The Great Australian Bite Pty Ltd v Menmel Pty Ltd
[1996] FCA 499
•24 JUNE 1996
CATCHWORDS
TRADE PRACTICES - s.52 - Involvement within s.75B - Sale of restaurant business and lease of premises for restaurant - Part of restaurant equipped and furnished for the provision of entertainment and sale of liquor not associated with the provision of a meal, and prior history of use partly as a nightclub or discothèque - Reference on inspection by representativies of vendor and lessor to these activities without any corrective advice that such use was and would be illegal - Whether misleading conduct - Remedies under s.87 - Measure of damages - Mitigation, whether reasonable to be required to submit to conditions to achieve benefit of representation - Circumstances in which lease should be set aside after lapse of a substantial time - Circumstances where losses incurred in a business were attributable to the contraventions and negligence proved.
PROFESSIONAL NEGLIGENCE - Claim against solicitor for failing to exercise due care so as to warn client of illegality of proposed use of premises the subject of contract and lease - Whether solicitor negligent where he failed to read inventory and certain annexures to contract.
Trade Practices Act 1952 (Cwlth), ss.52, 75B, 87
Liquor Act 1982 N.S.W., s.89 (now repealed)
Local Government (Theatres and Public Halls) Amendment Act 1989
Local Government Act 1919 (NSW), s.317JG
Jones v. Dunkel (1959) 101 CLR 298
Henjo Investments Pty Limited v. Collins-Marrickville Pty Limited (No 1) (1988) 39 FCR 546
Henjo Investments Pty Limited v. Collins Marrickville Pty Limited (No 2) (1989) 40 FCR 76
JAD International Pty Ltd v. International Trucks Australia Limited (1994) 50 FCR 378
Netaf Pty Ltd v. Bikane Pty Ltd (1990) 26 FCR 305
THE GREAT AUSTRALIAN BITE PTY LTD & ANOR -V- MENMEL PTY LIMITED & ORS
NG 412 of 1992
Burchett J.
Sydney
24 June 1996
IN THE FEDERAL COURT OF AUSTRALIA )
)
NEW SOUTH WALES DISTRICT REGISTRY ) NG 412 of 1992
)
GENERAL DIVISION )
BETWEEN:
THE GREAT AUSTRALIAN BITE PTY LTD
First Applicant
AND:
DENISE ERICA WINTERS and AILEEN DAWN PIPER
Second Applicants
AND:
MENMEL PTY LIMITED
First Respondent
SYDNEY GRIFF
Second Respondent
TIBIKI PTY LIMITED
Third Respondent
ALLAN HILL
Fourth Respondent
DAVID NATHAN FINKELSTEIN and LESLEY MICHAEL STEVEN POZNIAK
Fifth Respondents
CORAM: Burchett J.
PLACE: Sydney
DATE: 24 June 1996
MINUTE OF ORDER OF THE COURT
THE COURT ORDERS THAT the applicants bring in, on a date to be fixed, short minutes of orders appropriate to be made in the light of the reasons of the court.
NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA )
)
NEW SOUTH WALES DISTRICT REGISTRY ) NG 412 of 1992
)
GENERAL DIVISION )
BETWEEN:
THE GREAT AUSTRALIAN BITE PTY LTD
First Applicant
AND:
DENISE ERICA WINTERS and AILEEN DAWN PIPER
Second Applicants
AND:
MENMEL PTY LIMITED
First Respondent
SYDNEY GRIFF
Second Respondent
TIBIKI PTY LIMITED
Third Respondent
ALLAN HILL
Fourth Respondent
DAVID NATHAN FINKELSTEIN and LESLEY MICHAEL STEVEN POZNIAK
Fifth Respondents
CORAM: Burchett J.
PLACE: Sydney
DATE: 24 June 1996
REASONS FOR JUDGMENT
BURCHETT J. This is an action brought primarily in reliance on s.52 of the Trade Practices Act, 1974. In it, claims are made against Menmel Pty Limited ("Menmel") and its director
Sydney Griff, as a person involved within the meaning of s.75B, on the basis that Menmel was guilty of misleading conduct in connection with the negotiation of a lease of premises at Kings Cross for the purposes of a licensed restaurant. A further claim is made against the fifth respondents, who acted as solicitors for the applicants upon the purchase of the discontinued business and equipment of a restaurant formerly carried on there and upon the finalisation of the lease. It is alleged that the solicitors failed in their duty to advise the applicants properly in relation to the transactions. The statement of claim includes also claims against the third and fourth respondents, the third respondent, Tibiki Pty Limited ("Tibiki"), being the vendor of the equipment and the fourth respondent (Mr Hill) its director. However, the third respondent has been dissolved, and the claim against those respondents was not pursued at the hearing.
The first applicant (Mrs Winters) is very experienced in the conduct of restaurants. Until the venture with which this action is concerned, she was also very successful. A number of her restaurants had been licensed, but she had had no experience in the conduct of a nightclub or place of entertainment, or of a bar supplying liquor unassociated with the provision of a meal. Nor had she carried on a restaurant at Kings Cross. In about July 1990, she inspected premises at 36-38 Bayswater Road, Kings Cross, formerly the site of a well-known restaurant and place of entertainment. A hard-fought issue in the case was just what she saw there at that time. Equally in dispute was the purport of conversations that took place during the negotiations which ensued.
What Mrs Winters said she saw was a restaurant and associated areas on three levels, with dining rooms, bars, a kitchen and terraces on the upper levels, and a large bar, toilets and a dance floor (measuring about six metres by six metres), constructed of jarrah, complete with special lighting, disc jockey box with twin turntables, amplifiers, control deck, strobe lighting and numerous speakers and television sets, on the lowest floor, also known as the Ward Avenue level. Shortly after her first inspection, Mrs Winters inspected the premises again with her brother, Mr Piper, an agent named Pascoe, and Mr Griff, the second respondent. Mr Griff said that the rent would be $189,000-00 plus outgoings of $12,000-00 per annum, to which Mrs Winters responded:
"That's too much rent for a restaurant."
(Evidence given at the hearing, as well as subsequent events, confirmed that this comment would have been perfectly accurate.) Mr Griff replied:
"This place has been successfully operating as a nightclub for the past six years. With your experience in restaurants you should do O.K."
He also said:
"When we ran the place as Fiasco, the turnover in the bar on Friday and Saturday nights alone was in excess of $8,000-00 per night."
During the conversation, there was also reference to a sign on the front door indicating that Menmel had taken over the premises, as owner in possession, for non-payment of rent. Mr Griff said: "I am having a disagreement with the tenant and I have taken over the premises. I can therefore give you a new lease, and any equipment I will sort out with you later on." Within a short time, a deposit was paid to Mr Pascoe as agent for Tibiki, and Mr Griff handed the keys to Mr Piper. Mr Piper confirmed there was a history of substantial trade in liquor on the premises by inspection of the liquor purchases registers of the businesses formerly conducted there between 1986 and 1989, which had been known as Il Fiasco and Cafe Royale. He and his sister had both visited Il Fiasco and Cafe Royale prior to July 1990, and had seen that they had operated with a bar and nightclub, involving a disc jockey, music, and dancing on the dance floor. Mrs Winters had been there on many occasions, when the establishment had presented as an apparently successful restaurant, bar and nightclub, the premises being particularly crowded at weekends. Nearly all the matters I have just recounted were either disputed or at least qualified by Mr Griff and Mr Pozniak, but I have formed the opinion, for reasons which will emerge, that they are factual.
Despite the obvious message conveyed by the history of the place and by its appearance, furnished as it was with a dance floor, large bar and all the accoutrements of musical entertainment and dancing at the Ward Avenue level, the fact is that it was not lawful to conduct a nightclub there, to hold public entertainment, or to operate the bar except as an adjunct to the supply of meals. But nothing was said to Mrs Winters or to Mr Piper to suggest that they would not be able to carry on the activities for which the furnishing and equipment of the place were plainly designed. To show Mrs Winters and Mr Piper those mute representations without comment by way of correction was to be persuasively misleading. To refer, in addition, to the past success of the place, and to the substantial takings, was to cement, and build on, a false impression. For the points made by Mr Griff, quite apart from the express reference to a nightclub, implied that what had been done there before could be revived and continued.
Mr Griff must have been conscious of the facts, for he was a director of a company involved in the operation of Il Fiasco, the business of which was conducted by his son and co-director, Robert Griff, and later he had been asked to consent to an application designed to legalise the position during the time when Tibiki was carrying on Cafe Royale in the premises. During the earlier period, while Il Fiasco was operating, the liquor licence was held by Robert Griff, and there were "many breaches of their licence", as Mr Sydney Griff admitted, in connection with the provision of entertainment and the supply of liquor not in connection with a meal. An application for an entertainment licence was made on 10 March 1986, in the time of Il Fiasco, and after some amendments was finally refused by the Liquor Administration Board by letter dated 28 June 1990. Mr Griff equivocated in cross-examination about his knowledge of the application and its refusal, but I infer without hesitation that he was well aware of it. On this issue, as on a number of others, it is relevant to point out that Mr Griff's son, Robert Griff, was not called to give evidence, although there was no suggestion he was unavailable. See Jones v. Dunkel (1959) 101 CLR 298.
The very successful business of Il Fiasco was conducted in the premises during the whole of 1986, and until a sale was effected to Tibiki in May 1987. From then, the restaurant continued as Cafe Royale. Mr Griff conceded, after some hesitation, that Mr Hill, the director of Tibiki, "approached me if I remember now to get an entertainment licence, yes". On 17 November 1988, Mr Hill had signed a proposed development application addressed to the City Council, seeking approval to "provide live entertainment in conjunction with existing restaurant". The form provided for the consent of the owner, and was submitted at about that date to Mr Griff. He treated it seriously, obtaining legal advice on it, and then declined to consent. Given the history of the premises, I do not believe he could have overlooked this fact during the negotiations with Mrs Winters.
At the same time, it is beyond question that Mr Griff must have appreciated the likelihood that Mrs Winters, having regard to the manner in which the restaurant had been conducted in the past, and having regard to the way it was set up at the time of her inspection, would in all likelihood have assumed that an integral part of the functioning of a restaurant at those premises was the entertainment area and bar at the Ward Avenue level. Indeed, when asked in evidence to comment upon the "similarity between the business operated by Great Australian Bite [i.e. the business subsequently carried on by it] and those which had preceded it in the premises", Mr Griff expressed his opinion, at some length, about the superiority of Il Fiasco and generally about the circumstances, and then made what I regard as a significant statement:
"Other operators must have looked at the Il Fiasco operation and said: 'Well, we'll continue to do it', and that's how I saw the matter happening. As I say, I'm not a restaurateur. I don't have a background of that but I understand marketing reasonably well."
I think he understood it equally well in 1990. He knew that a restaurateur of Mrs Winters' experience would have known of Il Fiasco, and would have been likely to have thought its success could be restored and continued. But it was not legal to do so. (There were said to have been special reasons, personal to the operators, for the failure of Cafe Royale.)
A further matter which confirms Mr Griff's true state of mind is the high rental he charged for the premises. He sought to deny that the rental was particularly high, but I accept the evidence, on this point, of his own expert, Mr Grech, who considered that "the rent is either too high [or] there was a higher expectation of turnover". Mr Grech's view was in accord, in this respect, with that of the applicant's valuer, Mr Roberts, who said "the level of rental ... to my mind was ... a rather extraordinary level of rental". (I have relied on my note of this evidence rather than the transcript; my note accords with the re-examination and with the purport of the witness's written report.) In the re-examination, Mr Roberts added that "the rentals ... were outside of normal industry parameters". It was also in accord with the evidence of Mrs Winters, who was as already stated a very experienced restaurateur, that the rent was "calculated on [the] basis" of a "greater turnover in liquor sales which you would be able to achieve by operating a nightclub in contradistinction to merely operating a restaurant". In the event, after the failure of the applicant's restaurant, it was found necessary to obtain an entertainment licence to achieve a re-letting to a lessee with a prospect of obtaining a sufficiently high turnover.
The respondents recognised the effect that must have been produced on Mrs Winters if she had seen the Ward Avenue part of the premises set up as she described. It was, as I have indicated, likely to have misled her as to the way in which the restaurant had been and could be conducted. Particularly when a director of the company being the proposed lessor was present and referred to the place having operated as a nightclub for a substantial time and achieved significant bar takings, Mrs Winters was likely also to have understood that the company had no objection to the continuance of the activities for which the furnishing and equipment of the premises provided. The respondents sought to confront the difficulty so presented for their case by asserting that the use of the premises had changed after Il Fiasco was sold to Tibiki and became Cafe Royale. It was strongly suggested that Mrs Winters and Mr Piper were not telling the truth in their description of the Ward Avenue level. But I have come to the conclusion that this attack on Mrs Winters and Mr Piper reflects rather on the credit of the respondents who made it.
For on the whole of the evidence, I am quite satisfied that the dance floor and equipment already described were there to be seen in 1990, much the same as in the time of Il Fiasco. A great deal of the evidence only came out in the later stages of the hearing, but when it did come out, whatever other problems it raised for the applicant, it established this foundation of the case under s.52. Mr Louison, for instance, an independent promoter of nightclubs, was asked by Mrs Winters in January 1991, after a lease to the applicant had been entered into and the restaurant had been operating for some three months, to promote a nightclub there. He did so, he said, on about two occasions starting on 1 March, and he thought he had made "a normal good start ... It was fine". He gave specific evidence that he could not remember providing any equipment himself, and that he "used the disc jockey console that was already there". Before starting, he had inspected the premises "and observed that the place was set up for use as a nightclub. There was a disc jockey console and a dance floor. There was a lighting system such as was found in the Cafe Royale." (Mr Louison had been there in the time of the Cafe Royale, not for a meal, but, as he said, "to the nightclub [where he] danced and drank".) Mr Louison's business associate, Miss Roe, had been to the premises during the couple of months before Christmas 1990 when the restaurant was known as The Great Australian Bite. She described it as follows:
"It was then operated as a restaurant upstairs but downstairs the premises were run as a nightclub. I observed at that time that there was a disc jockey playing tapes and records, there were people dancing to the music and the lights downstairs were flashing and appropriately dimmed for use as a nightclub."
She thought the "set-up", as well as the activity, was "consistent with its use as a nightclub". Since there is nothing to indicate that the applicant purchased new equipment for the conduct of nightclub operations (and indeed the respondents strenuously denied that before Christmas 1990 the applicant even intended to operate in that way), this evidence is powerful confirmation of the version of events given by Mrs Winters and Mr Piper, presently under examination. Miss Roe
recalled promoting the nightclub at The Great Australian Bite on three Friday nights in March, rather than two, and there was an irrelevant mistake in her affidavit. Apart from drawing attention to these matters, counsel did not cross-examine her. I accept her evidence.
When the case commenced, a Mr Shierny, who had worked for Mrs Winters in various capacities for a substantial time as chef, waiter or restaurant manager, and had assisted in the setting up of The Great Australian Bite in the premises and in the running of the restaurant there, was conducting a restaurant on his own account in Auckland, New Zealand. He was not called to give evidence. Reference was made to his absence during the cross-examination of Mrs Winters. But after an adjournment, Mr Shierny happened to return to Sydney on a holiday, when he saw the applicant's solicitors and made an affidavit. He gave evidence of the condition of what he described as "the lower ground floor area" prior to the refurbishment of the premises by the applicant. He said it "gave the appearance of being used for dancing, drinking and general entertainment. There was a dance floor, a bar, special lighting, including a Starburst light, (a sphere covered in mirrors of about 1cm by 1cm which reflects spotlights in different directions), and a Disc Jockey Console. The lower ground floor area was amplified for use as a dance area/nightclub." When the restaurant opened, Mr Shierny assisted in the running of it, and "also supervised the Night Club area. [He] attended to the operation of the Disc Jockey Console in the lower ground floor area, which played Compact Discs and Tapes and Records." Mr Shierny remembered using the equipment before they opened "because it had a very good sound system". Mr Shierny said that he had been to the Cafe Royale "[m]any times", that he "used to dance there when it was Cafe Royale", that it was the same dance floor, and that the disc jockey box, video and television and monitoring system were "there when we moved into the premises", having been taken over from the Cafe Royale. I accept this evidence.
A Mr Stephen Baartman, a public relations consultant called to give evidence for the respondents, said in cross-examination that the Cafe Royale, to the best of his knowledge, continued for approximately two years to operate as both a restaurant and a nightclub. In fact, in his affidavit he described the Cafe Royale as a "restaurant/nightclub". He thought it still had "the original dance floor from Il Fiasco times" and a booth at which a disc jockey sat. All that Mrs Winters did in this area when she took over was to effect "a superficial redecoration". This evidence is in accord with evidence given by Mrs Winters herself, and I accept it.
The respondents placed reliance on evidence to the contrary effect given by an officer of South Sydney Council, Mr Koloadin, who said he saw the premises on 14 March 1991, when it did not look as if it was being used as a place of public entertainment. He conceded his memory was vague, but he thought it was "virtually empty inside, an empty space, some tables and chairs were out, that's about it. ... [D]ownstairs was pretty empty." But he was there as a result of a letter of 28 February 1991 written by the Council in respect of the use of the premises, a letter which in itself suggests someone had given information that the premises were being used for public entertainment. In any case, Mr Koloadin's evidence simply cannot stand with the evidence of Mr Louison and Miss Roe. They, who were experts in the promotion of nightclubs, had been there on at least the 1st and 8th of March when the dance floor, sound system and other equipment satisfied them. I do not believe that on 14th March the area looked as if it was not used for public entertainment, and I conclude that Mr Koloadin was an unreliable witness.
I have digressed to examine some of the material bearing on the truthfulness of evidence of Mrs Winters and Mr Piper concerning what they said they regarded as a nightclub area at the premises, because the issue was so hotly contested during the opening stages of the hearing. Ultimately, as I have indicated, further evidence clarified the matter, and Miss Roe was scarcely cross-examined. But in the earlier part of the hearing, Mr Pozniak gave evidence that there "was no dancing or live entertainment at the Cafe Royale", and he dismissed any equipment which may have been there at the time of the transaction involving the applicant as "some antiquated equipment left in the restaurant by Mr Hill", not capable of leading to any inference "that it's going to be a nightclub or a discotheque". He said of the Cafe Royale that he had been there twice, and "there was certainly no nightclub, there was no dancing or a discotheque, and the reason I never went there again is because it was so unlike Fiasco".
Mr Griff acknowledged that he had seen the premises with Mr Hill about three months before Mrs Winters went there. He denied there were nineteen television sets there, that there were about twelve speakers in the dance floor area, and that he saw a turntable or a "disco" console. I do not believe this evidence. The console was prominent, as were a number of the other items, and I consider Mr Griff, after observing him, to be an intelligent and careful man who would have kept note meticulously of the state of the premises constituting his major property investment. He was putting out one tenant in order to accept another shortly afterwards, and I think he would have examined the premises in detail, both with Mrs Winters and Mr Piper and probably also on other occasions at about that time. I did not think he was a satisfactory witness. An example was his evidence on the subject of work which the applicant did during the two months prior to the re-opening of the restaurant. Mr Griff was initially evasive as to whether he knew about that, and then denied it. But after being forced to concede that he was at the premises during the period in question, when he must have seen that work was being done, he conceded:
"Yes, there was some work being carried out, I think there was some in the front of the building being carried out."
But he said he had not looked at it "in detail", and could not remember whether or not his permission had been sought, although he had complained quite vigorously only shortly before about Mr Hill having made alterations without his consent.
Mr Griff's anxiety to deny knowledge of the situation with respect to the operations on his premises led him several times into evidence which was not acceptable. He even denied his awareness in August 1990 of the fact that "the business in the premises was not being conducted on a full-time basis". Yet he had the key to the premises, and was proposing to grant a fresh lease, bringing the lease to Tibiki to an end. Indeed, the new lease was back-dated to 1 August 1990 just because of Tibiki's difficulties and the applicant's entry to carry out alterations and refurbishment (at a cost of over $160,000) preparatory to its opening on 16 October 1990. When his cross-examination continued on the next day, Mr Griff referred to Mr Hill "having closed his business which I realized he'd then gone out to rent it." Obviously, he had forgotten his evidence of the previous day, and the latter statement was correct.
In my opinion, the proper inference from Mr Griff's attempts to minimise his knowledge of the premises, and of what was going on in them, is that he was strongly conscious of how misleading an impression the premises conveyed, particularly in the light of their well publicized use over a substantial period, and he knew that the inspection of the premises in which he had taken part with Mrs Winters and Mr Piper had been calculated to lead them into error. Of course, he also denied making the positive statements attributed to him by them.
It is time to resume the story of what occurred. After the payment of the deposit, the applicant instructed Mr Pozniak to act as its solicitor on the transactions of purchase and lease, as he had done in relation to previous restaurants. According to Mr Pozniak himself, his partner warned him, and warned Mrs Winters and Mr Piper, that Mr Griff was "extremely difficult to deal with. If you want my advice you won't deal with him at all." Nevertheless, they proceeded. A draft lease was received from Mr Griff's solicitors on about 20 August 1990, and a copy of the proposed agreement for sale of business was received from Mr Hill's solicitors on about 21 August 1990. Mr Pozniak advised Mrs Winters concerning the terms of these documents. On 30 August, he had a detailed conference with her. It was arranged that the lease would be conditional on the transfer of the liquor licence within three months.
Mr Pozniak assumed that the only licence of concern to Mrs Winters was a restaurant licence. The lease provided, and he had advised Mrs Winters accordingly in writing on 22 August 1990, that the "permitted use of the demised premises is that of a Restaurant". This, of course, is an important point, but the implication that Mrs Winters should have appreciated she would not be able to conduct a nightclub or discothèque in conjunction with the restaurant is not very convincing when the other evidence in the case is taken into account. The Cafe Royale had operated under a similar lease, and the business of Il Fiasco, which certainly included a nightclub even on the respondents' evidence, was also called a restaurant. It was that business, according to Mr Griff, which was sold on 29 May 1987 "by Travelly Pty Limited [a company of which he and his son Robert were directors] to the third respondent", i.e. Tibiki. In the agreement for sale, those companies referred to the nature of the business of Il Fiasco as "RESTAURANT". Even the circumstances of this case do not seem to have been sufficient to cause Mr Griff to see matters differently. For when Menmel leased the premises again after they had been thrown back on its hands by the applicant, undoubtedly with the intention that live entertainment should take place there pursuant to an entertainment licence specially obtained at some expense, the description of the premises and the permitted use stated in the new lease remained the same. It may be that, nevertheless, the true construction of the lease involves a limitation, which might or might not be subject to removal in proceedings for rectification, but I do not think this bears on the question of misleading conduct, nor does it deny the nature of the use that the parties actually contemplated. It is apparent that the directors of both Menmel and the applicant thought the business would be sufficiently described as a restaurant business, even if entertainment and liquor without meals were also to be provided.
The agreement for sale of business contained a series of provisions dealing with the transfer of "the On-Licence (Restaurant) Serial No. 404103 (the 'licence') in respect of premises situated at 36-38 Bayswater Road, Kings Cross and known as 'Cafe Royale'". The sale did not include the name "Cafe Royale". It was conditional upon the grant of a new lease to the applicant. Cl.17 of the agreement provided (inter alia):
"17.1The Purchaser shall on Completion, subject to the consent of the supplier, take over (either by way of assignment or by way of a new agreement with the supplier consequent upon the surrender by the Vendor of the existing agreement) the benefit of the Vendor's Equipment Lease Agreements as set forth in Annexure A hereto relating to equipment not owned by the Vendor and to the supply of services as set out in Particular S of this Agreement. The Vendor and the Vendor's Guarantors named herein shall on and from Completion indemnify and keep indemnified the Purchaser in respect of all liabilities under the Agreements arising after Completion, and the Vendor shall pay all interest and other payments
arising out of the said Equipment Leases.
17.2The Vendor shall within one (1) year from the date of Completion of this Agreement pay out all moneys owing under the abovementioned Equipment Leases and shall provide to the Purchaser evidence of the same by that date.
17.3On Completion, the Vendor shall deliver possession to the Purchaser of the plant and equipment described in the above described Equipment Leases."
Annexure A listed five leases, copies of which were attached to the contract. On the face of those documents, the equipment to be acquired included many items not ordinarily found in a restaurant, but that would be ordinarily found in a nightclub or discothèque. Among these items were a "starburst", "turntable", "disco console", "disco-strobe", numerous articles related to spotlights, speakers and amplifiers, an item described as "2 x Speaker Dance Floor", and another "1 x Amplifier to Control Dance Floor Speakers".
The business sold included (by cl.4) "the goodwill and all plant, fittings, chattels and fixtures used by the Vendor in connection therewith as set out in the Inventory". The Inventory was divided into sections such as "RECEPTION", "DINING ROOMS", "DISCOTHEQUE" etc. Under the last heading were shown the following:
KENWOOD CASETTE (sic) PLAYER
TECHNICS RECORD PLAYERS
PRO SOUND SOUND MIXER
PULSAR MODULATOR
DYNALITE MATRIXMIX
AMPLIFIERS
ELECTRONIC CROSSOVER
TEAC GE20 EQUALISER
SEEBURG AMPLIFIER
LIGHT CHASER
STROBE LIGHT
MUSIC TO LIGHT MODULATOR
SPEAKER CONTROL BOXES"
These items are consistent with the heading itself which, as a matter of language and in such a context, refers to a "place ... at which recorded pop music is played for dancing" (see The New Shorter Oxford English Dictionary (1993) under "Disco" and under "Discothèque"). There were also listed, in additions handwritten at the end of the Inventory, eleven "Televisions" and three "Video Recorders".
If Mr Pozniak read the portions of the contract to which I have referred, he must have appreciated that there was at the least a possibility that the premises the subject of the contract were set up, not merely as a restaurant, but also for entertainment. In particular, the group of items in the inventory under the heading "DISCOTHEQUE" must have suggested this quite strongly. But Mr Pozniak denied reading the inventory. He said he received it either on the day of exchange or the day before and simply annexed it to the contract without reading it. He said this notwithstanding that it was he who forwarded the draft of the inventory to the vendor's solicitors a week earlier, and that on 28 August 1990 he wrote to them requiring the addition of two further specific items which "the Inventory should include". He claimed to justify his stated approach to his task as a solicitor on the basis that it was for his client to check the inventory, he not having inspected the premises. He was then asked and answered the following questions:
"And if you had read the word 'discothèque' that would have sent alarm bells ringing to you, would it not?.... It might have - it might have, not necessarily because what I knew she was doing was a restaurant. The fact that there is some antiquated equipment left in the restaurant by Mr Hill, it's obviously stuff that he didn't want to take, doesn't mean to say you can't automatically follow on that it's going to be a nightclub or a discotheque.
What makes you assume A, it is antiquated and, B, he did not want to take it? ... Well, I'm assuming that because the Cafe Royale to me was a restaurant; there was no dancing or live entertainment at the Cafe Royale. What I understood Denise Winters [was] doing was purchasing the Cafe Royale restaurant; the fact that it had once been used as a nightclub many years before that didn't cause me to ring any alarm bells.
And that belief that Cafe Royale was only a restaurant colours your judgment in this matter, did it not Mr Pozniak? ... No, no, Denise had had a history of restaurants only."
It will be observed that these answers concede that the word "DISCOTHEQUE" might have alerted him if he had read it. The balance of the answers consists of quite inadequate attempts at self-justification. The equipment was not antiquated, as I have already pointed out, since it satisfied the experts Mr Louison and Miss Roe, who did not suggest there was anything at all wrong with it. Nor was it the point put against Mr Pozniak that it automatically followed the place was going to be a nightclub or a discothèque; simply that a question was raised which a prudent solicitor was bound to clarify. Any question in relation to this transaction required to be clarified with special care because of the warning received from Mr Pozniak's partner. And it was not true that there was no dancing or live entertainment at the Cafe Royale. In fact, on the evidence which I accept, there was. The one accurate statement, that Mrs Winters had had a history of restaurants only, should have caused Mr Pozniak to appreciate that she might have need of full and proper legal advice if this transaction involved premises where entertainment was provided.
On the following day, Mr Pozniak gave further evidence concerning this matter. He said "there was a great confusion as to what equipment was in the restaurant, what was not, because they were all subject, or most of it was subject to these equipment leases." Some of the items referred to in the equipment leases, as I understood his evidence, had been taken from the premises prior to the sale and installed in other premises of the vendor. That, of course, may have introduced doubt as to whether particular items referred to in the leases were included in the sale. But the contract is quite clear that the inventory lists items which were included in the sale. Almost immediately after the exchange on 30 August 1990, Mr Pozniak wrote a letter dated 3 September 1990 in which he drew specific attention to the problem of including leased equipment in a contract of this nature. He wrote:
"We confirm that this transaction is most unusual in that you have in effect agreed to buy equipment which is not owned by the vendor at this stage. Notwithstanding, we confirm your advice to proceed to exchange on the above securities."
(The securities were personal guarantees and an equitable mortgage.) The letter says nothing at all about any difficulty in identifying the items the subject of the contract, or about any problem with the inventory itself. When this was pointed out to him, Mr Pozniak responded that he "had no idea what equipment they were retaining and what equipment they were not retaining". But any suggestion that Mrs Winters was not really interested in the bulk of the equipment covered by the equipment leases seems inconsistent with a note Mr Pozniak had made on 23 August 1990, just one week before exchange, on a copy of a letter by which (inter alia) he forwarded a draft of the inventory to the vendor's solicitors (an action that would normally imply he was aware of the inventory's terms). The note makes it clear that Mrs Winters was concerned to obtain good title to the equipment covered by the equipment leases of which, at that stage, she was contemplating taking assignments. Despite Mr Pozniak's stated concern about the eventual arrangement reached in respect of the equipment leases, he gave evidence in cross-examination that he "never went through the equipment leases". He said "the equipment was something that was left to the parties".
There is no dispute that if, at a restaurant, there were also a bar and discothèque where liquor was supplied in association with the playing of music and dancing, the normal restaurant licence would be insufficient. Both the provision of entertainment and the supply of liquor otherwise than in association with a meal would require the grant of a special permission. From 4 February 1985, pursuant to s.89 of the Liquor Act 1982 (N.S.W.), the Liquor Administration Board was able to grant, to the holder of a restaurant licence, authority to use an area on the licensed premises for the provision of entertainment, including music for dancing. The Liquor (Entertainment Areas) Regulation 1985 provided for this. On 1st September 1990, s.89 and those regulations were repealed, and the Local Government Act 1919 (N.S.W.) was amended by the Local Government (Theatres and Public Halls) Amendment Act 1989 (N.S.W.). Relevantly, the principal effect of the changes which came into operation on 1st September 1990 was to remit the question of authorisation of entertainment to the local government body responsible for the area in which the premises were situated - in this case South Sydney Council. Both before and after 1st September 1990, entertainment and the supply of liquor other than in association with a meal required, as I have said, special authorisation. After 1st September 1990, s.317JG of the Local Government Act made a person, who was responsible for permitting entertainment upon the premises without the appropriate authority, liable, in the case of a corporation, to a fine of $2,000-00.
I accept the evidence of the witness Tony Schwartz, a solicitor specializing in liquor licensing matters who is also an associate member of the Australian Hoteliers Association and the Restaurant & Caterers Association, to the effect that liquor sales at licensed premises are generally greatly increased when an entertainment authority is held. Indeed, Mr Griff's evidence was that such an authority "could be ... a money winner".
In my opinion, if Mr Pozniak had acted with reasonable care as solicitor for the applicants, he would have examined the inventory and the equipment leases, and would have become aware that there was a real possibility of illegality being involved in the conduct of the restaurant in the manner contemplated by Mrs Winters, unless the required authorization could be obtained. Had Mrs Winters been advised of the true position, I have no doubt that she would have insisted, as she said she would, upon an appropriate condition being inserted in the agreement of purchase and in the lease. It was a major part of the attraction of the premises for her that Il Fiasco had been so successful, and she would have been anxious to secure the advantages which Il Fiasco had in fact enjoyed (although, it now appears, in breach of the law). What the applicant has lost is the opportunity of raising this objection, and thereby securing a better deal, or perhaps avoiding entry into the transaction altogether.
Substance is added to the latter possibility by a consideration of some of the preceding and succeeding events. Mr Griff had previously refused the request of Mr Hill, during the time of Cafe Royale, to consent to an application made with a view to the obtaining of an entertainment licence. That was even although he regarded Mr Hill, he said in evidence, as a good tenant. Subsequently, when Mrs Winters discovered, too late, her predicament, Mr Griff proved dilatory and obstructive. Had he evinced these characteristics during the negotiation stage of the transaction, it is likely that the view of him held by Mr Pozniak's partner would have been heeded, and the lease would never have been entered into. Weighing up all these considerations, I conclude that this would have been the most probable outcome if the misleading conduct had not occurred, or Mr Pozniak had exercised reasonable care.
In the event, Mr Pozniak did not give any consideration to the question whether his client would require an entertainment approval or authorization to supply liquor not in association with a meal. The purchase was completed and the lease, although there was some delay, was ultimately executed in November. On 16 October 1990, as I have stated, the applicant's restaurant opened under the name The Great Australian Bite. In the early stages, there was no special promotion of the discothèque, and the advertising put out by the applicant referred simply to a restaurant. The respondents built on this a contention that there was not, at that time, a discothèque conducted by the applicant, and that Mrs Winters did not intend to have one. But on all the evidence, I conclude that the discothèque did operate, though without the impetus of any specialized professional organizer, from the beginning, or almost from the beginning. My acceptance of the evidence of Mr Shierny and Miss Roe makes this finding inevitable, and it is in accord with my view of the reasons that influenced the applicant in the first place to open its restaurant there.
By January 1991, Mrs Winters had decided that the discothèque needed a more polished presentation in order to boost that side of the business. She arranged to engage Mr Louison and Miss Roe. But just as they were about to commence their nightclub promotion in the premises, the Council of the City of South Sydney sent a letter dated 28 February 1991, addressed to the proprietor of the Cafe Royale restaurant, containing the following:
"Arising from the introduction of new statutory legislation on 1st September, 1990, Local Councils are now responsible for the assessment and determination of applications for authorisation of places of public entertainment pursuant to the requirements of Part 62 of Ordinance No. 70.
Accordingly, I have to advise that it has come to the Council's attention that the subject premises is currently being used/proposed to be used as a place of public entertainment.
In accordance with the above you are now required to complete a Building Application form and an application form for Places of Public Entertainment (copies enclosed) and submit them to Council with the prescribed fee.
Relevant application forms for lodgement with Council are enclosed herewith.
You are further advised that under Section 317JG of the Local Government Act 1919, you are prohibited from conducting public entertainment within your premises unless authorised to do so by Council. In view of the above it would be in your own best interest to lodge the attached applications if you do intend to conduct public entertainment on your premises."
Shortly afterwards, Mrs Winters called at the Council Chambers to see someone about the problem, who may or may not have been Mr Koloadin. Mr Koloadin certainly came out to the premises, but as I have already made clear, I do not accept the detail of his account of that visit. He also wrote a note suggesting that there was no entertainment at the premises, a note which is dated 13 March 1991, immediately after Mr Louison and Miss Roe had been conducting a nightclub there for two Friday nights. Of course, he may have been misinformed, or he may have been confused. The latter possibility cannot be discounted. At any rate, on 18 March 1991, Mr Koloadin recorded that he had inspected the premises on 14 March and that Mrs Winters had advised she "would be lodging an application for entertainment in the not too distant future". In the meantime, it is clear that the applicant had no alternative but to cease the then current nightclub promotion.
Unfortunately, the problem of entertainment approval had arisen at the very time when the applicant was having trouble with its landlord over what was alleged to have been quite significant storm damage, and over other matters. From the beginning, according to Mr Griff himself, relations had been strained. The documentary material includes a facsimile letter from the applicant to Mr Griff dated 29 January 1991 containing itemized details concerning the storm damage, stating that the water entered through the ceiling directly below "the unused portion of the building", assessing the damage as "in the order of $5,000-00", and asking for the provision of "a key to the upstairs so we can allow access to whatever tradesmen/assessors as may be required". Mr Griff's response appears to have been to send a facsimile note to his solicitor taking up quite pedantically the terms of the communication as well as those of another letter, and concluding:
"DO YOU THINK ANY OF IT WORTH A REPLY? ADVISE ME WHO IS RESPONSIBLE UNDER LEASE TERMS."
The language of this note reveals quite plainly the state into which the relationship had degenerated, and the attitude of Mr Griff.
Mrs Winters sought, as I shall recount, the consent of Mr Griff to the obtaining by the applicant of an entertainment approval. There was some dispute about how promptly she sought this consent, the respondents contending that there was a long delay which provided, they argued, evidence that the applicant was not running a discothèque and had not actually decided to do so. However, it seems to me that this argument was turned on its head by the evidence which accumulated during the case to show that in reality the applicant was
running a discothèque and had engaged outside assistance to render it more attractive. In that situation, the great probability is that Mrs Winters would have done precisely what she said she did, that is, seek the consent of Mr Griff to her obtaining an entertainment approval.
Mr Griff said in cross-examination that "in May 1991 [he was] considering applying for an entertainment licence for the premises". Asked whether he had discussed it beforehand with Mrs Winters or Mr Piper, he began by indicating that he had done so at about that date, and then said:
"I think we discussed it for quite some time."
He thought the discussions had been prompted by the applicant company, and that he spoke to both Mrs Winters and Mr Piper. Asked:
"Can you recall when you spoke to them?"
He replied:
"Early in 1991, I think."
After some further questions and answers during which Mr Griff said that "the relationship had already - easily - soured in the first couple of months", he was again asked when "the question of the entertainment licence was raised with [him]", and he stated: "It was raised early in the year ... ", i.e. 1991. That evidence was given on a Friday.
On the following Monday, during further cross-examination, Mr Griff said that to "the best of my memory", the question of "the entertainment licence was not discussed either formally or informally until the middle of 1991"; and again, reminded of his testimony on the previous Friday, and asked "so it was early in 1991 that you discussed the question of the entertainment licence, not in May and June 1991" he answered: "No, I can't agree to that." But the evidence reveals an even greater contradiction with regard to this matter. In a letter dated 28 April 1992, Mr Griff's solicitor wrote to the applicants' then solicitors stating that "the first approach by your client to my client in respect of the proposed application was in mid-January 1992". The "proposed application" there referred to was "for entertainment licence". Apart from my general finding that he was an unreliable witness, the evidence plainly shows that Mr Griff has given three different versions of the time when the subject of a crucial issue in the case was taken up with him by Mrs Winters.
Mr Piper gave evidence that he sent a facsimile message to Mr Griff by computer shortly after the receipt of the letter of 28 February 1991. The copy of this message produced is dated 5 March 1991, although there is evidence that facsimiles of this kind were not always accurately dated (Mr Griff queried the obviously erroneous date of another of Mr Piper's facsimile messages in one of his letters). The message mentioned "an Entertainment Endorsement", and asked:
"Why were we not told that this was necessary for the continuing use of the club?"
It indicated that Mrs Winters had been to the Council and ascertained that Mr Griff had been refused such a licence in June 1990, "as you let the application lapse". Mr Griff denied ever receiving this facsimile, but he denied too, when first asked about it, although this denial was withdrawn the next day, receipt of another letter a copy of which was on his file and bore his handwriting. Receipt of yet another communication was also denied. I was at one stage inclined to think that the language of the challenged documents told against their authenticity in being almost unnaturally acrimonious. However, a perusal of the whole of the communications between the parties lends no support to any suggestion that discourtesy in correspondence came unnaturally either to Mr Griff or to Mr Piper. And the landlord who could suggest the ignoring of a request for access to enable a serious leak to be repaired would be apt to provoke acrimony. I have concluded on the evidence, and after observing Mr Griff in the witness box, that he might well have aroused extreme frustration in Mr Piper. Even Mrs Winters, whom I judged much less likely than her brother to give way to the expression of anger, wrote to Mr Griff at one stage: "I find it very annoying that you continually ignore my faxes to you."
It should also be noted that Mr Piper gave evidence, at an early stage of the hearing, admitting that he had never obtained "an acknowledgment from Mr Griff that he had received
this fax", but claiming that he had spoken about the problem raised in it to Mr Robert Griff, who brought to the premises the plans relating to the earlier application, understood by Mr Piper to have lapsed in 1990. Asked about the other communication, to the receipt of which Mr Griff maintained his challenge, dated 14 June 1991, Mr Piper said:
"[I]t was sent to Robert. Mr Griff - Mr Griff wasn't dealing with this at that stage. He'd asked us to deal with his son."
As I have previously pointed out, Mr Robert Griff was not called to give evidence although he was available. That enables the court to accept Mr Piper's evidence more readily, although there was a difficulty about the date of one of his communications, which might, however, be accounted for in one of a number of ways. Mr Piper remained firm under cross-examination, and I do not think his evidence could be rejected on the oath of Mr Griff. In any case, I accept on the basis of the other evidence in the case, and particularly the evidence of Mrs Winters, that Mr Griff was advised promptly about the need for an entertainment approval. His response was that he had never had any problem, and he dismissed the complaint made by Mrs Winters quite curtly:
"That's your concern."
Asked why he had not told her "that there was no permission to operate the nightclub", he replied:
"That's not my responsibility."
Mrs Winters asked Mr Griff to sign an application form addressed to the Council, and he said he would think about it. Later, he told Mrs Winters that if she wanted an entertainment licence she would have to carry out the necessary building work, which was substantial, and pay for it herself, but that he would not consent unless the licence was in his name. He actually said that "he wanted to control it". Mrs Winters was concerned that this situation would leave the applicant having paid out substantial sums, but without control over its own licence. Nevertheless, she arranged for an architect to attend the premises with a view to the making of an application for an entertainment approval. Mrs Winters then telephoned Mr Griff to advise him that the cost would exceed $20,000, but that she would pay for the work provided the entertainment licence was in her name. He replied that he would not consent unless it was in his name. He also said:
"I think I have plans that were previously prepared."
Robert Griff brought the plans round a few days later, together with a rough handwritten note of conditions which Mr Griff would impose on his consent to their submission to the Council. Those conditions included unrelated variations of the lease adverse to the applicant as lessee, the payment of all building and legal costs by the applicant, and "licence to be granted to ... Menmel". Mrs Winters swore that she commented to Mr Robert Griff (who was, I infer on all the evidence, himself a director of Menmel):
"Your father is making demands for alterations to the lease when the entertainment licence was represented as being in existence. I do not agree to any changes to the lease when I am having to make an application for something I thought I had."
This evidence, of course, was not denied. It is consistent, so far as Mr Griff's attitude is concerned, with a letter he wrote on 13 June 1991.
In June 1991 Mrs Winters broke her leg, and was incapacitated for a few months. However, between June and December 1991, she had a number of telephone conversations with Mr Griff in which she again requested that he consent to the application required to enable entertainment to be carried on in the premises. Mr Griff consistently refused unless the applicant paid all the expenses and he retained "complete control". At the hearing, it was suggested that Mrs Winters acted unreasonably in not accepting these conditions. The onus in respect of the mitigation of damages rests, it is recognized, on the respondents. I am neither satisfied that Mrs Winters acted unreasonably, nor that if she had acceded to Mr Griff's demands the problem would have been solved. I do not accept that Mr Griff's word was to be relied on. One of his concerns was that the operation of a nightclub in the premises might affect his ability to let the upper floors of the building (which had remained vacant for between six and eight years); and I am not satisfied that, while ever the rent
was paid, he was prepared to be other than obstructive in respect of any application to the South Sydney Council. I do not think, in the circumstances, that it was less than entirely reasonable of Mrs Winters to wish to have the protection of a licence in her own name if the applicant was to bear all the expense. Furthermore, it is difficult to think that a corporation, which has been guilty of a misrepresentation within the meaning of s.52 of the Trade Practices Act, could claim that an applicant was guilty of failure to mitigate its loss on the basis that it would not submit to the imposition of conditions inconsistent with the very representations constituting the contravention of the Act, together with adverse amendments to its lease. The implied representations proved in this case did not involve the applicant bearing the costs of substantial alterations to the premises, while conferring control of the licence upon the landlord.
During 1991 and 1992, sporadic attempts were made to run a discothèque or nightclub illegally in the Ward Avenue portion of the premises in some fashion. To the extent that Mrs Winters and Mr Piper sought to conceal this fact (and they gave a number of inaccurate or misleading answers about it), their credit was affected. I have given that serious consideration. However, I have concluded that on the other issues in the case, I should generally accept their evidence, which accords with my view of the probabilities.
In January 1992, a meeting took place between Mr Griff, Mrs Winters and Mr Piper, at which Mr Griff stated he was now prepared to consent to an entertainment licence issuing in the name of Mrs Winters, provided he obtained control upon any sale of the business. The applicant would still have to pay for the work required. It was arranged that this would be put in writing through Mr Griff's solicitor. But shortly afterwards, a letter was received from that solicitor which required the licence to be in Mr Griff's name, and in a conversation following the receipt of that letter he denied that he had ever said otherwise. Not surprisingly, the conversation became heated. Thereafter, on 3 March 1992, Mr Griff's solicitor wrote withdrawing even his previous letter which had indicated a conditional consent would be forthcoming. Mr Pozniak, as the applicants' then solicitor, responded by a letter dated 9 April 1992 in the following terms:
"We refer to your letter of 3rd March, 1992 in which you advised that your clients are not prepared to support an application for an Entertainment Licence for the premises.
"Our client entered into the Lease dated 20 November, 1990 following several inspections of the premises and conferences with Syd Griff, a principal of your company.
The inspections revealed that the premises contained a large dance floor and a fully equipped disco. Associated with the dance floor was a bar.
During inspections of the premises, Denise Winters and Richard Piper, both directors of our client
company, were advised by Syd Griff that the premises, previously operated as a nightclub, had a turnover of Friday and Saturday nights of $8000.00 per night.
As you are aware, the premises can only be lawfully operated as a nightclub/disco if they hold a current Entertainment Licence. Without such a licence the use of the premises is severely restricted and the takings greatly diminished. At no time prior to entering into the Agreement to purchase the business (30 August, 1990) previously conducted by Tibiki Pty Limited or the Lease, were our clients advised that, not only did the premises not have an Entertainment Licence, but that they did not comply with the preconditions necessary for the issue of such a licence.
Our client would not have;
(a) entered into the Contract to purchase the business,
(b) paid the purchase consideration of $100,000.00, and
(c) signed the Lease,
had it not been for their expectation that the conduct of the nightclub/disco from the premises was lawful and could continue."
The letter went on to allege (inter alia) contraventions of the Trade Practices Act by Menmel and aiding and abetting by Mr Griff, in respect of which it threatened these proceedings. Finally, there was a call on Menmel to co-operate in reducing the damages through the obtaining of an appropriate entertainment licence in the name of the applicant.
It is noteworthy that the assertion of the existence at inspection of "a fully equipped disco" does not stand well with the evidence given during the hearing by Mr Pozniak, when he suggested in effect that the premises had not for "many years" been used as a disco, and that any disco equipment would have been antiquated so as to be virtually worthless. I have already made it clear that I do not accept that evidence, preferring the evidence of Mrs Winters, supported by a number of witnesses. I also accept her evidence that she did not receive notice from Mr Pozniak of any problem related to the liquor licence or the right to carry on in the premises activities involving entertainment. Nor did she receive the on-licence itself until, at earliest, well after the transaction was finalized. When the arrangements were made with Mr Louison and Miss Roe, early in the new year, Mrs Winters was still unaware of any obstacle to their fulfilment.
From early in 1992, the applicant attempted to sell the business. It was unsuccessful. Both in 1991 and in 1992, very substantial losses were suffered. Finally, at the end of December 1992, the applicant abandoned the premises. Eventually, but only after the lapse of a considerable time and the carrying out of work to enable an entertainment authority to be obtained, Menmel was able to achieve a re-letting.
On the facts which I have found established, Menmel contravened the provisions of s.52 of the Trade Practices Act, and in its contraventions Mr Griff was a knowing and intentional participant. The applicant company, through Mrs Winters and Mr Piper, relied on the express representations of Mr Griff and on the implied representations arising, in the absence of any corrective statement, out of the state of the premises when inspected by them with him, and arising out of the history of the premises, which was known to them. Mr Griff knew that history intimately, and also knew that Mrs Winters would be likely to know the relevant facts; indeed he made reference to them in what he said to Mrs Winters and Mr Piper directly. They relied on these representations in entering into the transactions of purchase and lease, which would not otherwise have been concluded without substantial alteration. Given the attitude maintained by Mr Griff, I have found it is established on the probabilities that if the misleading conduct had not occurred the transaction would not have been concluded at all. On this basis, I think the expenses incurred by the applicant company and the losses sustained by it flowed from Menmel's misleading conduct.
I have also found that Mr Pozniak failed to exercise due care in and about the transaction, and that if he had exercised due care it is more probable than not that the misleading conduct would have been revealed for what it was in time. Accordingly, the fifth respondents are also liable for the applicant company's losses.
A number of issues remain to be resolved. The applicants seek relief under s.87 of the Trade Practices Act, and logically this question must be considered first, since any remedy granted in respect of the lease must have a bearing on the appropriate measure of damages. The case seems to me to be clearly distinguishable from Henjo Investments Pty Limited v. Collins-Marrickville Pty Limited (No 1) (1988) 39 FCR 546. In that case, which also involved the taking of a lease of premises where a restaurant was conducted, Lockhart J. said (at 562) that account must be taken of the considerable changes suffered by the business after the applicant had acquired it. He said:
"The business of the New York Deli has run down since its ownership passed to Collins-Marrickville and the business has changed from one that was making a substantial profit into one with losses between $14,000 to $15,000 per month. The number of customers has declined during the past two years and the goodwill of the business must have been adversely affected. Restitution involves the handing back to the former owner of a business which has for some two years or so been in other hands and conducted in a different way, some of the differences being quite substantial. The restaurant trade is notoriously volatile."
His Honour recognized (at 564) that:
"In granting a remedy under s 87, the court is not restricted by the limitations under the general law of a party's right to rescind for breach of contract or misrepresentation."
But he added:
"Nevertheless, in exercising its discretion under s 87, the court will consider the conduct of the parties after they had knowledge of the misleading quality of the conduct ... ."
In expressing my agreement with his Honour's reasons and with orders which denied the remedy of rescission under s.87 in the circumstances of that case, I referred (at 568) to the "many possibilities of injustice to other parties" which that remedy would there have entailed. The view of the law explained in Henjo (No 1) was accepted, though the outcome was different, in JAD International Pty Ltd v. International Trucks Australia Limited (1994) 50 FCR 378, where the joint judgment of the Full Court (Keely, Hill and Drummond JJ) states (at 380):
"The power of the Court to grant relief under [s. 87] is wider than the power of the equity court to grant rescission: the bars to rescission in equity, such as affirmation and the non-availability of restitutio in integrum, are no more than discretionary matters that the Court will take into account in deciding whether in a given case to grant relief under the statutory provision ... ."
The facts of this case may be starkly contrasted with those of Henjo (No 1). Here, the applicant company did not take over an existing restaurant, only to change it substantially and see it run down, but premises in which a restaurant had already failed. While Il Fiasco had been successful, that success had been achieved some time earlier, and by means involving illegality; if the law was to be heeded, or obedience to it was to be enforced, the success could not be repeated without a change of attitude on the part of Mr Griff so as to enable an entertainment authorization to be obtained. In the event, the lease did continue for a significant period, until after the applicant company abandoned the premises in December 1992, but eventually that abandonment was accepted and the premises were re-let. The principal, if not the only, significance of an order
rescinding the lease as at the date of the abandonment would be to set a term to the rental liability under it. In my opinion, it is appropriate I should exercise my discretion to order that the lease be set aside as at and from 31 December 1992. It was conceded it could not, in the circumstances of this case, be simply set aside, with the complex problems of restitution which that would entail.
I turn to the question of damages. The applicant company seeks, first, reimbursement of the sum of $164,551 expended in the repair and renovation of the premises, and the sum of $120,000 attributed in the contract to the equipment taken over, and paid on that account. Although I do not think anything was put about this in argument, some small allowance should, of course, be made for whatever residual value any of the equipment may have had. I think this would have been extremely small, and it is most convenient to deal with it by taking it into account in the assessment of an allowance for contingencies. An allowance will also need to be made for interest.
The controversial aspect of the damages is the appropriate amount to allow in respect of the large losses incurred by the applicant company. The respondents contended that the applicant had failed to mitigate these losses; that, although they did not dispute the collapse of the business, the extent of the losses alleged should not be accepted; that the losses did not flow from the misrepresentations alleged; and that the credit of Mrs Winters and Mr Piper was relevant on this as on other issues. A number of related questions were raised.
The doctrine of mitigation of damages poses some problems in this case. Undoubtedly, the applicant company pursued the business of the restaurant for substantially longer than would have been justified had it been reasonably practicable simply to wind up that business. But it was not reasonably practicable to do so. The company was saddled with a lease that bound it for five years at a rental that was conceded in argument to be "very high" even on the respondents' own evidence. I conclude that this rental was actually prohibitive, and I readily accept the applicants' case that, when it did attempt to extricate itself, it was unable to sell the business. No sensible person would have taken an assignment of that lease. The difficulties of a case of this kind are well illustrated by Henjo Investments Pty Limited v. Collins Marrickville Pty Limited (No 2) (1989) 40 FCR 76. But there it did prove possible for the lessee eventually to find someone willing to take over the lease, and the trial judge held as a fact that, in all the circumstances, as I noted in my judgment at 86, "the only reasonable course for the [lessee] to take, as at [a particular date], was to close down the restaurant", notwithstanding that "it would have been confronted with the grave problem of a continuing liability to meet its obligations under an uneconomic lease". Here, I reach a different factual conclusion. I do not think the respondents have discharged the onus of establishing that the applicant company, bound as it was by a lease on which Menmel was insisting, unreasonably failed to mitigate its damages by continuing the finally unavailing struggle to maintain the restaurant. There is no suggestion that any of the respondents called upon the applicant company to abandon its efforts. On the contrary, through Mr Griff's evidence, the appropriateness of the rental provided for by the lease was maintained, even at the hearing. Certainly, I do not think that in the circumstances of this case it lay in the mouth of Mr Griff to say that the applicants acted unreasonably in this respect.
The trading figures put before the Court indicated that the restaurant was always unprofitable. Relying on this fact, the respondents submitted that the inability of the applicant company to operate a discothèque continuously, openly and without fear of prosecution after March 1991 could not have affected profitability. The company's operations had been almost equally unprofitable before that date. I think there are two answers to this proposition. One answer is that commonly a new business takes time to build up and become established. In this case, I accept evidence that the applicant company's experienced directors expected to incur losses for a substantial period. Mrs Winters said it was "not unusual" for a restaurant to take up to twelve months to establish a name in a location and gain a regular clientele. The other answer is that the point is irrelevant. For I have found, on the probabilities, that the company would not have entered into the transactions of purchase and lease if the misleading conduct had not occurred, or if Mr Pozniak had not been negligent. Therefore the assessment of damages is not limited to losses that flowed from the inability to operate a discothèque in the optimum manner, but should include all losses that reasonably and naturally flowed from the transactions. Except in a respect to which I shall advert, this case bears no resemblance to Netaf Pty Ltd v. Bikane Pty Ltd (1990) 26 FCR 305, where the misguided management decisions made by persons wholly unfamiliar with the relevant industry made it impossible for the applicant to show that certain losses were fairly attributable to the misleading conduct found. Here, on the contrary, Mrs Winters was experienced and very competent, so that, subject to the matter to be mentioned, the losses should be regarded as inherent in the business undertaking entered into by reason of the misrepresentations and negligence.
The question I have just put to one side should now be discussed. There was evidence of a series of burglaries and of the infliction of substantial malicious damage. Not much attention was paid to these matters at the hearing, nor was there any discussion of the problem whether a proper assessment of the effect of them would have to take account of any insurance cover, but losses suffered in this way could certainly in some circumstances be seen as not causally related to the source of liability. However, in other circumstances, losses of this kind might fairly be regarded as inherent in the operation of a business, or as appropriately falling within the range of things considered under the heading of contingencies. In the present case, I intend to take the matter into account when assessing the amount of a deduction for contingencies.
The applicant company relied, to establish its losses, on its profit and loss accounts, verified generally by Mrs Winters and explained by expert evidence. A chartered accountant, Mr Bruce Houston, who is a Fellow of the Institute of Chartered Accountants of Australia and a partner in the firm of Ruwald & Evans, gave evidence that he had audited the company's accounts in accordance with Australian auditing standards, including examination, on a test basis, of evidence supporting the amounts in the statements, but without evidence, such as till tapes, to enable verification of takings. Although Mrs Winters was cross-examined at very great length, nothing emerged from her cross-examination by way of a challenge to the honesty of the primary records of takings. Mr Houston said that "it is not unusual for till tapes (cash register records) and stock sheets not to be kept where an audit is not anticipated". The audited figures produced by Mr Houston showed a net loss in the period from 16 October 1990 to 30 June 1991 of $215,802, in the year ended 30 June 1992 of $324,789, and in the six months to 24 December 1992 of $329,608, a rounded total of $870,200.
For the respondents, Mr Grech, who is also a Fellow of the Institute of Chartered Accountants, and who is a partner in the firm of Crispin & Jeffery, analysed the details of the accounts, to derive the conclusion that the profit margin of the restaurant was lower than he would have expected. He estimated that a restaurant in Kings Cross should have achieved a profit margin between 65% and 70%. If the figures were adjusted on that basis, the loss would be, not $870,000, but $640,000.
In some cases, evidence of the nature of that adduced by Mr Grech might lead to a conclusion that the proprietor of a restaurant had extracted some part of the takings in cash. However, having regard to the nature of the cross-examination of Mrs Winters and Mr Piper, and my conclusions about them, I could not accept such an explanation in the present case. Alternative explanations come fairly readily to mind, and were not explored in any systematic way by counsel for the fifth respondents or by Mr Griff, who appeared during the relevant part of the hearing in person, although later he was represented by Mr A.B. Shand, QC and Miss R.P. Rana. It is, of course, possible that the explanation involves losses through the occurrence of contingencies, such as gross mismanagement of pricing or thefts by employees, for which the respondents should not be held liable.
An allowance for contingencies in this case should also cover what Lockhart J. (in Henjo (No 1) at 562) called the notorious volatility of the restaurant trade, and should take account of the location of this restaurant in the Kings Cross area.
Having regard to all of the matters for which I have held allowances should be made, and bearing in mind also that not all contingencies are adverse, I conclude that a fair amount to award in respect of the losses sustained by the applicant company is $600,000. To that amount should be added the sums of $164,551 and $120,000 previously mentioned, and an appropriate figure for interest. Interest should, in accordance with the usual practice of this court when sitting in Sydney, be calculated at the rates adopted by the Supreme Court of New South Wales during the relevant periods, and the calculation should take account of the different periods during which the losses were sustained. The first, second and fifth respondents must pay the costs. The only order I make at this stage is that the applicants bring in, on a date to be fixed, short minutes of orders appropriate to be made in the light of these reasons.
I certify that this and the preceding forty-eight (48) pages are a true copy of the Reasons for Judgment herein of his Honour Justice Burchett.
Associate:
Date: 24 June 1996.
Counsel for the Applicants: Mr D.L. Warren
Solicitors for the Applicants: Michael Conley
Counsel for the 1st and 2nd Mr A.B. Shand, QC
Respondents: and Miss R.P. Rana
(ultimately, but these respondents were not represented by any
legal practitioner
until the last two
days of the hearing)
Solicitors for the 1st and 2nd Messrs Gye Perkes Respondents: & Stone
Counsel for the 5th Respondent: Mr M.A. Pembroke
Solicitors for the 5th Respondent: Mallesons Stephen
Jaques
Dates of hearing: 7,8,9,10,13 & 14/3/95
26, 27/6/95
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