crase and Mr Southwick without substantial qualification, I find myself left with no real option short of taking a broad-axe approach to the plaintiff’s loss.

21. As I have said, the first head of damages claimed is the difference between the price paid for, and the market value of, the business at the date of acquisition.

22. The price that the plaintiff paid for goodwill was, in round figures, $170,000.

23. To determine the market value of the business, I begin by selecting a figure for future maintainable profits.  To borrow words from the authorities mentioned above, the figure must include whatever adds value to the business by reason of situation, name and reputation, connection, introduction to old customers, and agreed absence from competition; the figure must recognise that, used in an established business that has won the favour of its customers, the tangibles may be expected to earn in the future as they have in the past; and it is important that a long-term view be adopted that discounts any short-term irregularities in profitability.

24. I select the figure of $40,000 per year.  I deduct 20% for tax to arrive at $32,000.

25. With regard to the capitalisation rate, Mr Crase suggested a range between 4 times or 25% and 2.5 times or 40%.  Mr Southwick used 35% to value the business and 25% to value the business and property combined.  I will adopt a rate of 30%.  If future maintainable profit of $32,000 after tax is capitalised at 30%, the result is $106,667.  After deducting net tangible assets of $10,321, the result is $96,346.  I will round that figure off at $100,000.

26. So the plaintiff’s loss under the first head of damages is $70,000, being the difference between goodwill paid of $170,000 and the market value of goodwill which I have assessed at $100,000.

27. The second head of damages claimed is the loss of profit which the plaintiff sustained after its acquisition of the business.

28. Although I have said that the plaintiff’s claim for loss of profits is limited to the 21 month period between 29 September 1997 and 30 June 1999, the evidence of Mr Ehmann and the statements of childcare assistance payments and adjustments for the four quarters of the 98/99 year (P17) show that the business acquitted more than it was advanced in the September, December and March quarters of that year.  Mr Ehmann said:

    “The October quarter was down, October-December quarter was down.  The January-March was woeful, but after that it just climbed out, because we were then able to put a new face to the place and a new operation.”

29. By ‘new face’ and ‘new operation’, Mr Ehmann was referring to his earlier evidence that his partner took over as director in September 1998, and that he and she then reduced the fees to increase the sales.  He said:

    “We structured our fees . . on the premise that it was cheaper to run a full centre than an empty one and we implemented that in October ‘98”.

30. Mr Ehmann also said that the departure, and the period leading up to the departure, of the former director was the cause of disruption to the business.

31. I do not know whether the ‘woeful’ March quarter was a reflection of the school holidays. In any event, I consider that an assessment of loss of profits should be limited to a 15 month period between 29 September 1997 and 31 December 1998.  The plaintiff has not satisfied me to the requisite degree of proof that the period should be any longer.

32. I need to emphasise the point that my earlier assessment of future maintainable profit per year represents an attempt to weigh considerations beyond the actual trading results of the business in the period which immediately followed the sale.  So the plaintiff’s actual loss over the 15 month period will be different from the figure which I have assessed as future maintainable profit.  For reasons already discussed, I cannot rely upon Mr Crase’s approach without substantial qualification.  For example, I cannot rely upon his income figure for the 97/98 year.  Nor can I rely entirely upon his approach to expenses in both the 97/98 and 98/99 year.  Doing the best I can with the material before me, I will start with a loss of $23,617, which is Mr Crase’s assessment of the plaintiff’s net loss in the 98/99 year.  I will add back $3,336 for advertising, $10,000 (say) for other unproven assumptions in the list of expenses, and $20,000 (say) for imponderables such as net short term cost of expansion, impact upon profitability of the plaintiff’s lack of experience, and impact upon profitability of changes of staff.  I will then treat the resulting figure of $9,719 as the benchmark for assessing the plaintiff’s profit for the 15 month period following the sale.  $9,719 over 12 months equates to $12,149 over 15 months.

1. As for the profit projected by the defendants, I consider that it would be reasonable to adopt the Quarterly Financial Statement figure of $58,000 per year, or $72,500 for the 15 month period.  In the result, I assess loss of profit by deducting an actual profit of $12,149 from a projected profit of $72,500, making an overall shortfall of, in round figures, $60,000.

2. I readily acknowledge that some of the figures which I have used for the assessment of both heads of damages are arbitrary, and that no degree of precision in the calculations can make them any less so.  Nevertheless, the plaintiff has satisfied me that it has sustained losses under both heads as a consequence of the defendants’ misleading and deceptive conduct and non-compliance with statutory provisions.  So I have done my best with the evidence to allocate proper but conservative values to those losses, remembering always that it is the plaintiff which bears the onus of proof.

3. In the result, the plaintiff is entitled to $70,000 under the first head of damages and $60,000 under the second head, making a total of $130,000.  The defendants are entitled to judgment on the counterclaim for the vendor finance of $65,000 that the plaintiff acknowledges is due.

4. Before entering formal judgment, I will hear the parties with respect to interest and costs.