Sutton, J.S. v A.J. Thompson Pty Ltd

Re: JOHN SCOTT SUTTON
And: A.J. THOMPSON PTY LTD (In liquidation); ALAN JOHN THOMPSON; K.L.K.
MANUFACTURING PTY. LTD. and KEVIN ERROL KOCH
No. SA G39 of 1986
Trade Practice

COURT

IN THE FEDERAL COURT OF AUSTRALIA

SOUTH AUSTRALIA DISTRICT REGISTRY< 986 GENERAL DIVISION
Forster J.
Woodward J.
Wilcox J.

CATCHWORDS

Trade Practices - misleading and deceptive conduct - sale of business - whether alleged misrepresentations were of fact or expectation - whether findings in conformity with pleadings - whether applicants' failure to take reasonable care of own interests provides defence to action - whether accountant knowingly concerned in principal's contravention.

Trade Practices Act 1974, s.52 and 75B

Parkdale Custom Built Furniture Pty. Ltd. v. Puxu Pty. Ltd. (1982) 149 CLR 191

Neilsen v. Hempston (1986) 65 ALR 302

Collins Marrickville Pty. Ltd. v. Henjo Investments Pty. Ltd. (unreported judgment of Wilcox J. 16 April 1987)

HEARING

ADELAIDE

#DATE 21:5:1987

Counsel for the appellant: J.W. Perry QC & R.L. Beven

Solicitors for the appellant: Baker McEwin

Counsel for the respondents: B.M. Debelle QC & M.E. Hoile

Solicitors for the respondents: O'Loughlin Robertson

ORDER

The appeal be dismissed with costs.

(NOTE: Settlement and entry of orders is dealt with in O.36 of the Federal Court Rules.)

JUDGE1

This is an appeal, by one respondent only, from a decision of the Court in which it was held that there had been a contravention of s.52 of the Trade Practices Act 1974 ('the Act') and the particular respondent had been knowingly concerned in that contravention.

The action arose from the sale of a business which manufactured "Flexebars" - flexible bars designed for attachment to the front of vehicles so as to reduce damage to the vehicle by impact, particularly with animals.
The learned trial judge found that there had been misleading and deceptive conduct on the part of the vendor company, K.L.K. Manufacturing Pty. Ltd. ('KLK'), in the period leading up to the sale, and in particular in the course of a meeting held on 18 February 1983. Present at that meeting were the principal of the purchasing company, Mr Thompson, his accountant, Mr Stevens, the principal of KLK, Mr Koch, and that company's accountant, the present appellant.
A.J. Thompson Pty. Ltd. (In liquidation) and Alan John Thompson ('the applicants') alleged a number of misrepresentations by KLK, but in the event it is only necessary to refer to three. These were

(i) the cost of materials, labour and packaging of a Flexebar unit was $36.00,

(ii) the average sale price to distributors of Flexebar units was $65.00, (giving a gross profit per unit of $29) and

(iii) KLK had sold as many as 2400 Flexebar units per month and the average number sold in a month was 1800.

The learned trial judge made findings about these allegations which need to be set out in some detail. They were as follows:

(i) "At the meeting Mr Sutton presented a document which supported his statement that $36 was the cost of manufacturing a Flexebar unit. Mr Koch agreed that when Mr Thompson asked him what it would cost to make a Flexebar he replied '$26'. Mr Sutton however corrected him by saying that the cost was $36." (The making of this representation was not disputed and it seems to have been reasonably accurate.)

(ii) "My finding that Mr Koch represented at the meeting on 18 February that the average selling price was $65 per unit is confirmed by the fact that he showed the figure of $64.50 in the document he prepared setting out stock and plant values. Moreover the figure of $65 was very shortly thereafter used in budget statements prepared by Mr Stevens for the bank. These statements were shown to Mr Sutton who, even if he only glanced at them, could not have missed seeing this crucial figure. It was mentioned on a number of occasions on the first page of the documents, and he made no comment on this figure used by Mr Stevens for this purpose.

A number of matters rendered this representation highly misleading, particularly if used by the purchaser for the purpose of assessing the margin between average selling price and cost of manufacture. It was also a simplistic statement in that it did not take account of the fact that K.L.K. produced a number of different models of Flexebar units (two bar, three bar and four bar units) which it sold to different classes of purchasers at different prices.

It is however in the implied invitation to the purchaser to compare this selling price with cost price that the statement was primarily misleading. The evidence established that the three automotive firms abovementioned were K.L.K's principal customers and that two bar units, K.L.K's major selling product, were sold to them at $44.50 a unit. The applicants produced evidence derived from an assessment of K.L.K's documents that the average selling price of Flexebar units from March 1982 to February 1983 was $52.88. This evidence was not effectively challenged by the respondents and the only manner in which the figure of $65 could be in any way supported was, as put forward on their behalf, on the assumption that the total proceeds of sale represented sales of Flexebar units. This was in fact quite incorrect as K.L.K. sold not only Flexebar units but also spare bar sets and components. I find that it was represented to the applicants that the average selling price of a unit was $65."

(iii) "The further crucial representation to the applicants was on the topic of volume of sales achieved by K.L.K. and what the applicant company could expect to attain. ......

Mr Stevens said that at the meeting there was a discussion concerning the turnover of the business. He said that he and Mr Thompson were told that in the past the business had achieved 1,800 per month. Mr Sutton confirmed that Mr Koch said in answer to a question from Mr Thompson that the business had sold as many as 1,800 per month. Mr Koch said that Mr Thompson asked him whether he would be able to sell 1,800 per month and he, Mr Koch, answered 'Allan, that is entirely dependent on how you operate and I mean you have got to get to know the industry'. Mr Sutton said that when Mr Koch first mentioned the figure of 1,800 per month he corrected him and said it was as high as 2,428 per month. Mr Stevens said the figure of 1,800 was mentioned in the context of an assertion that the business was viable and had achieved such sales.

The first statement by Mr Koch was misleading in that it conveyed to Mr Thompson the impression that it was reasonably possible for him to achieve sales of 1,800 per month. In fact such sales could not possibly be achieved, as Mr Thompson ultimately found, if an average selling price of $65 was to be maintained. The great majority of K.L.K's sales were, as Mr Koch must or should have known, at prices $20 per unit lower, and he was at the time achieving sales very substantially lower than 1,800 units per month.

Mr Sutton's statement that the business had in the past sold as many as 2,428 units in a month was, as he should have known, false. This figure appeared in a document listing sales in the 1979/80 year together with the proceeds of such sales. The figures for the months of February, March and April 1980 were set out as follows:

' No. Sales Before Tax February 754 $47,105.36 March 2,428 $77,486.31 April 760 $50,049.51'

It was, or should have been, patently obvious to anyone seeking to use these figures in a discussion concerning sales that there was something seriously wrong with the March figures. Either the number of sales was incorrect or the amount of the proceeds of sales was wrong. The fact that on the document produced there was an asterisk indicates that some person had earlier noticed the error. Mr Sutton acknowledged that the number of sales was incorrect, and obviously incorrect, a matter of which he was or certainly should have been aware. It was misleading for him in the circumstances to tell the purchasers that K.L.K. had sold 2,428 units in 1979/80 the year of record sales and profit which sales and profit Mr Thompson was inferentially told the business had the capacity again to achieve if vigorously promoted.

Mr Thompson and Mr Stevens were not told that the business was currently selling 1,800 units per month or in fact how many were being sold each month. They were told that the current level of turnover was low. In the forecast of sales which Mr Stevens prepared for his budget he included 600 per month rising to 1,500 by the end of the 1983 calendar year. He said that he prepared his budget in this manner because he was aware the current level of turnover was low (in fact it was approximately 600 units per month) and Mr Thompson 'needed time to get the feel of the business'. The manner in which he prepared his budget confirmed the impression which he said he gained from the meeting, namely that sales of 1,800 per month could be achieved. Statements were made at the meeting from which Mr Thompson and Mr Stevens were reasonably entitled to infer that the business was viable because it had a substantial gross profit margin and that it was capable of increasing considerably its sales and in consequence become profitable. Furthermore that such an increase in sales could be achieved at an average selling price of $65 per unit."

We have set out these extracts from the learned trial judge's reasons for decision at some length because elsewhere his Honour expressed his findings in more general terms and those findings were challenged by the appellant on several grounds. His Honour said that the essential element in an action under s.52 of the Act is that the totality of the respondent company's conduct be found to be misleading or likely to mislead. He referred to Parkdale Custom Built Furniture Pty. Ltd. v. Puxu Pty. Ltd. (1982) 149 CLR 191 at 199.
After referring to other authorities, his Honour continued,

"It is my opinion that the proper approach to this matter is to assess the conduct of K.L.K. as a whole and to view the various statements in the context and atmosphere of the meetings rather than to analyse each statement separately for the purpose of determining its truth or falsity. By adopting this approach I propose considering critically each statement which I find was made, not so much for the purpose of determining its intrinsic accuracy but rather for the part it played, in the context of the meeting as a whole, in producing in Mr Thompson the impression that the sum of $200,000 was a fair price to pay for a business which was said to be viable and potentially profitable."

Having made, among others, the several findings which are set out at length above, his Honour concluded,

"I am of opinion that K.L.K. engaged in misleading conduct at the meeting of 18 February 1983 in that it represented to Mr Thompson and Mr Stevens that the Flexebar business was viable, in the sense used above, capable of achieving sales of 1,800 per month with a substantial gross profit margin and that in the light of the value of the component parts of the business the price of $200,000 was reasonable."

With regard to this finding, counsel for the appellant argued:

(a) that there had been no determination by the learned trial judge as to the detailed misrepresentations alleged in the pleadings;

(b) that representations concerning the viability of the business and the reasonableness of the purchase price had not been pleaded; and

(c) that any representations on these subjects amounted merely to expressions of opinion or predictions which, in the circumstances, did not constitute misleading or deceptive conduct.

We do not believe there is substance in any of these arguments. As to (a) we find that there was ample material on which his Honour could find that the selling price of Flexebars was seriously misrepresented by KLK to the applicants and, in the passage cited above, he made such a finding.
The position with regard to volume of sales is rather more complicated. His Honour did not find that there had been a representation in terms of that numbered (iii) above. Instead he found that there had been one false statement that 2428 units had been sold in a particular month, and further false statements to the effect that sales of 1800 units per month had been achieved in the past and could be achieved again.
The facts were that a figure as high as, or higher than, 1800 units in a month had only been achieved once in the past, so that any element of continuity suggested by the phrase "1800 per month" was missing; and sales had since deteriorated so much in the face of competition that there could be no basis for an honest belief that such figures could be achieved in future.
All KLK references to "1800 per month" were therefore misleading - as his Honour found.
It was suggested by counsel for the appellant that the applicants would not, in fact, have been misled by statements about volume of sales, because Mr Sutton gave Messrs Stevens and Thompson, to take away, a copy of the sales figures which he had in front of him. This was claimed by Sutton and Koch, but denied by Thompson and Stevens, and was clearly not accepted by his Honour, although he did not say so expressly. We think it is most unlikely that the figures were handed over; if they had been they would immediately have prompted questions which in fact were not asked - whether on 18 February or at a later meeting on 3 March or at any time in between.
As to (b), we believe that, having made specific findings about the statements made to the applicants, his Honour was entitled from then on to speak in terms of the general effect of those statements, and to find that this general effect constituted misleading conduct, without that having been pleaded. The requirement of a statement of claim is to set out the material facts upon which the applicant relies. These facts, so far as misleading representations are concerned, are constituted by statements, documents or implications. The net effect of such specific representations on the minds of those to whom they are made, is obviously a matter of interest, appropriate for argument, and one on which the court may make findings, if it sees fit, in the course of determining whether the conduct complained of was misleading in a relevant way. However it would not normally be necessary to plead the overall effect of specific misrepresentations and it was not necessary in this case.
As to (c), although there was, no doubt, an element of prediction in the representations made, because the questions repeatedly asked by the applicants were as to how many Flexebars they could expect to sell, and at what margin of profit, the actual representations made chiefly concerned the past performance of the respondent company. The clear impression was created that, based on past experience of sales of 1800 units per month, sales would soon build up again to that figure, and these units could be sold at an average price of $65 which was presently being obtained.
The truth of the matter was that a sales rate as high as, or higher than, 1800 per month had only been reached on one occasion, several years earlier, when there had been no competition. In recent times, in the face of vigorous competition, they had averaged 600 per month. The sale price over the last twelve months had averaged $53. There was no reason to believe that this sale price could be increased without further loss of sales. The net result for KLK was that it had been conducting the Flexebar business at a substantial loss for the last two years. This fact was not volunteered by the company although, as his Honour held, it did not represent itself to be making profits either.
In our view, the representations made about sale price and turnover were, in substance, representations as to existing facts, and they were false, as his Honour found. In so far as any expression of expectation or belief as to the future was involved, that also was false.
The next challenge to his Honour's findings was based on the fact that the contract between the parties seems to have been entered into on 24 February when a deposit was paid. After that there was a further meeting on 3 March at which the applicant company's accountant, Mr Stevens, produced a cash flow statement which set out sales rising from 600 per month to 1500 per month over a twelve months period and a selling price of $65 rising to $70 over that time.
His Honour relied on the fact that these figures were tabled at the meeting and accepted without comment by Mr Koch and Mr Sutton. It is clear that his Honour was entitled to rely on this circumstance as tending to confirm the representations which had been made on 18 February of a sale price of $65 and sales rising towards 1800 per month - they would have been shown as reaching that figure in the month following the period covered by the cash flow statement if the progression it postulated had continued.
The behaviour of Messrs Koch and Sutton on this occasion could also have gone to their credibility and to the likelihood or otherwise that they would have misled the applicants two weeks earlier.
However no representation made on this occasion would have been actionable in itself, since the applicants had already acted upon the representations made earlier and had committed themselves to the contract.
Counsel for the appellant submitted that the learned trial judge had treated the reactions of KLK's representatives to the tabling of the cash flow statement as representations which he could find to have constituted misleading conduct. However, in our view, a fair reading of his Honour's reasons for decision shows that his findings related to the meeting of 18 February, he realised that the contract had been entered into before the meeting of 3 March, and he only regarded the events at that meeting as corroborative of the findings he had otherwise reached.
The other challenge made by counsel for the appellant to his Honour's finding of liability against KLK was based on the circumstance that the applicants failed to take reasonable care of their own interests. It was said that they should have investigated KLK's affairs more closely, and that their failure to do so was the real cause of the damage they suffered. Alternatively, no duty is owed to a person who fails to take reasonable care of his own interests.

It is a bold submission which says, in effect, "You should not have believed me when I misled you". In this case there was a factor not often present in claims under s.52 of the Act, and that was a pre-existing relationship between the respective parties, giving rise (it may be assumed) to an atmosphere of mutual trust rather than the natural caution which one would expect to find in business dealings of this type. The four principal actors were all, it seems, known to each other. All but Mr Koch were members of the same tennis club, and Mr Koch knew Mr Thompson reasonably well. In particular there was a very close relationship of friendship and business dealings between the two accountants who were advising and assisting the principals of the respective companies. Mr Stevens worked in part of Mr Sutton's premises, shared secretarial facilities, and sometimes did work for him.
It is against this background that the appellant's submission must be considered. It is true that the learned trial judge was very critical of the applicants' failure to make independent investigations, bearing in mind that they had "so little knowledge or understanding of the business" they were planning to acquire. He took this into account in determining "the actual loss flowing directly from" KLK's contravention of the Act. The propriety of this course has not been challenged, but his Honour's refusal to deny all remedies to the applicants, on the basis that they were the authors of their own misfortunes, is challenged.
Reliance is placed upon a number of statements in the authorities to the same general effect as that of Gibbs C.J. in Puxu's case (above) at 198-9, where his Honour said,

"... the court must decide objectively whether the conduct is misleading or deceptive or likely to mislead or deceive, and .... evidence that members of the public have actually been misled is not conclusive. I would add that evidence that members of the public were misled, not by any conduct of the defendant, but by other circumstances for which the defendant was not responsible, would be quite irrelevant.

Section 52 does not expressly state what persons or class of persons should be considered as the possible victims for the purpose of deciding whether conduct is misleading or deceptive or likely to mislead or deceive. It seems clear enough that consideration must be given to the class of consumers likely to be affected by the conduct. Although it is true, as has often been said, that ordinarily a class of consumers may include the inexperienced as well as the experienced, and the gullible as well as the astute, the section must in my opinion be regarded as contemplating the effect of the conduct on reasonable members of the class. The heavy burdens which the section creates cannot have been intended to be imposed for the benefit of persons who fail to take reasonable care of their own interests. What is reasonable will of course depend on all the circumstances."

This was, of course, said in relation to an allegation that the respondent's conduct had been such as to mislead the buying public. In such a case, although the reaction of individual customers may be relevant, the ultimate test must be objective.
However, in a case such as the present, where the allegedly misleading conduct consists in representations directed specifically towards a particular person or group of people, with a view to making a single specific sale, it is more helpful to recall the principles of law restated by Wilson J. in Gould v. Vaggelas (1984) 56 ALR 31 at 46. Although these related to the common law action of deceit, they are in our view equally applicable to breaches of s.52 of the Act. The principles are:

"(i) Notwithstanding that a representation is both false and fraudulent, if the representee does not rely upon it he has no case.

(ii) If a material representation is made which is calculated to induce the representee to enter into a contract and that person in fact enters into the contract there arises a fair inference of fact that he was induced to do so by the representation.

(iii) The inference may be rebutted, for example, by showing that the representee, before he entered into the contract, either was possessed of actual knowledge of the true facts and knew them to be true or alternatively made it plain that whether he knew the true facts or not he did not rely on the representation.

(iv) The representation need not be the sole inducement. It is sufficient so long as it plays some part even if only a minor part in contributing to the formation of the contract."

In this formulation, the possibility that a foolish person might be misled by some representation which no normal person would take seriously, is covered by the exclusion of representations which are not "calculated to induce" entry into the contract - the test is objective, but must take into account the respective positions of the parties, including such matters as their knowledge of each other through previous dealings and their respective familiarity with the subject-matter of the contract.
Similarly, if a person is so determined to enter into a contract that he is not in truth influenced by some false representation made to him, he clearly has no case. But there is nothing in the principles cited, or in any other authority which has been brought to our attention, to suggest that a person who has been misled into entering a contract, by false representations of a type which were likely to produce that result and in fact did so, can be deprived of his remedy because of his failure to check the accuracy of those representations. See, to the contrary, Neilsen v. Hempston (1986) 65 ALR 302 at 309, and Collins Marrickville Pty. Ltd. v. Henjo Investments Pty Ltd (unreported decision of Wilcox J, 16 April 1987).
In our opinion, for the reasons given, none of the appellant's arguments to the effect that the applicants' action should have failed entirely can succeed.
This leaves for consideration perhaps the appellant's strongest contention, namely that he should not have been found to have been "knowingly concerned", within the meaning of s.75B of the Act, in KLK's contravention of s.52 of the Act.
It was argued that the appellant, as the company's accountant, only attended the meeting of 18 February as an adviser to Mr Koch, and that any representations in which he may have been involved, and which were found to have been misleading, were made without knowledge of the true facts.
It is true that Mr Sutton seems to have had nothing to gain from assisting Mr Koch in any deception of the applicants. His only possible motive would seem to be to assist his client and friend to escape from an unprofitable business. On the other hand he had ties of acquaintanceship at least with Mr Thompson, and of friendship and business collaboration with Mr Stevens. In these circumstances it is necessary to look critically at any evidence which would seem to suggest that he was knowingly concerned in the contravention of the Act.
The learned trial judge thought he was knowingly concerned, and he had the advantage of seeing Mr Sutton in the witness box over a considerable period of time. In considering questions of credibility, after finding Mr Koch's evidence to have been "totally unacceptable and unreliable", his Honour went on,

"Mr Sutton's evidence was more difficult to assess. On the surface it was rational and business-like, a welcome contrast to Mr Koch's evidence. He performed well the difficult task of attempting to satisfy me that the respondents acted responsibly. However I am not satisfied that his evidence and his conduct at the meeting was thoroughly disinterested. To the extent to which his evidence is in conflict with Mr Thompson corroborated by Mr Stevens I prefer their evidence. Moreover there is in some portions of his evidence an indication of a desire held at the meeting to have the purchase consummated and to refrain from putting anything other than the most optimistic view of the proposition to Mr Thompson without qualification. More significant than what he said at the meeting was what he left unsaid."

This last comment of his Honour's referred to the fact that Mr Sutton could have disclosed the company's accounts to the applicants but did not - he had them readily available but gave an excuse for not producing them which was false in its detail and entirely unconvincing in its substance. However it satisfied Messrs Thompson and Stevens at the time, perhaps because of the trust which they placed in him.
Before leaving this point about the company accounts, which was strongly relied on by his Honour in his findings, we note that the failure to produce records was not stated, in the applicants' pleadings, as a particular of misleading conduct. Although it could no doubt have been included, the applicants were, in our view, entitled to treat it rather as significant background to the positive representations made.
In the claim against Mr Sutton under s.75B of the Act, no material facts constituting his being "knowingly concerned" in the contravention were pleaded. The allegation was simply made in terms of the section. This is undesirable, at least where the respondent concerned is not a principal of the respondent company or the prime actor in the conduct alleged. The consequences for the individual can be so serious that he is entitled to have the details of his alleged involvement, amounting as it must to something akin to fraudulent conduct, spelt out. However no such point was taken in the present case. In these circumstances we think the applicants are entitled to rely upon all aspects of Mr Sutton's involvement in the contravention, considered as a course of conduct, and not just on his part in the spoken or written representations which his Honour found to be false.
Thus the evidence shows that Mr Sutton had worked for Mr Koch as a financial adviser since 1975; he was accountant and secretary to KLK; he visited the factory at least twice a month, and collected information as to sales, levels of stock and costs; he engaged and broadly supervised the accounting staff at the factory; he had complete access to all company records, and bank statements came directly to his office. He had, a few weeks earlier, prepared the profit and loss accounts of the company for the year 1981/82, which showed a loss of some $135,000. He took the chair at the 18 February meeting, and Mr Koch invited Messrs Thompson and Stevens to direct any questions on the financial side of the business to Mr Sutton.
At the outset he told them that the company's financial statements "would be a bit misleading because they included other things such as the louvres". In fact the louvre business had been sold some time earlier and did not complicate the 1981/82 financial statements. These showed that the flexebar business - almost the whole of the respondent company's 1981/82 activities - was running at a heavy loss.
So far as the specific representations of selling price and turnover are concerned, his Honour found that Mr Sutton "allowed the applicants to assume $65 as the average sale price and in fact exacerbated the representation as to volume by falsely stating a figure of 2,428 units as having been in the past achieved" in one month.
His Honour went on,

"Mr Sutton was, or at least should have been aware that these figures were unrealistically optimistic and would convey the false impression of an excellent gross profit margin."

Since Yorke v. Lucas (1985) 61 ALR 307 establishes (as his Honour mentioned) that to be liable under s.75B of the Act a respondent must be an intentional participant, with full knowledge of the essential elements of the contravention, it is necessary for this Court to be satisfied that Mr Sutton knew in fact that the figures in which he concurred would convey a false picture.
His reference to 2428 units in one month may well have been an honest mistake, based on an obvious error in figures he had before him and which he failed to detect. However his purpose was to bolster a claim by Mr Koch that the business had achieved 1800 units per month in the past and, by inference, could do so again. The figures which Mr Sutton had in front of him showed this claim to have been most misleading, particularly in light of the active competition of recent years, of which Mr Sutton was well aware.
Similarly Mr Sutton, from his detailed knowledge of the business, and his regular discussions with Mr Koch, must have known that the average selling price was well below $65, though he probably did not know just what it was. He admitted in evidence that he knew the margin between cost of manufacture ($36) and selling price was "certainly less than" $29.
These were vital pieces of information, going to the heart of the company's viability (which we take to mean its ability to trade profitably in the near future - before accumulating losses which could not be supported).
We agree with the learned trial judge that Mr Sutton played a significant part in the contravention by keeping important information (the financial statements) from Messrs Thompson and Stevens and by accepting joint responsibility for false statements about the volume of sales of Flexebars and their selling price.
For all these reasons the appeal should be dismissed with costs.

[1987] FCA 248

21 MAY 1987