Sutherland v Gersteling

[2001] NSWCA 191

CITATION:	Sutherland v Gersteling [2001] NSWCA 191
FILE NUMBER(S):	CA 40440/0
HEARING DATE(S):	20/6/01
JUDGMENT DATE:	22 June 2001
PARTIES :	Barry Sutherland and Geraldine Sutherland (Appellants) Johannes A. Gersteling and Carmela M. Gersteling (Respondents)
JUDGMENT OF:	Giles JA at 1; Ipp AJA at 2; Fitzgerald AJA at 3

LOWER COURT JURISDICTION :	District Court
LOWER COURT FILE NUMBER(S) :	DC 20/00
LOWER COURT JUDICIAL OFFICER :	Delaney DCJ

COUNSEL:	N. Cotman SC and R Odgers (Appellants) M Painter (Respondents)
SOLICITORS:	Malcolm McDonald & Co (Appellants) Burston Roberts and Cole (Respondents)
CATCHWORDS:	Misleading and deceptive conduct - findings that a representation was made and relied on but that the representation was correct - trial judge's failure to understand the evidence - failure to comprehend strength of evidence that representation incorrect and misuse of evidence in consideration of representors' credibility - finding that representation correct set aside - new trial ordered. ND
LEGISLATION CITED:	Fair Trading Act 1987 Suitors Fund Act 1951
CASES CITED:	Abalos v Australian Postal Commission (1990) 171 CLR 167 Rosenberg v Percival [2001] HCA 18
DECISION:	Appeal allowed with costs. Judgment below set aside and new trial ordered. Costs of first trial to be reserved to the Judge retrying the action. If qualified, respondents to have a certificate under the Suitors Fund Act.

CA40440/00

GILES JA

IPP AJA

FITZGERALD AJA

Sutherland v Gersteling

1   Giles JA: I agree with Fitzgerald AJA.

2   Ipp AJA: I agree with Fitzgerald AJA.

3   Fitzgerald AJA: On 6 December 1995, the appellants (the “purchasers”) agreed to purchase the “Four Star Video” business at Glenbrook from the respondents (the “vendors”). The transaction was completed on 9 December 1995.

4 The purchasers subsequently sued the vendors in the District Court at Penrith for damages, interest and costs. According to the purchasers’ Amended Statement of Claim, the price paid for the business was $57,000.00. Most of the amount paid related to stock and fixtures, with a comparatively small proportion for goodwill. The purchasers alleged that they purchased the business in reliance upon misrepresentations made by the vendors on 18 October 1995, contrary to s 42 of the Fair Trading Act 1987, and that, as a result, they “…suffered loss and damage…”. The nature and amount of that loss was not pleaded and has not been determined.

5   The trial judge dismissed the purchasers’ claim against the vendors. The purchasers have appealed to this Court. The vendors did not submit that leave to appeal was necessary. Although the notice of appeal seeks an order that judgment be entered in the purchasers’ favour, presumably for damages to be assessed, they accepted in the course of argument that the appropriate order if their appeal succeeds is an order for a new trial.

6   The two misrepresentations alleged by the purchasers were a misrepresentation that the turnover of the business was not less than $10,000.00 per month (the “$10,000 representation”) and a misrepresentation that, after deduction of expenses, the vendors were making approximately $4000.00 per month from the business (the “$4000 representation”). It is necessary, and in the circumstances appropriate, to discuss only the $10,000 representation.

7   The trial judge found that the $10,000 representation was made by the vendors. Although his Honour’s findings, and reasons, in relation to reliance are obscure, I am satisfied that he also ultimately accepted that the purchasers relied on the $10,000 representation. In the final passage in his judgment relating to reliance, his Honour said:-

“… I find that [the purchasers] just decided to purchase this business on a knee-jerk reaction without reliance upon anything other than the $10,000 per month which I find was a true representation made by [the vendors]”.

8   As is apparent from the passage quoted, the trial judge held that the $10,000 representation was accurate, not a misrepresentation. His Honour made that finding despite cogent evidence to the contrary, including the vendors’ tax returns of the 1994-1995 and 1995-1996 financial years, i.e., the financial year in which the sale occurred and the preceding year. Unchallenged evidence of the purchasers’ takings from the business after they took it over was consistent with the vendors’ gross income according to their tax returns. According to both the vendors’ tax returns and the purchasers’ figures, the takings from the business were much lower than $10,000 per month.

9   In this Court, the vendors did not challenge the purchasers’ assertion that the representations made to them by the vendors included profit and loss statements which the vendors had prepared for the financial years 1991-1992, 1992-1993, and 1994-1995. It was common ground that those profit and loss statements (respectively exhibits B, C1 and A) were broadly consistent with the $10,000 representation. However, the profit and loss statements were the vendors’ documents and were relied on by the purchasers to support their allegation that the vendors made the $10,000 representation. They could not, of themselves, also establish that the $10,000 representation was accurate.

10   The only document capable of providing any support for the $10,000 representation was exhibit 1, a copy of the bank statement of the vendors, “TA Four Star Video”, for the period 2 June 1995 to 2 January 1996. Although the purchasers pointed out some matters which indicated a need for care in considering the bank statements, they accepted that the bank statements showed deposits of more than $10,000 per month over the period to which they related.

11   However, the bank statements obviously did not reveal the source of the deposits. The vendors’ evidence was that all deposits were takings of the business which they sold to the purchasers.

12   The trial judge said “…it is clear from ex 1 how much money was being deposited in the account of Four Star Video on a monthly basis during the months immediately before the business was acquired by [the purchasers].” A little later, his Honour stated that “...ex 1, together with the frequently referred to ex A and B and C1, demonstrated by virtue of an incontrovertible contemporaneous record, the actual money which was banked in the Four Star Video business during the months to which I have referred...”. His Honour’s conclusion was that: -

‘ …[The vendors], when speaking to [the purchasers],… said on or about 18 October that at that time the business turnover was not less than $10,000 a month and pursuant to ex 1 they had a proper basis for doing so and.. that representation I find was not, in accordance with the allegations made in the statement of claim, misleading or deceptive or false’”

13   The trial judge’s reference to “an incontrovertible contemporaneous record” is troubling. Exhibits A, B and C1 were not an “incontrovertible record” of anything. Exhibit 1 might perhaps be considered an “incontrovertible…record” of deposits into and withdrawals from the bank account to which it relates but is certainly not an “incontrovertible.. record” that only takings from the business were deposited in the material period. (I mention in passing that an amount of $5440.77, which is shown as deposited twice about mid-August 1995, was a deposit by cheque, which seems unlikely to relate to a receipt from the hire of videos).

14   The trial judge’s conclusion that the $10,000 representation was correct necessarily depended on the vendors’ evidence that only takings from the video business were deposited to the bank account in the material period. The vendors submitted that his Honour must have accepted that evidence on the basis of his assessment of the vendors’ credibility.

15   The High Court has recently reaffirmed the limits which apply to an appeal court’s review of a trial judge’s findings based on the credibility of a witness: se Rosenberg v Percival [2001] HCA 18. The vendors’ submissions also reminded the Court that McHugh J stated in Abalos v Australian Postal Commission that a trial judge’s omission to refer to the demeanour or credibility of a witness does not necessarily mean that demeanour or credibility played no part in findings which were made ((1990) 171 CLR 167,179). However, in this case the trial judge’s description of the vendors’ “hesitancy” in answering questions in cross-examination was accompanied by not only an absence of any finding concerning the general credibility of the vendors but also the troubling finding of “an incontrovertible contemporaneous record” and an unsatisfactory treatment of the vendors’ tax returns.

16   His Honour said: -

“ It was suggested by Mr Odgers to both [the vendors] in cross-examination that there must have been some other form of income or emolument of some type which was included in that banked deposit figure each month because those bank deposit figures were, prima facie, inconsistent with the taxation returns ex T. However as Mr Gerstaling responded, he had left the question of the determination of the way in which his tax affairs were to be determined, in the hands of his accountant. This is not an unusual sequence of events for a small business. The small businessman would normally give the books and records of his business to the accountant who would then prepare them in a fashion which was the most advantageous in terms of minimising, as opposed to avoiding, taxation liability. As has been many times confirmed in the courts, there is no obligation on any taxpayer to pay the maximum sum that can possibly be paid to the Income Tax Commissioner, and that it is a legitimate exercise to, in accordance with the taxation laws, seek to take advantage of what deductions can be allowed. This, I find, the [vendors] did.”

17   That confused and confusing discussion includes the fallacious premise that an understated amount for gross income in a tax return can be explained by reference to claimed deductions. That error was magnified by the trial judge’s failure to note that, according to the vendors, the gross income stated in the tax returns was based on information that they had provided to their accountant and “seemed to be right”.

18   However, even if that concession is ignored, his Honour’s misunderstanding of the relevance of deductions to gross income in the present context led him to disregard the cogent support which the tax returns provided to the purchasers’ case that the $10,000 representation was incorrect and the importance of the tax returns to an assessment of the reliability of the vendors’ evidence that only takings from the business were deposited to the bank account in the material period.

19   In the circumstances, the trial judge’s finding that the $10,000 representation was a “true representation” cannot stand.

20   It is unnecessary to consider other complaints made by the purchasers. However, at least some of the factors which at one point seemed to persuade the trial judge that the purchasers did not rely on the vendors’ representations seem to me to point clearly in the opposite direction.

21   The appeal should be allowed with costs, the judgment below set aside and a new trial ordered. The costs of the first trial should be reserved to the judge who retries the action. If qualified, the vendors should have a certificate under the Suitors Fund Act.

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