Streets v Bakery One Pty Ltd - [2019] TASSC 36

[2019] TASSC 36

COURT: SUPREME COURT OF TASMANIA

CITATION: Streets v Bakery One Pty Ltd [2019] TASSC 36

PARTIES:  STREETS, Garry Robert
  v
  BAKERY ONE PTY LTD
  CASH, Anthony Francis
  CASH, Janine Louise

FILE NO:  15/2012
DELIVERED ON:  28 August 2019
DELIVERED AT:  Hobart
HEARING DATES:  1 and 2 April 2019
JUDGMENT OF:  Brett J

CATCHWORDS:

Contracts – General contractual principles – Discharge, breach and defences to action for breach conditions – Conditions and warranties – Breach of warranty – Breach of warranty not causative – Evidence incapable of establishing breach of warranty – Action dismissed.

Aust Dig Contracts [141]

REPRESENTATION:

Counsel:
             Plaintiff:  P Zeeman
             Defendants:  G Bigmore QC and J Kitto
Solicitors:
             Plaintiff:  Shields Heritage
             Defendants:  James Kitto

Judgment Number: [2019] TASSC 36
Number of paragraphs: 55

Serial No 36/2019
File No 15/2012

GARY ROBERT STREETS v BAKERY ONE PTY LTD,
ANTHONY FRANCIS CASH and JANINE LOUISE CASH

REASONS FOR JUDGMENT BRETT J

28 August 2019

This case concerns the purchase by the plaintiff from the first defendant of a business engaged in the retail sale of window furnishings. I infer that the second defendants are the principal shareholders and directing minds of the first defendant, and were parties to the contract of sale in their personal capacity. The business traded as "Dollar Curtains and Blinds", and was operated as a franchise of the supplier of the merchandise sold by the business. The parties entered into the written contract of sale on 14 April 2008. The sale was completed, and the plaintiff took over the operation of the business, in June 2008. On 30 May 2008, just before the completion of the sale, the plaintiff entered into a fresh franchise agreement with the franchisor, Dollar Furnishings Pty Ltd, in respect of the business. Twelve months later, he unilaterally terminated the franchise agreement and closed down the business. He asserts that he did so because the business was unprofitable and he had run out of money.
When this happened, the franchisor repossessed all of the stock and other property contained on the business premises. It purported to be entitled to do so under the terms of the franchise agreement. The plaintiff alleged that some of the property repossessed by the franchisor had been acquired by the plaintiff pursuant to his contract with the defendants.
The plaintiff has now sued the defendants, seeking damages relating to losses incurred by him in respect of the failure of the business. The basis of the plaintiff's claim is that the defendants, jointly and severally, had made a number of warranties or, alternatively, representations to him concerning the past and, by implication, the future profitability of the business, and their ownership of the relevant plant and equipment, which were untrue, or for which there were no reasonable grounds. He also asserts that the false representations constitute conduct which was misleading and deceptive. The plaintiff asserts that he had relied on the truth and accuracy of the representations in making the decision to purchase the business, and that he would not have done so otherwise. Accordingly, he claims that the breaches of the warranties and/or the misrepresentations and the misleading and deceptive conduct has caused loss. The asserted loss is mainly constituted by the cost of purchasing and running the business, together with costs incurred in respect of the termination of the franchise agreement. The plaintiff's claim also includes the value of property repossessed by the franchisor, which the plaintiff says was sold to him by the defendants.
The defendants admit that they provided certain information to the plaintiff concerning past profitability, and warranted the accuracy of that information. The defendants deny that the information provided was untrue or inaccurate, except in one respect, and in that respect, deny that the inaccuracy related to a matter which would have had any material impact on the plaintiff's decision to purchase the business. The defendants contend that the plaintiff would have purchased the business in any event. With respect to the ownership of the property, the defendants admit that they warranted their ownership of it, but dispute that they are in breach of that warranty.

The purchase of the business

The plaintiff has considerable experience in the retail of soft furnishings. He worked for many years in the industry, initially at managerial level for a department store, and then, since 1997, has successfully operated his own retail business in Launceston, known as "Factory Blinds". He became interested in the purchase of the Dollar Curtains business after first seeing an advertisement for its sale in October 2007. The reason for his interest was that he saw an opportunity to complement his existing business. His business was predominantly concerned with the sale of blinds, but his assessment of market trends was that curtains and other soft window furnishings were gaining popularity. He had been considering including the sale of soft furnishings in his overall business strategy for a couple of years, and had taken particular interest in the Dollar Curtains franchise. He had conducted research into the franchise, which included meeting with the operators of such franchises on the mainland. The Dollar Curtains franchise was of interest to him because it emphasised the sale of soft window furnishings.
The business subject to these proceedings had only been operated by the defendants since January 2006. It was the first Dollar Curtains franchise in Launceston. The plaintiff was aware of the business through his involvement in the industry. He knew that it had only been operating for approximately 18 months, and believed that the defendants lacked experience in the industry. He commenced negotiations by making contact with a real estate agent, Mr Benneworth, with a view to obtaining relevant information in respect of the business. He also approached and met with the franchisor. The franchisor provided him with general information concerning the operation of the franchise, but refused to provide any financial information in respect of the specific business.
Towards the end of 2007, the plaintiff sought and received from Mr Benneworth a document containing financial information in respect of the business. It was a single page document stamped "DRAFT" and entitled "Profit and Loss Statement for Sales Purposes". It purported to show the profit and loss of the business over the 18 month period between the commencement of its operation by the defendants and 30 June 2007. Apart from some BAS statements and other supplementary information obtained by the plaintiff's accountant well after the commencement of negotiations, the document constitutes the only financial information provided by the defendants to the plaintiff. It is the document upon which the plaintiff purports to have relied in making his decision to purchase the business, and the information contained in the document is central to his allegations of breach of warranty and misrepresentation. For the sake of clarity, I have annexed a copy of this document to these reasons.
The plaintiff's evidence was that the statistic of crucial interest to him was the gross profit margin, that is the gross profit obtained from sales after the cost of the merchandise had been paid to the franchisor. He had little interest in the "other expenditure". He explained in evidence that the gross profit was directly linked to turnover and that this, for him, was the crucial determinative factor in respect of the potential viability and profitability of the business. He explained his lack of interest in the items of expenditure "below the line" as follows:
"If the business is not generating enough profit, it doesn't matter what the list of other expenditures are underneath, that's my choice as to where I spend the money and how I spend it but it had to have ... a good gross profit that I could play with."
He observed from the document that the gross profit margin over the 18 month period of trading was around 40%. He considered that this was "fairly reasonable", although he thought 39.63% for the full 2007 trading period was "a bit low". However, his belief was that the low margin for this period was probably attributable to the inexperience of the defendants in this industry, that they had probably made a number of "mistakes", and that, with his experience, he could probably increase the gross profit margin. Accordingly, he "felt comfortable with it sitting around 40%".
The plaintiff then sought the advice of his accountant, Richard Lawson. Mr Lawson requested and obtained BAS statements for the business in order to verify and support the sales information contained in the document. He also obtained a profit and loss statement for trading in the period between June and December 2007. This document showed a slightly reduced gross profit margin of 37.4% for that six month period. He then used the information contained in the two profit and loss statements and the BAS documents to prepare some calculations and projections in respect of future maintainable earnings and the value of the business. This document was provided to the plaintiff and formed the basis of Mr Lawson's advice to him.
Apart from some specific queries by the plaintiff to the real estate agent concerning specific items in the documents referred to above, it does not seem that either Mr Lawson or the plaintiff sought any further financial information from the defendants concerning the business before the plaintiff entered into the purchase agreement. In evidence, the plaintiff denied having seen the profit and loss statement for June to December 2007, but it is apparent from email correspondence and Mr Lawson's calculations that he was aware of the contents of that document before signing the contract of purchase.
The business was initially advertised for sale at a price of $170,000. In evidence, the plaintiff said that after Mr Lawson had made his calculations, he "came back to me with a price at about" $135,000. The plaintiff decided to make a lower offer in an effort to secure the business cheaply. It was apparent from his evidence that he considered that a price below $135,000 represented good value. This evidence is consistent with the calculations and projections provided to him by Mr Lawson, and with the written correspondence. That correspondence shows the plaintiff expressing an opinion in an email to Mr Lawson on 18 January 2008 expressing that his "gut feeling on business value would have been low $100,000 mark". On 23 January 2008, he made an offer to purchase the business for a price of $115,000. He made an increased offer of $120,000 on 14 March 2008. However, at the beginning of April, the plaintiff had a discussion with a lawyer, Mr Morgan, during which Mr Morgan suggested to him that it might be in his interest to make a lower offer. Consequently, on 9 April 2008, he reduced his offer to $60,000. After some further negotiation, the parties settled on a price of $65,000.
It is clear from the plaintiff's evidence and statements made by him in correspondence during the negotiation period that, in addition to the financial information referred to above and Mr Lawson's advice, in making the decision to purchase the business and assessing the price he was prepared to pay to do so, he also relied upon his general assessment of the industry, his own experience of the market derived from his operation of Factory Blinds, and his specific enquiries with respect to the Dollar Curtains franchise. It is not possible to attribute with precision the significance of any specific piece of information in relation to the plaintiff's decision to purchase the business and his assessment of its value, but I am satisfied that he relied generally on the matrix of information described above. Having said this, it is also clear that the gross turnover and gross profit margin were pieces of financial information of crucial importance to the plaintiff. They formed the basis of his opinion that the business, in the inexperienced hands of the defendants, was capable of achieving a gross profit margin of 40% or better. As far as the plaintiff was concerned, this made the business a viable proposition. A significantly lower profit margin would not have led him to the same conclusion.

Operation and closure of the business

As already noted, the plaintiff took over the operation of the business in June 2008, shortly after signing the franchise agreement on 30 May 2008. He also borrowed $150,000 to finance the purchase price and initial operating costs of the business.
A condition of the franchise agreement was that the business was to be operated from larger premises than had been the case with the defendants. The plaintiff secured such premises and entered into a lease on 1 January 2009. The cost of fitting out and moving into the premises was financed by the borrowed money.
At the end of May 2009, the plaintiff instructed his lawyers to notify the franchisor of his intention to terminate the franchise agreement. By letter dated 24 June 2009, the plaintiff's lawyers gave notice to the franchisor that he intended to cease conducting the business as and from 30 June 2009. The reason given was that the plaintiff was "of the view that it is no longer viable for the franchise business to continue trading within the constraints of the franchise agreement". Lawyers acting on behalf of the franchisor responded by letter on the same day. The letter enclosed a formal notice of termination of the franchise agreement, and made demand for return of property in accordance with the terms of the agreement. The property included "all stands and display stands". The plaintiff understood this to include show drops and other property acquired under the purchase contract with the defendants.
After the franchise agreement came to an end on 30 June, the plaintiff continued to trade from the business premises under a different business name. However, the franchisor objected to this and demanded compliance with a restraint clause contained in the agreement. A dispute also arose in relation to the return and use of property claimed by the franchisor. The plaintiff's evidence was that he returned some property but kept all property which he believed had been sold to him by the defendants. This included show drops, display stands and sample racks. The plaintiff said that some time in July, agents of the franchisor attended his business and physically took possession of property in his premises. They met with some resistance from the plaintiff but I infer that they actually secured possession of a substantial amount of property. The plaintiff said that the franchisor's agents took everything within his premises, including show drops, waterfall samples and sample racks. In answer to a question from me, he said that they took "everything", whether it belonged to him or not.
Subsequently, correspondence passed between the respective lawyers for the plaintiff and the franchisor in respect of various aspects of the dispute, including the question of the ownership of the relevant property. By letter dated 7 August 2009, the franchisor's solicitors made an offer to settle all issues between the plaintiff and the franchisor for the payment of the sum of $30,000, and acceptance by the plaintiff that he would comply with the restraint of trade clause. This offer was accepted by letter from the plaintiff's lawyers, dated 11 August 2009. When the plaintiff was questioned in evidence about his decision to settle his issues with the franchisor on this basis, his response was:
"Because I was a scared little boy ... I was facing ..., the might of a national franchisor with the power of their solicitors behind them."
I observe that this response from the plaintiff does not seem to align with the realities of the dispute and its basis. The franchisor was simply responding to a unilateral statement on the part of the plaintiff that he intended to abandon the franchise business, and his attempt thereafter to continue to trade in breach of a restraint provision. The property dispute was settled promptly, without significant argument, and on the terms proposed by the franchisor. The settlement clearly included the compromise of any claim made by the plaintiff with respect to property he asserted to be owned by him.
The plaintiff's explanation for unilaterally terminating the franchise agreement is that the business had become unviable and that he had run out of money. He claimed that the lack of viability of the business was the direct result of his inability to maintain the anticipated gross profit margin of 40% or greater. He attributed the problem largely to a requirement to sell stock at the retail price recommended by the franchisor. This requirement arose from the use of software supplied by the franchisor which confined prices to those fixed within the software, and which, when compared with the costs of the stock charged by the franchisor, did not permit a profit margin of greater than 34%. When asked by me to explain why he was bound to sell at the recommended retail price, the plaintiff gave what I considered to be a confusing and somewhat inconsistent response. He acknowledged that he was "supposedly able to change the prices", but found it difficult to vary the software. When I asked why he simply could not write the price on his quotes, his answer suggested a system whereby his margin was defined by discounts provided to the price by the franchisor. I must concede that I found it difficult to follow this explanation. However, and in any event, correspondence between the plaintiff and the franchisor prior to his termination of the agreement suggests that the franchisor considered that the profit margin for franchisees on the sale of the franchise product was approximately between 29 and 31%. Although the correspondence from the franchisor asserts that it had informed the plaintiff of this prior to him entering into the franchise agreement, he disputed this in his evidence. However, the information is consistent with the plaintiff's asserted experience, and is also consistent with financial accounts produced after the termination of the franchise agreement. These show a gross profit margin for the period during which the plaintiff traded in the business, of approximately 34%.

Past profit and fair summary warranties

The primary claim made by the plaintiff is that the defendants warranted (the past profit warranty) that all written information provided to the plaintiff relating to past or current turnover, profits, expenses and/or other financial information, was true and correct in all respects. A related warranty (the fair summary warranty) is that the accounts of the defendants had been prepared in accordance with accepted Australian accounting standards of practice, gave a true and fair summary of the financial position of the business, and were, in all material respects, true and correct. The existence of these warranties was admitted by the defendants on the pleadings. The subject matter of each warranty was also pleaded in the alternative as a representation, and, further, the breach of the warranties is asserted to amount to misleading and deceptive conduct for the purposes of the Trade Practices Act 1974 (Cth) and the Fair Trading Act 1990 (Tas).
Both parties argued the case on the basis that the variable and alternative claims expressed above fall to be resolved on the basis of the determination of two fundamental issues:
(a)Whether the profit and loss information provided to the plaintiff by the defendants, and in particular the information contained in the document annexed to these reasons, was true and correct in all respects; and
(b)Whether that document was prepared in accordance with accepted Australian accounting standards.

These questions were the subject of expert accounting evidence presented by each party. It is common ground between the experts and, indeed, it seems to me, conceded by senior counsel for the defendants in his submissions, that in one particular respect the annexed document has not been prepared in accordance with such standards and was not true and correct. The point in question concerns the components of the calculation of the gross profit margin, which are the gross sales income, and the cost of goods. The evidence established that the gross sales income had been derived on an accruals basis, that is on the basis of sales made during the relevant period, irrespective of whether or not payment had been actually received. However, the cost of the goods sold had been calculated on a cash basis, that is on the basis of money actually paid out during the relevant period but not including the cost of goods unpaid at the end of the period. The defendants conceded that the accounts had been prepared on this differential basis, and to that extent there has been a breach of both warranties. It is accepted that accounting practice would generally require use of the accruals basis for both components, and, in any event, the basis used for each component should be consistent. Failure to do so can lead to an inaccurate and inflated understanding of the operation of the business during the period in question, because of the potential that the gross profit will not be fully discounted by the corresponding cost of the goods. Despite these concessions, the defendants argue:
· The difference in the result if the accounts had been correctly prepared is immaterial to the substance and effect of the profit and loss document. In particular, the plaintiff would still have purchased the business if the accounts had been prepared on an accruals basis for both gross sales and cost. Accordingly, the breach has not caused loss to the plaintiff.
· In any event, the plaintiff did not rely on the accounts in making his decision to purchase the business. The argument is that he relied on a variety of other information in making that decision, and accordingly would have purchased the business irrespective of the basis of preparation of the accounts.
The nature and effect of the conceded problem with the accounts was the subject of expert accounting evidence.

The accounting evidence

Each party called a chartered accountant with appropriate expertise and experience to express an opinion about a number of issues. The following are those which have importance in respect of the determination of this case:
(a)Whether the written information provided by the defendants to the plaintiff relating to past or current turnover, profits, expenses and other financial information, was true and correct in all respects.
(b)Whether the accounts and financial statements provided by the defendants to the plaintiff:
(i)     had been prepared in accordance with generally accepted Australian accountancy standards and practices;
(ii)     gave a fair summary of the financial position of the business during the periods to which they related;
(iii)    were true and correct in all material respects.
The expert called on behalf of the plaintiff was Martin Rees, and on behalf of the defendants was Michael Harvey. The evidence of each focussed on the profit and loss statement annexed to these reasons.
Both accountants identified a fundamental flaw in respect of the preparation of this document. It was common ground between them that there had been inconsistent treatment of the elements used to calculate gross profit and the gross profit margin. In particular, sales and trade debtors had been accounted for on an accrual basis, whereas the cost of sales and trade creditors had been accounted for on a cash basis. It was agreed between the experts that this inconsistent use of different methodologies constituted a breach of Australian accounting standards. They both accepted that those standards generally require both components to be assessed on an accrual basis, but Mr Harvey was of the view that exceptions can be made in the case of smaller entities. However, both agreed that the effect of the standard is that a consistent basis should be used across all elements of the financial statements. In the context of this case, therefore, either an accruals or a cash basis should have been used in respect of both sales and the cost of sales.
The accountants also agreed that consequently it could not be said that the accounts were true and correct in all respects. The inconsistent use of the bases of reporting meant that the gross profit calculation would be distorted in respect of each financial year, because while all sales achieved would be included in the gross sales figure, whether payment had been received or not, the reduction for the cost of sales would not take into account the matching orders, unless those orders had actually been paid within the relevant period. I accept the logic that at least on a theoretical basis, this produces an inaccuracy in the accounts.
The point upon which the experts differed was their opinion as to the significance of this inaccuracy in the circumstances of this case. It was, of course, possible with the benefit of hindsight to adjust the calculations so as to show the result of preparation of the accounts on an accruals basis for both sales and their cost. This would then enable a comparison to be made between the document actually produced to the plaintiff and that which he would have been shown had the accounts been properly prepared. This comparison would inform an assessment of the materiality of the inaccuracy, and, in particular, whether it would have made any difference to the decision of the plaintiff to purchase the business.
Critically, the accountants employed different methodologies in making their recalculation of the components of the financial statements under consideration. Mr Harvey, on behalf of the defendants, contacted and obtained from the franchisor the actual creditor balances as at 30 June 2006 and 30 June 2007. This information enabled him to rectify the accounts by deducting from the cost of sales orders made but not paid prior to the end of the financial year. As this was a franchise, the only cost incurred in respect of sales was the payment due to the franchisor. There was also a theoretical debate as to whether freight should be included as a cost of sales. Freight had been shown "below the line" as a business expense in the material produced to the plaintiff. However, as this was consistent in respect of both financial years, and was clearly shown as a business expense, and understood by the plaintiff to be such, this theoretical debate had no relevance to the issues before me.
Mr Harvey's recalculation resulted in a modest adjustment of the financial information. It reduced the gross profit achieved in the six months to 30 June 2006 significantly, but increased the gross profit achieved in the full year ended 30 June 2007. In terms of the crucial gross profit margin, the adjustment had the following effect:
2006        Draft P and L      Adjusted P and L
45.64%              38.58%
2007        Draft P and L      Adjusted P and L
39.63%              40.79%
As can be seen, the effect of the adjustment is to demonstrate an upward trend in the gross profit margin. Mr Harvey concluded that these adjustments meant that the inaccuracy arising from the inconsistent treatment in the draft profit and loss was not material. His definition of materiality is, of course, not necessarily that which is applied by this Court. However, materiality is a concept relevant to compliance with Australian accounting standards. Mr Harvey's evidence was that "the general approach to determining what is material is whether the omission or misstatement could influence the decisions that users make on the basis of the financial information". In his view, using that test, the adjustment was not material.
Mr Rees, on the other hand, did not obtain access to the creditor balances from the franchisor. His approach was to recalculate the relevant figures on a pro rata basis, having regard to the performance of the business over the entire period between January 2006 and the sale to the plaintiff in April 2008. He considered that this calculation would "smooth some of the fluctuations", because it would, in effect, "disregard the artificial cut-off points of the end of the financial year period". He justified this approach on the basis that it was unlikely that there would have been any significant variation in trading conditions over the whole period, and that any anomaly could be explained by the inconsistency in the reporting basis. The only exception was if there had been a deliberate discounting of sales after 30 June 2007.
Adjusting the figures on the basis of these assumptions produced an adjusted gross profit margin extrapolated across the whole period of 34.76%. The plaintiff's argument is that the gross profit margins reported in the financial statements shown to the plaintiff are misleading because they show higher margins than 34.76%.
I prefer the approach of Mr Harvey to that of Mr Rees. Mr Harvey's approach directly addresses the matters in issue in this case, that is, whether the information provided to the plaintiff was then true and correct and, if not, what difference the provision of accurate information would have made to the plaintiff's decision to purchase the business. These questions of accuracy must be assessed as at the time of provision of the information to the plaintiff. The information obtained by Mr Harvey from the franchisor permits a direct comparison to be made between information that was provided to the plaintiff and that which would have been provided to the plaintiff had the financial accounts been properly prepared. There is really no room for error in this respect. Mr Rees' calculations make a theoretical assumption. His assessment, logical as it is, addresses a different question. That question is the significance of the apparent drop off in the trading of the business after 30 June 2007, and its effect on the overall profitability of the business over the entire period. This is a matter which might be of interest in terms of the assessment of the overall value of the business, but it is an assessment being made with the benefit of hindsight. Hindsight can have little relevance to the issue of what the plaintiff would actually have been shown had the accounts been properly prepared at the time in question. This case concerns the accuracy of the information provided to the plaintiff, and upon which the plaintiff asserts that he based his decision to proceed with the purchase of the business.
It may well be that Mr Rees' evidence demonstrates that there was a reduction in the profitability of the business after 30 June 2007, prior to its purchase by the plaintiff. Further, it is arguable that this reduction in profitability was consistent with the experience of the plaintiff after he purchased the business. This information is relevant to the question of the future maintainability of profits, which is a matter that I will deal with shortly. However, it has little relevance to the warranties under consideration by me at the moment.
Accordingly, for present purposes, I intend to proceed on the basis of the revised calculations produced by Mr Harvey.

Resolution of issue concerning the past profit and fair summary warranties

The first question is whether the plaintiff relied on the profit and loss statement at all in making his decision to purchase the business. Although, as already discussed, I accept that he took into account a number of considerations and a variety of information, I am satisfied that he placed considerable emphasis on the profit and loss statement and, in particular, its representation of the gross profit margin of the business over the trading periods referred to in it.
It is true that some statements made by the plaintiff in email correspondence with Mr Benneworth and with his accountant prior to purchasing the business, as well as some of his evidence before me, suggest that he did not place any, or any significant reliance on this information. For example, in an email to Mr Benneworth dated 23 January 2008, a copy of which was forwarded to Mr Lawson, the plaintiff said this:
"As there are insufficient trading records for us to analyse we have made a decision based on a compilation of facts by comparing Dollar Curtains financial results to that of Factory Blinds at a comparative $turnover stage and also compared the Dollar Curtains financial results to national results as per the Australian Beaureau [sic] of Statistics and then applied the results to a return on investment calculation."
Other comments contained in correspondence suggest that the plaintiff considered that the results of 18 months' trading were not sufficient to enable him to form an opinion as to the profitability of the business.
However, in evidence, the plaintiff explained and placed in context his reference to the operation of Factory Blinds and the Bureau of Statistics data. That explanation is encapsulated in the following answer:
"And when you say made those assumptions, what exactly was the information that you'd been provided?.....That was all I had to operate off. So I didn't know how the mark-ups were done, I hadn't spoken with the franchisor at that stage, when I did speak with the franchise–, 'cause, this was not done, I didn't pick the figures up 1^st of January and make a decision end of January, I took five months to work through to get information to try and present a document that had some meaning to me. So I didn't get anything from the franchisor. I didn't get anything from the franchisee. And the real estate agent didn't send me anything too much so I relied on my trading figures as Factory Blinds. With Richard we tried – he had no other businesses in his stable that he could go back – no window furnishings businesses he could go back and use that as a comparison. We pulled out the Bureau of Statistics – they had figures for home furnishings and we looked through those to see if we could get a general rate on that because the census hadn't been long done and I thought there might have been some current figures in there that we might have been able to play around with. The – the census figures showed the home furnishing – or the furniture industry at – sitting at around 35 – 37 percent I think which put this a few percent above the industry norm and a little bit below what we do – or what I was doing as Factory Blinds. I took into account some other things that in our industry it's not a matter of if you make a mistake it's a matter of when you make a mistake. So those mistakes cost you gross profit. Um it's not something that I talked about a great deal but at the time Tony Cash was known in the industry we – cause I used to be out measuring and quoting a lot so I knew a lot about our competitors at the time and the feedback I got was that there was a number of jobs that Tony had made mistakes on and I thought coming from another industry – cause I assumed Bakery One – and Tony Benneworth did tell me that Mr Cash had come from another industry and I thought I've been in this industry for a number of years and I still make mistakes so somebody that's new to the industry is going to make probably more mistakes and so part of the reading in between that I assumed that I might be able to reduce a number of mistakes that were being made and that in turn would allow for an increase in gross profit.
So after you assessed that document and the analysis that you'd done you entered into the agreement? Went to - entered into the agreement to purchase the business?.....Yep, yep. So I'd spoken with the franchisor, they didn't give me any information. What we'd researched ourselves, what we looked at, we then decided – I felt comfortable with it sitting at around 40 percent. I then said to Richard, we'll take the next step and we'll go from there."
The impression which I gained from the whole of the plaintiff's evidence is that the profit and loss figures and, in particular, the gross profit margin, was crucial to the plaintiff's decision-making. It is clear that he was looking for a business that would return a gross profit margin of around 40%. The profit and loss statement suggested that this was the case. He then used information derived from his existing business and other sources such as the Bureau of Statistics figures and his general knowledge of the industry, to confirm the impression provided by the profit and loss statement. Accordingly, while that statement was not the only information taken into account by the plaintiff, it was an important component of that relied upon by him. The statement provided the basis for his conclusion that the gross profit margin was at a level that would make the business a viable proposition. It is clear that the plaintiff did rely on the profit and loss statement in this general sense.
The next question which arises is the extent of such reliance and, in particular, whether a statement containing the correct information would have made a difference to the plaintiff's decision to purchase the business. The accounting evidence has importance in this regard. On the basis of Mr Harvey's evidence, the correct figures would still have shown gross profit margins in the vicinity of 40%. Further, it would have shown a progressive increase in these margins over the 18 month trading period. I am satisfied that if the profit and loss statement had been prepared in accordance with Mr Harvey's methodology, it is more probable than not that the plaintiff would still have purchased the business. The difference is of little practical effect when regard is had to the matters of interest to the plaintiff. In fact, the adjusted figures would have provided more support for the viability of the business in the plaintiff's mind, than those actually contained in the document.
This conclusion is supported by the agreed price of the business and the negotiations which resulted in that price. It is clear from Mr Lawson's evidence, and from the email correspondence, that the plaintiff utilised the profit and loss information to calculate the value of the business, and this then informed his negotiation strategy. The course of the negotiations described above demonstrates that the plaintiff was comfortable with a purchase price above $100,000, notwithstanding that he was successful in securing the business for $65,000. His evidence was that his view on the value of the business had not changed, and that the reason for making the lower offer was simply because his lawyer had expressed the view that the defendants were negotiable because of their circumstances, and the lack of any other prospective purchaser.
I think it is extremely unlikely that the adjusted figures based on Mr Harvey's evidence would have made any significant difference to the plaintiff's perception of the business or its value. It is abundantly clear that he regarded a gross profit margin of around 40% as sufficient evidence of viability. I am satisfied also that he wanted to purchase the business for reasons other than its gross profit. He was familiar with the franchise and his enquiries had suggested its success in other locations. The business suited his overall strategy in that it complemented his existing business. The existence of a gross profit margin of around 40% was a necessary pre requisite for his decision to purchase the business. However, I am satisfied that his enthusiasm for the business was such that, provided the 18 months trading figures demonstrated a return in that order, he would have proceeded with the purchase. Mr Harvey's adjusted results would not have caused him to regard the business as unviable or to have a value less than the purchase price of $65,000. In short, I am satisfied that he would have proceeded with the purchase in any event.

It follows that although the breach asserted in respect of the past profit and fair summary warranties has been established, the plaintiff has not proved that he has suffered any consequent loss. His action in this respect therefore fails.

Future maintainability of profits

It was asserted in the pleadings that in addition to the past profit and fair summary warranties and/or representations, the defendants had also impliedly represented to the plaintiff that the gross profit and gross profit margin contained in the profit and loss statement would be sustainable in the reasonably foreseeable future. It was also alleged that the defendants had impliedly represented that they knew of no circumstance that could result in those profits and the profit margin not being so sustainable.
These allegations were denied by the defendants. The plaintiff's counsel, Mr Zeeman, in his closing submissions did not abandon these allegations, but also declined to make any positive submission in their support. In particular, he did not particularise the circumstances upon which the implications were said to be based, nor did he explain how it was that the implication of such representations arose.
I am satisfied that there is no basis to these claims. The plaintiff made very clear in his negotiations with the defendant's agent that he was seeking information about trading figures as part of his overall investigation into the business prior to its purchase. The profit and loss statement was given to him in that context, and not in circumstances that imply an assertion of the future maintainability of the profits. The plaintiff was well aware that the defendants had only been trading for 18 months and were inexperienced in the industry. Indeed, he had concluded this inexperience was to his advantage in respect of negotiating a price for the purchase of the business which was lower than that which he considered to be appropriate. Further, he had taken into account this inexperience in drawing his own conclusions about his capacity to maintain and perhaps increase the gross profit margin. There is no evidence that anything said or done by the defendants contributed to the plaintiff's conclusions. The plaintiff impressed me as a person who was confident about his own experience and knowledge of the industry and his capacity as a businessman, and I am satisfied that the conclusions he drew from the past financial information and opinions he formed about the future viability of the business on that basis, were his own. I am satisfied that the defendants did not make the asserted representations to the plaintiff by implication or otherwise. This aspect of the claim must fail.

Other warranties concerning the financial statements

The statement of claim makes other allegations concerning warranties and representations. These concern aspects of the profit and loss statement which are alleged not to give a true and fair summary of the financial position of the business. They relate, in particular, to various expenses including freight and wages. However, no evidence was presented to substantiate the inaccuracy of these aspects of the accounts. Further, and in any event, it was clear from the plaintiff's evidence that he did not pay any real attention to the expenses "below the line". Notwithstanding that some of his email correspondence with Mr Benneworth during his initial enquiries, contained queries relating to these expenses, in evidence the plaintiff was quite explicit that his primary concern in respect of the accounts related to the components which were "above the line", that is those relating to gross profit and the gross profit margin.
It is not surprising that the pleaded claims relating to these aspects of the plaintiff's case were not seriously pursued by his counsel. They do not provide a basis for recovery.

Ownership warranty

It was a term of the sale agreement that the ownership of specified plant, equipment, furniture and fittings pass to the plaintiff. The plaintiff pleads that the defendants warranted absolute title to that property. This allegation is admitted by the defendants.
The statement of claim asserts that the plaintiff is in breach of this warranty because certain listed property was in fact owned by the franchisor and not the first defendant. The property in question is alleged in the pleading to be the following:
·     332 curtain show drops
·     450 waterfall samples
·     50 sample books
·     five sample racks
The specification in the sale agreement of plant and equipment subject to the warranty is contained in an inventory. The inventory contains the items "all show drops" and "five sample racks". There is no specific reference to waterfall samples or sample books, but there is a reference to display swatches and blind samples.
In evidence, the plaintiff described his understanding of show drops and sample racks. He said that he had taken possession of such property upon completion of the contract. His evidence did not encompass waterfall samples and sample books.
The fundamental difficulty with this aspect of the plaintiff's claim is that there is no evidence to establish the asserted breach of warranty. That is, there is no evidence to establish that the defendants did not own the property which passed with the contract. The only evidence presented by the plaintiff about this question was that the franchisor had repossessed the property in the possession of the plaintiff, after the plaintiff had unilaterally repudiated the franchise agreement. This evidence fell well short of establishing the asserted breach. The following observations are relevant:
·     There was no evidence which established the right of the franchisor to the said property, apart from its entitlements under the franchise agreement in the event of the termination of that agreement. While the evidence suggested that the franchisor had the right to repossess property because of these events, that right arose under the franchise agreement. This did not, of itself, establish that the franchisor, and not the defendants, owned the property at the date of the purchase contract. Further, the right to repossess property was given by the plaintiff in the franchise agreement. The defendants were not a party to that agreement, the termination had been unilaterally triggered by the actions of the plaintiff, and this all occurred 12 months after the completion of the sale. The formation of that agreement said nothing about the prior ownership of the property. This evidence could not establish that the defendants did not own the property referred to in the ownership warranty.
·     Further, it is not necessarily established on the evidence that the franchisor was entitled to the property recovered by it after the unilateral termination of the franchise agreement by the plaintiff. The plaintiff returned a significant amount of property on demand from the franchisor, and all of the property in the hands of the franchisor, including that taken by force, was eventually relinquished by the plaintiff to the franchisor as part of the overall compromise. The abandonment by the plaintiff through compromise of any claim or right he had with respect to the property did not establish in law an entitlement on the part of the franchisor to that property. This was a compromise entered into by the plaintiff for his own reasons, and without any involvement on the part of the defendants. He cannot claim that his decision to give up the property to the franchisor in the context of their discrete contractual dispute somehow establishes the prior right of the franchisor in that property, so as to be binding on the defendants.
·     In any event, it is not at all clear that the property repossessed by or returned to the franchisor was the same property acquired by the plaintiff under the contract. For example, the plaintiff's evidence in relation to show drops and other displays was that there was a rolling range. He explained this as an ongoing arrangement whereby as various lines of merchandise were discontinued, samples relating to that range would be replaced by updated versions. He seemed to suggest that these new displays would be purchased from the franchisor. His evidence lacked specificity as to the extent of replacement of original displays acquired under the purchase contract. It is impossible for me to determine that the property subject to the compromise was the same property as that subject to the ownership warranty.
There was simply no other evidence concerning the ownership of the relevant property by the defendants. It follows that the evidence was incapable of establishing that there had been a breach by the defendants of any warranty or representation concerning the ownership of the property referred to in the contract of sale. This aspect of the claim must fail.

Conclusion

It follows that the plaintiff has failed to establish any aspect of the claim. The action is dismissed and there will be judgment for the defendants.