Trampoline Enterprises Pty Ltd v Fresh Retailing Pty Ltd and Burra Foods Pty Ltd
[2018] VCC 399
•16 May 2018
| IN THE COUNTY COURT OF VICTORIA AT MELBOURNE EXPEDITED LIST | Revised Not Restricted Suitable for Publication |
Case No. CI-14-05639
| Trampoline Enterprises Pty Ltd | Plaintiff |
| - and - | |
| Fresh Retailing Pty Ltd and Burra Foods Pty Ltd - and - Fresh Retailing Pty Ltd - and - Trampoline Enterprises Pty Ltd Franchised Food Company Pty Ltd Stanley Gordon | Defendants Plaintiff by counterclaim First Defendant by Counterclaim Second Defendant by Counterclaim Third Defendant by Counterclaim |
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JUDGE: | Lewitan | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 8, 9, 10, 11, 12, 15, 16, 17 and 18 May 2017, 29, 30 and 31 January 2018, 1,8, 9 and 12 February 2018 | |
DATE OF JUDGMENT: | 16 May 2018 | |
CASE MAY BE CITED AS: | Trampoline Enterprises Pty Ltd v Fresh Retailing Pty Ltd and Burra Foods Pty Ltd | |
MEDIUM NEUTRAL CITATION: | [2018] VCC 399 | |
REASONS FOR JUDGMENT
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Subject: Sale of Franchise Agreement
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff and the Defendants by counterclaim | Mr I Upjohn QC and Mr P Caillard | Comlaw Solicitors |
| For the Defendants and the Plaintiff by counterclaim | Mr J Whelen | MGA Lawyers |
INDEX
| Paragraph numbers | |
| Introduction | 1 - 20 |
| Plaintiff’s challenge to Independent Accountant’s determination | 21 - 65 |
| Plaintiff’s claim for damages for defective Fro Yo Yoghurt powder | 66 - 93 |
| The St Kilda Store bank guarantee | 94 - 116 |
| The Earn Out Deed | 117 - 169 |
| Breach of confidentiality | 170 - 199 |
| Loss and damage for faulty Plant and Equipment | 200 - 252 |
| False and misleading representations and conduct | 253 - 304 |
| Unconscionable Conduct | 305 - 332 |
| Damages | 333 - 427 |
| Conclusion | 428 - 434 |
| Orders | 435 |
1 Fresh Retailing Pty Ltd (Fresh Retailing) owned the Trampoline franchise business, selling gelato and ice cream products. By an agreement dated 4 September 2013 Trampoline Enterprises Pty Ltd (Trampoline Enterprises) agreed to purchase the assets and business of the Trampoline franchise business from Fresh Retailing (the Asset sale and purchase agreement).[1] Pursuant to the Asset sale and purchase agreement the plaintiff took over a business with 12 existing Trampoline stores. Of those, six were ‘company owned’ stores (Brighton, Chadstone, Fitzroy, Knox, Southgate and St Kilda). The ‘plant and equipment’ sold under the Asset sale and purchase agreement comprised the plant and equipment at these company-owned stores.[2] The remaining six stores were franchised to third parties (Camberwell, Darwin, Darwin Waterfront, Doncaster, Malvern and Royal Children’s Hospital).[3] Settlement of the sale of the business was to occur on the completion date, 30 September 2013 (the completion date).[4] A number of disputes have arisen between the parties in connection with the sale of the Trampoline franchise business by Fresh Retailing to Trampoline Enterprises.
[1] Exhibit 1.
[2] Exhibit 1, clause 1.1(61) which refers to an “indicative list” at Schedule 9.
[3] Exhibit 1, Schedule 7.
[4] Exhibit 1, clause 17.
The parties
2 Burra Foods Pty Ltd (Burra) is a milk processor. It buys milk from the farm gate and supplies ice cream pre-mix base for use in the Trampoline franchise business. Burra and Fresh Retailing are related parties. They have a common director, Grant Crothers (Crothers), and common ownership.
3 Burra collected milk off farm and pasteurised it. Burra added flavours and additives to the milk. The flavours came from half a dozen suppliers. The major supplier was PreGel. Burra purchased the additives from PreGel and PreGel would give Burra a rebate. Burra processed the milk and additives through its ESL plant (Extended Shelf Life) plant and packed it into 8.5 kilogram bladders which it put in a box. Burra would supply the finished, flavoured and coloured product to the Trampoline stores and Burra would pay a rebate to Trampoline Enterprises.[5]
[5] Transcript pp 404 - 405.
4 The sole director of Trampoline Enterprises is Stan Gordon (Gordon). Gordon and Ryan Alain Maletsky (Maletsky) are the directors of Franchised Food Company Pty Ltd (Franchised Food Company). Franchised Food Company is a multi-brand franchisor which owns various brands including Cold Rock, Mr Whippy and Pretzel World. The Cold Rock franchise sells ice cream products from retail stores. Franchised Food Company now owns Trampoline Enterprises.[6] Maletsky is the chief financial officer of Trampoline Enterprises and Franchised Food Company.
[6] Transcript p 98.
5 Cold Rock and Trampoline are both in the ice cream business. Cold Rock sells ice-cream with confectionary mixed in. Trampoline sold a high end gelato which was a consistent product across the entire network of Trampoline stores.[7]
[7] Transcript p 99.
6 The Cold Rock franchise has about 110 stores across Australia. It has two stores in Vietnam and is about to open a further two businesses overseas.[8] Cold Rock has one supplier, Bulla Dairy Foods (Bulla), for its base mix.[9] Bulla supplies the base mix to five factories in four states who manufacture flavoured ice cream and deliver it to stores.[10] The franchisees then open up the ice cream and add confectionary to it in front of customers.[11] The franchisees pay royalties to Cold Rock of about six per cent. They pay a marketing levy of two per cent. Cold Rock also receives rebates from Bulla.
[8] Transcript p 149.
[9] Transcript p 149.
[10] Transcript p 150.
[11] Transcript p 151.
7 Crothers approached Gordon in mid-2013 with a proposal for Burra to supply the Cold Rock base mix.[12] Gordon had previously met Crothers in 2008 or 2009 when Gordon was trying to raise funds to purchase Cold Rock.[13]
[12] Transcript pp 99 and 103.
[13] Transcript p 153.
8 In the course of those discussions, Gordon raised a different proposal, namely a proposal to buy the Trampoline franchise from Fresh Retailing.
The sale of the Trampoline franchise business
9 Negotiations for the sale of the Trampoline franchise business were primarily conducted by:
(a) Amanda Walton (Walton) and her husband, Crothers, on behalf of Fresh Retailing as vendor; and
(b) Gordon on behalf of Trampoline Enterprises as purchaser. Maletsky, an accountant, became involved in some of the due diligence financial work.
Terms of the Asset sale and purchase agreement
10 The purchase price was $797,677 plus the Completion Net Working Capital.[14] The Asset sale and purchase agreement recorded the parties’ agreement that the price of $797,677 was apportioned as follows: $503,650 for Plant and Equipment, $293,027 for Recipes and Goodwill, and $1000 for the balance of the Assets.[15] The purchase price was to be paid to Fresh Retailing in four instalments as set out in Schedule 12 of the Asset sale and purchase agreement. The final instalment of $200,000 was due on 28 February 2015.[16]
[14] Exhibit 1, clause 1.1(66).
[15] Exhibit 1, clause 4.2.
[16] Exhibit 1, clauses 4.1, 4.3 and Schedule 12.
11 The “Completion Net Working Capital” was to be ascertained via the “Completion Statement”. Under clause 11 of the Asset sale and purchase agreement the purchase price could be adjusted after completion (30 September 2013) depending primarily on the value of stock. Any disputes concerning the Completion Statement were to be determined by an Independent Accountant.[17]
[17] Exhibit 1, clause 11.
12 The Asset sale and purchase agreement referred to the opening of a new franchised store in Craigieburn.[18] One of the Annexures to the Asset sale and purchase agreement was the “Earn Out Deed”.[19] At one point the parties had been contemplating a purchase price of around $1 million, including the Craigieburn store, but at Gordon’s request Craigieburn was separated out and ‘sold’ via the Earn Out Deed.[20]
[18] Exhibit 1 definition of “franchise agreements” at clause 1.1(34(b) and definition of “franchisee” at clause 1.1(35(b).
[19] Exhibit 2.
[20] Transcript p 611, exhibit 1 definition of “agreement” at clause 1.1(1), “earn out deed” at clause 1.1(28), “franchise agreements” at clause 1.1(34)(b) and franchisee at clause 1.1(35).
13 At the same time Burra and Cold Rock entered into a “best endeavours” letter regarding potential future supply by Burra to Cold Rock.[21]
[21] Exhibit 11.
14 Disputes arose immediately after completion.
15 In February 2015 Trampoline Enterprises was due to pay Fresh Retailing $200,000 in respect of the final instalment of the purchase price. Trampoline Enterprises did not make that payment. Prior to this due date in November 2014, Trampoline Enterprises commenced this proceeding against Fresh Retailing and sought to set off various claims against that liability. The defendants contend that Trampoline Enterprises commenced this proceeding in November 2014 as a pre-emptive tactical manoeuvre to avoid paying the final instalment of the purchase price of $200,000 which, by then, was almost due.
Procedural History
16 The first trial date was vacated after an application by the plaintiff on the eve of trial to join Burra to the proceeding. The defendants filed a Further Amended Defence and Counterclaim in December 2015 (FADC). The plaintiff filed an Amended Reply and Defence to Counterclaim in January 2016 (ARD).
17 The second trial date was also vacated after an application made by Trampoline Enterprises for orders regarding the defendants’ discovery which it alleged threatened to delay the plaintiff’s expert report. The Court ordered both parties to make further discovery.
18 The trial was listed to commence on 8 May 2017. A few days before the trial, Trampoline Enterprises conceded Fresh Retailing’s counterclaim for the final instalment payment (subject to a defence of set-off).
19 On day 8 of the trial, the plaintiff served a new expert report from its expert, Russell Munday (Munday). This led to the trial being adjourned part-heard.
20 Both sides agree that Gordon and Franchised Food Company have guaranteed the obligations of Trampoline Enterprises under the Asset sale and purchase agreement and the Earn Out Deed.
First claim – the plaintiff’s challenge to the determination made by the Independent Accountant
21 The first dispute in time concerned the Completion Statement issued by Fresh Retailing on 7 October 2013.[22] The effect of the Completion Statement was to increase the purchase price by $102,765.78.
Relevant contractual terms
[22] Exhibit 26.
22 Clause 11 of the agreement contains a dispute resolution procedure. The key provisions are:
11 Completion Statement and Net Working Capital
11.1The Seller must arrange for the preparation and delivery to the Purchaser of the Completion Statement as soon as possible and in any event within 5 Business Days after the Completion Date.
11.2The Completion Statement must be prepared in the same format as the pro forma completion statement set out in Schedule 8.
…
11.4For the purpose of the Completion Statement:
(1)the Stock Value is to be calculated in accordance with clause 5; and
(2)Prepayments are to be valued at their face value (including GST).
11.5The Purchaser has 5 Business Days to review the Completion Statement after it has been delivered to the Purchaser in accordance with clause 11.1 (Review Period).
11.6If the Purchaser disputes any aspect of the Completion Statement, it must give the Seller a written notice within the Review Period, specifying:
(1)each item in the Completion Statement that it disputes;
(2)the grounds on which it disputes the item; and
(3)the proposed adjustment to the item.
…
11.10The Purchaser must not dispute any item or the calculation of any single item in the Completion Statement unless the sum in dispute exceeds $500.
11.11If the Seller and the Purchaser fail to resolve any dispute within 5 Business Days after the Purchaser notifies the Seller under clause 11.6 or any longer period which may be agreed between the Seller and the Purchaser, the dispute may be submitted for determination by the Independent Accountants on the reference of either the Seller or the Purchaser (with notice of reference to the other).
11.12The Independent Accountants must be appointed to act on the following basis:
(1)the Independent Accountants must act as experts and not as arbitrators;
(2)the Independent Accountants must determine the matter in dispute as soon as possible and in any event within 10 Business Days after their appointment;
(3)the Purchaser and the Seller:
(a)must provide the Independent Accountants with all information the Independent Accountants reasonably require;
(b)are entitled to make written submissions to the Independent Accountants; and
(c)must provide the other with a copy of all information provided and submissions made to the Independent Accountants;
(4)the Independent Accountants are entitled (to the extent they consider it appropriate) to base their opinion on the information provided and submissions made by the Purchaser and the Seller and on the Business Records;
…
(6)the determination of the Independent Accountants is (in the absence of manifest error) conclusive and binding on the Seller and the Purchaser, and the Completion Statement adjusted to reflect the determination of the Independent Accountants is final and conclusive of all matters stated in it;
….
Relevant Facts
23 The following facts are not in dispute.
(a) The Completion Date under the Asset sale and purchase agreement was 30 September 2013.[23]
[23] Paragraph 4.1 of the Amended Statement of Claim amended pursuant to orders made 29 October 2015and dated 5 November 2015 (ASC); admitted in paragraph 4 of the Further Amended Defence and Counterclaim (FADC).
(b) On 7 October 2013, Fresh Retailing delivered the Completion Statement.[24]
[24] Exhibit 26. ASC,[5]; admitted in FADC,[5].
(c) On 11 October 2013 the plaintiff gave written notice to Fresh Retailing of disputed items in the Completion Statement.[25]
[25] Exhibit 3. ASC,[6]; admitted in FADC,[6].
(d) On 8 November 2013, the dispute was submitted to the Independent Accountant, Piera Murone of Pitcher Partners (Ms Murone) for expert determination.[26] Ms Murone’s letter of engagement stated:
Our procedures and enquiries will not include verification work nor constitute an audit or a review in accordance with generally accepted auditing standards or statements on standards for accounting and review services, respectively.[27]
[26] Exhibit 4.
[27] Exhibit 4, p 2.
24 Each of Fresh Retailing and Trampoline Enterprises provided submissions to Ms Murone.[28]
[28] Exhibit BL (Fresh Retailing); Exhibit BM (Trampoline Enterprises).
25 On 21 November 2013, Ms Murone delivered a draft report for confirmation of facts.[29]
[29] Exhibit BN.
26 Each of Trampoline Enterprises and Fresh Retailing provided responses to Ms Murone.[30]
[30] On 21 – 22 November 2013, the parties provided Ms Murone with responses regarding marketing material (exhibit BO). On 25 November 2013, Trampoline Enterprises provided a further response as to factual accuracy (exhibit BP).
27 Ms Murone delivered her determination for the purpose of clause 11.12(2) of the Asset sale and purchase agreement on 25 November 2013.[31] The effect of Ms Murone’s determination (the Determination) was that Trampoline Enterprises was required to pay Fresh Retailing $93,981.23.
[31] Exhibit 5.
28 On 2 December 2013 Trampoline Enterprises paid Fresh Retailing the sum of $93,981.23 under protest.[32]
[32] Exhibit BQ.
29 On 23 December 2013 Trampoline Enterprises demanded repayment of part of that sum, namely $83,878.76.[33]
Relevant Principles
[33] Exhibit BR.
30 In Australian Broadcasting Commission v Australasian Performing Right Association Ltd Gibbs J stated:
It is trite law that the primary duty of a court in construing a written contract is to endeavour to discover the intention of the parties from the words of the instrument in which the contract is embodied. Of course the whole of the instrument has to be considered, since the meaning of any one part of it may be revealed by other parts, and the words of every clause must if possible be construed so as to render them all harmonious one with another.[34]
[34] (1973) 129 CLR 99, 109.
31 In interpreting commercial documents, a common sense approach is taken. It is presumed that the parties did not intend their contract to operate in an unreasonable way.[35]
[35]Gollin & Co Ltd v Karenlee Nominees Pty Ltd (1983) 153 CLR 455, 464.
32 In Legal & General Life of Australia Ltd v A Hudson Pty Ltd[36] the New South Wales Court of Appeal considered a term in a rental revision clause in a commercial lease which provided that where the lessor and lessee were unable to agree, a qualified valuer acting as an expert should determine the “amount of the current annual open market value of the demised premises”. McHugh JA stated:
…the question whether a valuation is binding upon the parties depends in the first instance upon the terms of the contract, express or implied. … a valuation which is the result of the mistaken application of the principles of valuation may still be made in accordance with the terms of the agreement. In each case the critical question must always be: Was the valuation made in accordance with the terms of a contract? If it is, it is nothing to the point that the valuation may have proceeded on the basis of error or that it constitutes a gross over or under value. Nor is it relevant that the valuer has taken into consideration matters which he should not have taken into account or has failed to take into account matters which he should have taken into account. The question is not whether there is an error in the discretionary judgment of the valuer. It is whether the valuation complies with the terms of the contract.
[36] (1985) 1 NSWLR 314, 335-336.
33 In Email Ltd v Robert Bray (Langwarrin) Pty Ltd[37] the Full Court of Victoria held that a valuation could not be attacked upon the ground that relevant matters had been disregarded or irrelevant matters considered. The Court was of the opinion that the parties were bound by the valuation “unless the assessment is vitiated by fraud, collusion or mistake.”
[37] [1984] VR 16, 21.
34 In this case, the Asset sale and purchase agreement provides that a determination is conclusive and binding absent “manifest error”. In Funtastic Ltd v Madman Film and Media Pty Ltd (Funtastic)[38] Almond J considered a clause in a share sale agreement which provided that the decision of the Independent Accountant “is, in the absence of manifest error, conclusive and binding on the parties.” Almond J set out the following principles in relation to ‘manifest error’:
[38] [2016] VSC 708.
Manifest error
52The term ‘manifest error’ is not defined in the SSA (share sale agreement). Its meaning is to be determined following established principles of contractual interpretation. In the present context, the term must be given its ordinary commercial meaning, shaped by reference to what a reasonable business person would understand it to mean, having regard to the background, context and commercial purpose or objects of the contract.
53The Oxford English Dictionary defines ‘manifest’ as ‘clear or obvious to the eye or mind’. The Macquarie Dictionary similarly defines ‘manifest’ as ‘readily perceived by the eye or the understanding; evident; obvious; apparent; plain’. A ‘manifest error’ in the context of arbitral awards liable to be set aside for ‘manifest error of law on the face of the award’ has been variously described as an error that is ‘apparent to the understanding of the reader’, ‘obvious rather than arguable’, ‘easily demonstrable without extensive investigation’, ‘an oversight [or] blunder so obvious as to admit no difference in opinion’ or ‘apparent to the judge upon a mere perusal of the reasoned award’. It is clear that an error that is ‘abstruse, obscure or inconsequential’ will not fall within the definition of ‘manifest error’.
54.The object and context of the Independent Accountant’s appointment also informs the meaning of ‘manifest error’. Here, the Independent Accountant was appointed as an expert, not an arbitrator, in order to provide an expeditious and cost-effective means of resolving disagreements with respect to the draft Completion Accounts. For this confined purpose, the parties eschewed the more formal rules and procedures of arbitration or curial process. Instead, they agreed to rely on the expertise and skill of the Independent Accountant, a highly experienced person in the field. The parties granted to the Independent Accountant a wide discretion to decide matters of procedure for determination of the draft Completion Accounts and were required to give all reasonable assistance requested by the Independent Accountant. The SSA contained a tight timetable for the provision of submissions and preparation of the Independent Accountant’s report. The parties were required to instruct the Independent Accountant to make a decision on the disagreement as soon as practicable after receiving any submissions from the parties. It is evident that there was an emphasis on expedition and prompt resolution of disagreements regarding the draft Completion Accounts. I am satisfied that in the present context, having regard to the evident objectives and the limited subject matter to be addressed by the Independent Accountant, ‘manifest error’ in the SSA is confined to clear and obvious errors.[39] (citations omitted)(emphasis mine)
[39]Funtastic [2016] VSC 708, [52] - [54].
35 Similarly in this case the Asset sale and purchase agreement provides that the Independent Accountants were appointed as experts and must determine the matter in dispute as soon as possible and in any event within 10 Business Days after their appointment.
Admissibility of Ms Murone’s statement dated 2 November 2016
36 Ms Murone made a statement dated 2 November 2016 (Ms Murone’s statement) in response to an invitation from Fresh Retailing to reply to the allegations made in this proceeding by Trampoline Enterprises. The plaintiff objected to the tender of Ms Murone’s statement. Ms Murone’s statement was marked for identification. Trampoline Enterprises submits that the report is not admissible.
37 The defence submits that Ms Murone’s statement ought be seen as a supplement to the determination she issued in 2013 and received into evidence.
38 In my view Ms Murone’s statement is not admissible. In TX Australia Pty Limited v Broadcast Australia Pty Limited[40] Brereton J said that the key requirement is that the error be apparent “upon the face of the Expert’s determination and accompanying reasons.” Clause 1.12(6) of the Asset Sale and purchase agreement provides that the determination of the Independent Accountant is final and conclusive in the absence of manifest error. These words have been used to avoid the need for the Court to consider further material which was not part of the Independent Accountants’ determination and accompanying reasons.
Did the Independent Accountant make a manifest error?
[40] [2012] NSWSC 4, [20].
39 Trampoline Enterprises challenges Ms Murone’s Determination in part. Trampoline Enterprises contends that Ms Murone’s determination “contained a manifest error” in relation to valuation of stock, marketing material and employee entitlements.
Stock
40 Trampoline Enterprises disputed the following items in relation to stock:
“(i) The vendor spent $9,915.54 on product purchased from a related party just prior to settlement. This product had not been paid for prior to settlement and title had not passed at that time. Accordingly, it was not “owned” by the vendor for the purposes of preparing the completion statement. This was the subject of paragraph 3.1.1(b) of the Determination.
(ii) $3,486.40 for obsolete stock that was not of merchantable quality. This was the subject of paragraph 3.1.1(c) of the Determination. The manifest error relates to part of the $10,986.57 referred to in that part of the Determination.
(iii) The corporate stores were overstocked with product worth $9,781 prior to settlement with product that was not “owned’ by the Vendor for the purposes of preparing the Completion Statement. This was the subject of paragraph 3.1.1(d) of the Determination.[41]
The ownership items
[41] Exhibit 5.
41 In relation to the stock referred to in paragraphs (i) and (iii), the plaintiff submits that Ms Murone had to consider whether the stock was in fact owned by the vendor. The plaintiff submits that the ownership items were the subject of a retention of title clause, had not been paid for and were not owned by the vendor as a matter of law. The plaintiff also submitted that Ms Murone incorrectly referred to the provisions made for creditors in the accounts.
42 In the Asset sale and purchase agreement, “stock” is defined in clause 1.1(77) to mean:[42]
All inventory used or intended for use in connection with the Business which is owned by the Seller (including raw materials, components, work-in-progress, finished goods, packaging, advertising and marketing materials, catalogues, stationery and spare parts and including items in transit from a supplier)
[42] Exhibit 1.
43 Clause 5 of the Asset sale and purchase agreement[43] provides:
[43] Exhibit 1.
5 Stocktake and Stock valuation
5.1For the purposes of calculating the Completion Net Working Capital, Stock will be valued in accordance with this clause 5.
5.2The Seller must carry out a full physical stocktake of Stock immediately after the close of business on the last Business Day prior to the Completion Date in the presence of representatives of the Purchaser and compile a complete list of Stock (Stock List) ascribing values to each item of Stock listed in the Stock List in accordance with clause 5.4.
5.3The Seller must provide a copy of the Stock List to the Purchaser on its completion (within 5 Business Days of the Completion Date) together with the Seller’s calculation of the value of Stock with reference to clause 5.4 (Stock Value).
5.4All Stock must be valued as follows:
(1)raw materials, components, packaging, advertising and marketing materials, catalogues, stationery and spare parts must be valued at invoice cost (including freight and cartage and any taxes and duties on it as specified in the invoice);
(2)ice cream mix and finished goods must be valued at invoice cost (including freight and cartage and any taxes and duties on it as specified in the invoice) plus the cost of manufacture of these goods. If this cannot be easily determined, the parties agree that the cost per litre of finished ice cream or ice cream mix is $8.00 per litre; and
(3)out of date and obsolete stock will be given nil value; and
(4)packaging, advertising and marketing materials, catalogues and stationery that are unusable will be given nil value.
5.5The Seller and the Purchaser must use their reasonable endeavours to ensure that the stocktake of Stock is completed and the Stock List is settled prior to Completion.
44 I do not accept the plaintiff’s submission in relation to the ownership items. The plaintiff pleads that Ms Murone erred in that she took into account irrelevant matters[44] and ignored other matters which she was required to take into account.[45] As stated by McHugh JA in Legal & General Life of Australia Ltd v A Hudson Pty Ltd,[46] these are not relevant grounds of challenge.
[44] ASC, [15.1(a)]-[15.1(c)].
[45] ASC paras 15.2(a).
[46] (1985) 1 NSWLR 314.
45 In Funtastic Almond J stated that having regard to the evident objectives of the Asset sale and purchase agreement, manifest error in is confined to “clear and obvious errors”.[47] The onus is on the plaintiff to demonstrate “manifest error”. The plaintiff has not pointed to any specific paragraph or sentence in the Determination which reveals “manifest error”. Ms Murone’s Determination includes an explanation of her reasons for rejecting the plaintiff’s complaint in relation to the ownership items.
[47] [2016] VSC 708, [54].
46 Ms Murone stated in the Determination that the stock was physically present during the stocktake. The plaintiff did not dispute the stocktakes. The plaintiff submitted that the Completion Statement contained allegedly unverified assertions as to ownership of the stock present at the physical stocktake.
47 I do not accept the plaintiff’s submission that Ms Murone should look behind the Completion Statement and seek verification of the allegedly unverified assertions and that in the absence of such verification she was required to exclude the ownership items from the Completion Statement. Clause 11.12(4) of the Asset sale and purchase agreement provides that the Independent Accountant was “entitled (to the extent they consider it appropriate) to base their opinion on the information provided and submissions made by the Purchaser and the Seller and on the Business Records”.
48 An engagement letter dated 8 November 2013 was signed by Ms Murone and accepted by Gordon on behalf of Trampoline Enterprises.[48] In that letter Ms Murone stated that “you have requested Pitcher Partners Transaction Services Pty Ltd (Pitcher Partners Transaction Services) act as the independent Accountant in this matter. In doing so, Pitcher Partners Transaction Services will act as an expert and not an arbitrator.” The letter of engagement stated that “our procedures and enquiries will not include verification work nor constitute an audit or a review in accordance with generally accepted auditing standards or statements on standards for accounting and review services, respectively.”[49]
[48] Exhibit 4.
[49] Exhibit 4.
49 I am not satisfied that the Determination contained a clear and obvious error in relation to the ownership items.[50]
Obsolete stock
[50] Exhibit 5, [3.3.1(b)].
50 In paragraph 3.3.1(c) of the Determination[51] Ms Murone stated:
[51] Exhibit 5.
In opining on the item of obsolete stock and counting discrepancies, I had regard to the following:
- The Purchaser identified obsolete stock in the dispute notice and therefore this item is categorised as a dispute item.
- Clause 11.10 provides that the Purchaser must not dispute an item or a calculation of any single item in the Completion Statement unless the sum in dispute exceeds $500.
With the exception of an amount of $2,191.97 in relation to Southgate conceded by the Seller, all other items were below $500.
While I accept that clause 5.4(3) of the Agreement states that “out of date stock will be given nil value”, the question of whether the items are obsolete is a disputed item and therefore falls under clause 11.10. As such, I am of the opinion that the items cannot be disputed and therefore should remain within the Completion Statement.
In any event, I have not been provided with any evidence that the items identified by the Purchaser as being obsolete were identified and agreed upon by the parties at the stock take.
51 Ms Murone was entitled to take into account the terms of the Asset sale and purchase agreement which included clause 11.10 that “The Purchaser must not dispute an item or the calculation of any single item in the Completion Statement unless the sum in dispute exceeds $500.” I accept the first defendant’s submission that the plaintiff is required to overcome this finding by Ms Murone for its claim to be successful and that the plaintiff has not purported to do so. I am not satisfied that the Determination by Ms Murone contains a manifest error in relation to obsolete stock.
Marketing Material
52 In relation to marketing material, the plaintiff made submissions to Ms Murone that stock should be reduced because:
i. certain marketing material was not in fact owned by Fresh Retailing (valued at $20,263) (ownership items);
ii. certain other marketing material had been destroyed by Fresh Retailing (valued at $16,516.45) (destroyed items).[52]
[52] Exhibit 5, [4.1.1].
53 In Section 4 of the Determination,[53] Ms Murone addressed each of the ownership items and the destroyed items. In each instance Ms Murone rejected the plaintiff’s complaints and did not reduce the stock after considering the plaintiff’s complaints.
[53] Exhibit 5.
54 Ms Murone explained her reasons for rejecting the plaintiff’s complaints. The Determination does not reveal a clear and obvious error. I am not satisfied that the Determination contains a “manifest error” in relation to the marketing material.
Employee entitlements
55
Ms Murone deals with employee entitlements in section 6 of the Determination.
She states:
6. Employee Entitlements
6.1.1The Purchaser is claiming that the purchase price should be reduced for amounts relating to employee entitlements.
6.1.2The Purchaser has submitted that agreement was reached to include Employee Entitlements in the Completion Statement and referred the Independent Accountant to email correspondence in section 15.1 of the Purchaser’s submission.
6.1.3However, my review of the Agreement indicates that the Completion Statement refers only to Stock and Prepayments. Items relating to employees are separately dealt with in clause 14 of the Agreement.
6.1.4Therefore I have not provided an opinion on this matter as it falls outside the scope of the Independent Accountant.
56 The plaintiff submits that the parties varied the Asset sale and purchase agreement in respect of two employees, Katie Malempre and David Moore. The plaintiff submits that there should have been an adjustment for these two employees because although Fresh Retailing paid them in lieu of leave, they still received their holidays. The plaintiff submits that there should have been an adjustment for these two employees as part of the clause 11 process.
57 During its closing address, the plaintiff referred to the emails passing between Gordon and Walton on 23 - 24 September 2013 regarding employee entitlements and contended that they gave rise to a variation of the Asset sale and purchase agreement. The legal characterisation of these emails was not pleaded. The plaintiff submits that Ms Murone’s refusal to do so because it was not what was in the original Asset sale and purchase agreement was a manifest error because the Asset sale and purchase agreement had been relevantly varied. The allegation that the Asset sale and purchase agreement had been varied was not pleaded. In any event, clause 25.8 of the Asset sale and purchase agreement provides that an “amendment or variation to this Agreement is not effective unless it is in writing and signed by the parties.”
58 In its written submissions, the plaintiff repeated the submissions it made to Ms Murone. In my view the Determination by Ms Murone in relation to employee entitlements does not contain a “manifest error”.
Fro Yo Yoghurt
59 The plaintiff claims that the Determination contained a manifest error in that it included $5,308.20 for Fro Yo Yoghurt soft serve powder cost which was unmarketable and obsolete.
60 In paragraph 3.1.1(c) of the Determination[54] Ms Murone stated:
Stock not fit for purpose. The Purchaser is claiming that the frozen yoghurt product is not fit for purpose and should therefore be removed from Stock. The Purchaser is also questioning whether the product has been paid for as at the date of settlement and therefore “owned”.
[54] Exhibit 5.
61 Ms Murone addressed the Fro Yo Yoghurt dispute in Section 3 of the Determination. Ms Murone rejected the plaintiff’s complaint and did not reduce the Stock value.
62 Ms Murone’s findings in relation to the Fro Yo Yoghurt soft serve powder are contained in paragraph 3.3.1(c) of the Determination. Ms Murone stated:
In opining on the frozen yoghurt product, I had regard to the definition of Stock in the Agreement as previously defined. The frozen yoghurt was physically present during the stock take and it was for use or intended use within the Business. Furthermore, as stated previously, as the Seller has retained the liability pertaining to this product, I am of the opinion that the product is owned and should be incorporated in the definition of Stock.
Furthermore, I had regard to findings of J L Lennard in their report dated 11 November 2013. J L Lennard tested the frozen yoghurt machine and opined as follows:
“checked machine components and re-set visc. Replaced damaged scraper blades. Due to viscosity of the raw product, feed tubes can’t be used to allow correct operation. Final product temp –7.3°C@visc of 3.6, product consistency good. Advised maintenance procedures and care for scraper blades.”
In addition, J L Lennard checked electrical, manual handling and slips, trips and falls and rated each of these at a 3, which was defined as moderate.
As such, I consider it appropriate that the frozen yoghurt be included in Stock in the Completion Statement.
63 The plaintiff pleads that Ms Murone erred in that she failed to take into account relevant considerations which she was required to address, relevantly that the Fro Yo Yoghurt powder was stock that was “unmarketable” and “obsolete”.[55] These are not valid grounds of challenge.[56] In any event the findings made by Ms Murone in the determination indicate that Ms Murone did take into account the plaintiff’s complaint that the Fro Yo Yoghurt powder was not fit for purpose. This was not a “manifest error”.
[55] ASC, [15.2(e)].
[56]Legal & General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314, 336.
64 In my view the plaintiff has not demonstrated a “manifest error” in relation to Fro Yo Yoghurt powder.
65 I refuse the plaintiff’s application for an order setting aside the Independent Accountant’s Determination. Having regard to the matters set out in the above paragraphs 22-64, the plaintiff’s claim for payment of the sum of $83,878.76 for moneys had and received is dismissed.
Second Claim – the plaintiff’s claim for damages for defective Fro Yo Yoghurt soft serve powder
66 In paragraph 20 of the ASC the plaintiff pleads that there were express and implied terms of the Asset sale and purchase agreement that the Fro Yo Yoghurt soft serve powder would be fit for purpose and of merchantable quality.
67 As discussed in the above paragraphs 59 – 63, one of the complaints made by the plaintiff to Ms Murone was that the Fro Yo Yoghurt soft serve powder was defective and not fit for purpose.
68 It is clear from the emails passing between the plaintiff and the defendant that the parties referred the dispute about the Fro Yo Yoghurt soft serve powder to Ms Murone for determination. On 31 October 2013 Gordon advised Walton that “we will rely on this email chain with respect to the Completion Statement”.[57] On 11 November 2013 Walton forwarded an email to Gordon which states:
We trialled the yoghurt powder from Maltra Foods this morning with Josh and JL Lennard.
The JL Lennard representative possibly was not made aware of the unique nature of the product when it was last trialled, but the product performed perfectly today with very slightly modified settings suited to the product viscosity and ingredients. His assessment was that the product consistency was good and there were no issues with freezing. He commented that the flavour and texture were very good.
We therefore consider the product to be ‘useable’ and this assessment will be submitted to Piera. (emphasis mine)[58]
[57] Exhibit BA, p 555.
[58] Exhibit BC.
69 On 11 November 2013 Walton forwarded an email to Ms Murone stating:
Please find attached the additional report (which I referred to in our submission) relating to stock of yoghurt mix – an item disputed by FFCo/Trampoline Enterprises with a value of $5,308.20 in the stocktake line. Could you please add this report to our submission.
JL Lennard is the authorised service representative for the Soft Serve machine located in the Brighton store and in which the soft serve yoghurt is made.
There were no issues with the product trialled today at the Brighton store, so viewed in conjunction with the report from the supplier, Maltra foods, it can be concluded that this product is not faulty as claimed by FFCo/Trampoline Enterprises, and is not out of date or obsolete (as per Clause 5.4(3) of the SPA). The same serviceman compiled the report which will be submitted by Trampoline Enterprises, but he has acknowledged that due to the unique nature of the product the machine may not have been calibrated correctly when he conducted his first trial.
A FFCo representative (Josh Raatz) was present at the trial today and has signed off the attached report stating that the product consistency was good.
I will add this report and copy this email to Stan when I send our submission to him. Please let me know if you require clarification in relation to this matter.[59]
[59] Exhibit BC.
70 As clause 11.12(6) of the Asset sale and purchase agreement provides that the determination of the Independent Accountant is conclusive and binding on the seller and the purchaser, the first question to be determined is whether Ms Murone’s determination precludes the plaintiff from advancing this claim in a different form as a claim for damages for breach.
71 In my view the plaintiff’s claim in relation to the Fro Yo Yoghurt soft serve powder has been determined by the Independent Accountant. Ms Murone’s determination is “conclusive and binding” and precludes the plaintiff from raising that dispute in these proceedings as a claim for damages for breach of contract.
72 The plaintiff alleges that “the term in respect of the Fro Yo Yoghurt soft serve powder is express and is contained in Clause 5.1 of the Seller’s Warranties set out in Schedule 1 to the Agreement and which are the subject of the express warranty in Clause 19 thereof.”[60]
[60] ASC, [20].
73 Clause 19 of the Asset sale and purchase agreement provides:
19 Warranties
19.1The Seller represents and warrants to the Purchaser that each Seller Warranty is true and accurate on the date of this Agreement (except that a [sic] Seller Warranty which states it is made as at the date specified). Each Seller Warranty is a separate warranty in no way limited by any other Seller Warranty.
19.2The Seller acknowledges that the Purchaser has entered into this agreement and will complete this agreement in reliance on the Seller Warranties.
19.3The Seller indemnifies the Purchaser against all Loss or Claim arising from or connected with a breach of any Seller Warranty. The Seller’s liability under this indemnity is limited in the same manner as its liability is limited under clause 20.
74 The Seller Warranties are contained in Schedule 1 of the Asset sale and purchase agreement.[61] Clause 5 states:
[61] Exhibit 1, clause 1.1(74).
5 Stock
5.1The Stock (including its packaging) is of merchantable quality and fit for its intended purpose.
75 The Asset sale and purchase agreement contains the following provisions governing any claims made by the purchaser under the Seller Warranties:
20.6The Purchaser must give notice of a claim under the Seller Warranties setting out details then known to the Purchaser, including:
(1)details of the facts, matters and circumstance giving rise to the breach;
(2)the nature of the breach; and
(3)to the extent it is reasonably able to do so, the Purchaser’s estimate of the Loss suffered;
within 20 Business Days of first becoming aware of the facts, matters or circumstance giving rise to the claim.
20.7 Despite any other provision of this Agreement:
(1)the Seller is not liable for any breach of any Seller Warranty unless:
(a)notice of a claim against the Seller is given by the Purchaser to the Seller before the Claims Expiry Date.
(b)within 6 months after the Seller has received the notice, the claim has either been:
(i)admitted or satisfied by the Seller;
(ii)withdrawn by the Purchaser;
(iii)settled between the Seller and the Purchaser; or
(iv)referred to a court of competent jurisdiction by the Purchaser properly issuing and validly serving legal proceedings against the Seller in relation to the claim.
Otherwise, the claim is taken to be waived or withdrawn and is barred and unenforceable.
(2)The maximum aggregate amount that the Purchaser may recover from the Seller (whether by way of damages or otherwise) for all breaches of the Seller Warranties is an amount equal to $250,000.
(3)The Seller is not liable for any breach of any Seller Warranty:
(a)unless the amount Finally Adjudicated against or agreed by the Seller in respect of the breach exceeds $10,000 (Qualifying Claim); and
(b)until the total of all amounts Finally Adjudicated against or agreed by the Seller in respect of all Qualifying Claims exceeds $25,000.
76 Clause 1.1(12) defines Claims Expiry Date to mean 29 August 2015.[62]
[62] Exhibit 1.
77 The plaintiff bears the onus of proof. The plaintiff did not refer to clauses 20.6 and 20.7 in its pleadings or in its oral or written submissions. The Court has not been assisted by submissions as to whether these provisions have been satisfied.
78 Even if it can be said that the preconditions set out in clauses 20.6 and 20.7 of the Asset sale and purchase agreement have been satisfied, the plaintiff pleaded in the ASC:
23.By reason of Fresh Retailing’s breaches of the Agreement relating to the Fro Yo Yoghurt soft serve powder, the plaintiff has suffered loss and damage.
PARTICULARS
Cost of Fro Yo Yoghurt soft serve powder is $5,308.20.
79 The plaintiff’s claim was denied by the defendant in paragraph 23 of the FADC. In these circumstances it does not appear that the amount “finally adjudicated against or agreed by the Seller in respect of the breach exceeds $10,000.”
80 Having regard to the matters set out in the above paragraphs 72-79, Fresh Retailing is not liable for any breach of the Seller Warranties.
81 As alleged by the plaintiff in the particulars to paragraph 20, the term contained in Clause 5.1 of the Seller Warranties is an express agreement between the parties. As Clause 5.1 incorporates the implied conditions as to quality and fitness, it is not necessary for me to consider whether the conditions set out in s19(a) and (b) of the Goods Act 1958 (Goods Act) should in this context be implied in the Asset sale and purchase agreement.
82 In any event, I am not satisfied that the Fro Yo Yoghurt powder was defective and not fit for purpose.
Relevant Facts
83 Before the Asset sale and purchase agreement, Fresh Retailing sold a yoghurt product from its Brighton Trampoline store.[63]
[63] Transcript p 578.
84 About four months before Fresh Retailing entered into the Asset sale and purchase agreement, the original supplier told Fresh Retailing that they would no longer manufacture the product.[64] Fresh Retailing engaged Ramela Pty Ltd trading as Maltra Foods (Maltra Foods) to supply the product. On 16 September 2013 Maltra Foods issued an invoice and the yoghurt powder was delivered and paid for on 30 September 2013.[65]
[64] Transcript p 579.
[65] Exhibit 22.
85 On 3 October 2013 Trampoline Enterprises reported that the product was used in the soft serve machine which caused the machine to malfunction.[66]
[66] Exhibit 21.
86 Emails regarding the yoghurt powder were exchanged between Gordon, Kaisey Rizk (Rizk) and Walton between 23 – 31 October 2013.[67] Ms Walton was trying to organise testing of the yoghurt powder off-site at Maltra Foods.
[67] Exhibit BA.
87 On 11 November 2013 JL Lennard, the company responsible for selling and servicing the machine, attended the Brighton store to test the yoghurt powder in the presence of Walton and Josh Raatz (Raatz), a member of the operations team working for Rizk at Franchised Food Company[68]. JL Lennard’s findings are referred to in the above paragraph 62.
[68] Transcript p 586.
88 Mr Gordon said that he was not able to use the product at all.[69]
[69] Transcript p 141.
89 Walton gave evidence that the Fro Yo Yoghurt was a good product and that the machine worked.[70] She referred to the statement by JL Lennard which was signed by Raatz who attended the inspection. The statement said that the product consistency was good.[71]
[70] Transcript p 581.
[71] Exhibit BB.
90 Walton gave the following evidence:
I… asked that I could meet the JL Lennard, which was the equipment supplier’s representative in store personally with a member of the Franchised Food Company team, an operations person – I believe it was Josh Raatz – and so that we could verify for ourselves whether or not it worked, so the steps that I took was – because I was told it didn’t work but I didn’t believe it didn’t work because I knew that it worked, so we were in store and Josh signed off on a statement from JL Lennard which basically said it’s an ice product and you may need – maybe you need to take the air intake hose out.[72]
[72] Transcript p 581.
91 The plaintiff submits that the air intake hose is used to aerate the ice cream product. This “solution” meant that there was no longer air being injected into the product and it was too dense.
92 I prefer the evidence of Walton to Gordon. Walton’s evidence is supported by the statement by JL Lennard that the product consistency was good. The plaintiff did not call expert evidence or Raatz. In these circumstances I am able to draw the inference that that evidence would not have assisted the plaintiff’s case. Having considered the whole of the evidence, I am not satisfied on a balance of probabilities that the Fro Yo Yoghurt soft serve powder was defective.
93 In view of the matters set out in the above paragraphs 66 to 92, the plaintiff’s claim that the Fro Yo Yoghurt soft serve powder was not fit for purpose or of merchantable quality is dismissed.
Third claim – Fresh Retailing’s counterclaim for damages regarding the St Kilda store bank guarantee
94 The next dispute in time concerned the premises at 85 Acland Street St Kilda (the St Kilda store). The St Kilda store was a corporate store conducted by Fresh Retailing and transferred to Trampoline Enterprises pursuant to the terms of the Asset sale and purchase agreement.
95 The landlords of the St Kilda store were Godel Nominees Pty Ltd and Sreca Investments Pty Ltd (the landlord).[73] In April 2005 a lease of the St Kilda store was entered into by the landlords and the original tenant (Multi Ausindo Trading Pty Ltd) for a five year period commencing on 6 September 2004 (the 2005 lease).[74]
[73] Exhibit T.
[74] Exhibit T.
96 By Deed of Assignment (the Deed of Assignment) dated 29 July 2005 Multi Ausindo Trading Pty Ltd assigned the lease of the St Kilda store to Fresh Retailing.[75] The assignment of the 2005 lease was referred to in clause 11 of Schedule 5 of the Asset sale and purchase agreement. Clause 7 of the Deed of Assignment provides:
The Assignee hereby agrees to provide to the Landlord on the date hereof a Bank Guarantee in a form acceptable to the Landlord for the amount of $18,000.00 to be held by the Landlord as a security deposit. The Landlord may use the security deposit or any part of the security deposit to make good the cost of remedying breaches of the Assignee’s obligations under the Lease. After the Lease has ended and the Assignee has vacated the premises, the Landlord must return to the Assignee within seven days the Bank Guarantee for the unused part of the security deposit.
[75] Exhibit U.
97 Westpac Banking Corporation provided a bank guarantee in the sum of $18,000 to the landlord at the request of GWCB Holdings Pty Ltd. (a company related to Fresh Retailing) to secure Fresh Retailing’s obligations to the landlords under the St Kilda lease.[76] GWCB Holdings Pty Ltd made that request pursuant to an agreement with Fresh Retailing.
[76] Exhibit 25; transcript p 438.
98 Fresh Retailing claims that Trampoline Enterprises has failed and/or refused to provide a substitute for the bank guarantee in breach of Trampoline Enterprises’ obligation under clause 6.3 of the Asset sale and purchase agreement.
99 The relevant provisions relating to this dispute in the Asset sale and purchase agreement are:
1.1(50)Landlord Approval means obtaining advice or confirmation in writing from each of the Landlords and the Landlord’s Mortgagee(s)(if any) that the relevant Landlord consents to the assignment of each Property Lease from the Seller to the Purchaser or the Purchaser’s nominee;
1.1(51)Landlord Approval Date means 28 February 2014;
…
1.1(53)Lease Securities means the bank guarantees, security deposits, parent company guarantees and personal guarantees or other form of security provided to secure the obligations of the Seller under the Property Leases, including the securities specified in Schedule 11.
Schedule 11 – Lease Securities
Clause 1.1(53)
Bank guarantees
Store Name
Amount in $
Provided by
…
St Kilda
18,000
Seller
1.1(65)Property Leases means:
(a) the leases described in Schedule 5.
Schedule 5 – Property Leases
Clause 1.1(65)
Name
Address
Lease details
11
St Kilda
85 Acland Street, St Kilda VIC 3182
(a) Lease Agreement between Multi Ausindo Trading Pty Ltd, Godel Nominees Pty Ltd and Sreca Investments Pty Ltd commencing 6 September 2004;
(b) Assignment of Lease between Fresh Retailing Pty Ltd, Multi Ausindo Trading Pty Ltd, Godel Nominees Pty Ltd and Sreca Investments Pty Ltd dated 29 July 2005.
6 Assignment of Property Leases
6.1The Seller and the Purchaser must each use reasonable endeavours to procure:
(1)each Landlord Approval; and
(2)the return or release of all Lease Securities back to the Seller;
as soon as possible and in any event prior to the Landlord Approval Date.
6.2 The Purchaser, when requested to do so, must:
(1)provide any bank guarantee, security deposit, personal guarantees by its directors or other form of security;
(2)provide all information in relation to the Purchaser, the Purchaser’s nominee and the directors of the Purchaser and the Purchaser’s nominee; and
(3)sign and deliver to the Seller all documents and agreements;
required, or which may be required, to obtain each Landlord Approval. The obligation to provide personal guarantees by its directors is limited to where such guarantees have been provided by directors of the Seller.
6.3If the conditions in clause 6.1 have not been satisfied on or prior to the Landlord Approval Date, the Purchaser must at the Seller’s election either:
(1)provide to the Seller on the Landlord Approval Date with substitute bank guarantees in the name of, and on terms acceptable to, the Seller for the same amount as any bank guarantees or security deposits provided by the Seller that have not been returned or released on the Landlord Approval Date (Substitute Bank Guarantees). The Seller may draw down on any Substitute Bank Guarantee to satisfy any claim or drawdown by a Landlord under a Property Lease or a Lease Security. The Seller must return any Substitute Bank Guarantees to the Purchaser within 2 Business Days of the last Lease Security being returned or released; or
(2)provide to the Seller on the Landlord Approval Date with substitute bank guarantees in the name of, and on terms acceptable to, the Landlords for the same amount as any bank guarantees or security deposits provided by the Seller that have not been returned or released on the Landlord Approval Date.
100 In September 2009 the 2005 lease was renewed for another five year term (the 2009 lease).[77] Gordon accepted that the September 2009 lease was entered into in the exercise of the option under the 2005 lease.[78]
[77] Exhibit V.
[78] Transcript p 171.
101 Item 20 of the Schedule to the 2009 lease refers to security deposit. Item 20 refers to clause 13. Clause 13 of the 2009 lease provides:
13. SECURITY DEPOSIT
13.1The tenant must pay a security deposit to the landlord of the amount stated in item 20 and must maintain the deposit at that amount.
13.2Where the security deposit is invested in an interest bearing deposit, all interest accruing on it is treated as a supplementary payment of security deposit. …
…
13.5The tenant may, and if the landlord requires must, provide the security deposit by means of a guarantee by an ADI within the meaning of the Banking Act 1959 (Cth).
102 The landlord did not return the bank guarantee provided by Westpac Banking Corporation. Fresh Retailing sent a letter to Gordon on 7 March 2014 requesting substitute bank guarantees.[79] Between 11-13 March 2014, Maletsky and Walton exchanged emails regarding the substitute bank guarantees.[80] On 19 May 2014, Walton and Gordon exchanged emails regarding the St Kilda store bank guarantee.[81] On 4 June 2014 Walton received a rent invoice from the landlord’s agent (Beller Commercial), which she forwarded to Gordon on 5 June 2014, asking him again to expedite the bank guarantee.[82] Gordon conceded in cross-examination that Trampoline Enterprises did not provide a substitute bank guarantee by 28 February 2014 (the landlord approval date) or at all.[83]
[79] Exhibit W.
[80] Exhibit X.
[81] Exhibit S.
[82] Exhibit Z.
[83] Transcript p 172.
103 On 11 July 2014 Gordon notified Beller Commercial that Trampoline Enterprises had decided not to take up the option to renew the lease for the St Kilda store.[84] In September 2014 the lease expired and the St Kilda store closed.
[84] Exhibit AK.
104 On 18 September 2014, Walton received a final rent invoice from Beller Commercial, which she forwarded to Franchised Food Company on 19 September 2014.[85] The invoice was for the sum of $11,603.55.[86] That invoice was not paid. Between 15 and 16 October 2014 Walton and Gordon exchanged emails regarding the unpaid rent.[87] On 21 October 2014 Gordon sent Walton an email regarding the St Kilda store, in which he alleged that the 2009 lease did not appear to him to contain the quantum of any bank guarantee.[88]
[85] Exhibit AA.
[86] Exhibit AA, p 1069.11.
[87] Exhibit AA.
[88] Exhibit AB.
105 The plaintiff submitted that a lease of the St Kilda store had expired in 2009, many years before the agreement. The plaintiff submitted that the new lease on foot at the time of the agreement commenced on 9 September 2009 and superseded any previous lease, which was supported by the guarantee. The plaintiff submitted that as the new lease did not provide for any such security, the first defendant’s remedy (if any) is against the landlord or its bank, not the plaintiff.
106 I do not accept the plaintiff’s submission. The assignment of the 2005 lease was expressly referred in clause 11 of the Schedule 5 of the Asset sale and purchase agreement. A bank guarantee had been provided to the landlord pursuant to clause 7 of the Deed of Assignment.[89] I do not accept the plaintiff’s submission that the 2009 lease did not provide for any security. The 2009 lease states that the tenant must pay a security deposit to the landlord and that the tenant may provide the security deposit by means of a guarantee. In this case Fresh Retailing had previously provided a bank guarantee by Westpac Banking Corporation to the landlord.[90] The lease contains an express reference to the bank guarantee in clause 1.1(53) and Schedule 11 of the Asset sale and purchase agreement.[91]
[89] Exhibit 25.
[90] Exhibit 25.
[91] Exhibit 1, p 348.
107 On 22 December 2014 Adriana Lark (on behalf of the landlord) forwarded an email to Walton in the following terms: [92]
Good Afternoon Amanda,
Please note that we have made a demand on the Bank Guarantee held for $18,000.00.
Please provide us with you [sic] bank details so any additional monies past the dent [sic] owed can be refunded to you.
[92] Exhibit AC.
108 The tax invoice dated 22 December 2014 provides that Fresh Retailing remained indebted to the landlord in the amount of $11,603.55.[93]
[93] Exhibit AC, p 1074.5.
109 On 23 December 2014 the landlord called on the bank guarantee of $18,000.[94] The Westpac Business Account statement of GWCB Holdings Pty Ltd indicates that on 23 December 2014 the amount of $18,000 was withdrawn from that account.[95] On 8 January 2015 Fresh Retailing transferred the amount of $18,132.12 to GWCB Holdings Pty Ltd.(being a reimbursement of the amount secured by the bank guarantee).[96] This transfer is reflected in the entry dated 8 January 2015 Westpac Business Account statement of GWCB Holdings Pty Ltd.[97]
[94] Transcript p 440.
[95] Exhibit AS p 1102.2.
[96] Transcript p 440; exhibit AS p 1102.3.
[97] Exhibit AS p 1102.2.
110 The first defendant submits that Fresh Retailing’s position on this issue has remained constant throughout. In contrast, the plaintiff’s position has changed significantly. In the emails passing between the parties between March to May 2014, Maletsky and Gordon described steps they had taken, and would continue to take, to procure a substitute bank guarantee.[98] They did not assert that the plaintiff had no obligation to procure a substitute bank guarantee for the St Kilda store.
[98] Exhibits S and X.
111 On 15 October 2014 Gordon changed his position. He said he could not arrange for payment of the final rent invoice because it was made out to Fresh Retailing.[99] When cross-examined Gordon stated:
[99] Exhibit AA.
Your response then on 15 October at the top of the page, again within the hour was, “Firstly to make a point about who the invoice was made out to” – do you see that?...Yes.
“I cannot begin to process an invoice made out to Grant’s company.” What does that mean; you had been paying rent, hadn’t you, for months?...I was probably being pedantic.
Do you think you were being a little cheeky?...Not sure.
Do you think you were being a little obstructionist?...Absolutely not.
Had you paid in the vicinity of 12 rental invoices made out to Grant’s company prior to this?...Possibly.
Try a bit harder. Have you paid approximately 12 invoices made out to Grant’s company?...I – I can check. I believe we probably did, but I could not say that for certain.
So it was just a nonsense point you were making?...If you say so.
No I am asking you. Do you agree now in this court…?...Yes.
We have spent all afternoon over this $11,000 point, do you agree that it’s a nonsense point?...Probably. (emphasis mine)[100]
[100] Transcript p 188.
112 On the second day of the trial, and prior to the answers he gave in the above cross-examination, Gordon proffered an entirely new ‘defence’ of the claim in response to some leading questions in evidence in chief. The evidence was:
My friend referred yesterday to the failure by your company to reimburse the vendor for a month’s rent. Did you not pay your last month’s rent?...We did pay our last month’s rent. [101]
[101] Transcript p 145.
113 The plaintiff had not previously made this allegation. The plaintiff had not discovered any documents to support it. In response to a call for production of documents which indicated proof of payment, Maletsky produced the following documents:
(1) a bank statement showing two payments of $6,185 (total $12,370) made by Franchised Food Company on 20 November 2015 (but the bank statement contained no description of the payee or the reason for the transactions);[102] and
(2) a ledger printout from Franchised Food Company’s internal accounting system purporting to show journal entries reflecting those payments but the cheque numbers were different from those shown on the bank statement. The journal entries only contained one reference to the amount of $6,185 (not two). The printout reveals no reason for the transactions and no connection to the St Kilda Store.[103]
[102] Exhibit 38.
[103] Exhibit 38.
114 Maletsky gave evidence about these documents and was cross-examined.[104] His evidence was unsatisfactory. The transactions evidenced by these documents took place almost 12 months after the landlord made a call on the bank guarantee to satisfy the unpaid invoice.
[104] Transcript pp 334 -339; pp 372-374.
115 In response to these documents, Fresh Retailing procured a statement from Beller Commercial dated 9 May 2017. The statement makes no reference to the receipt of any payments after December 2014.[105] The statement makes no reference to any payments received from Franchised Food Company in November 2015.
[105] Exhibit AP.
116 Having regard to the matters referred to in paragraphs 94 to 115, I find that the plaintiff has breached its obligation to provide a substitute guarantee in accordance with clause 6.3 of the Asset sale and purchase agreement. I do not accept the plaintiff’s submission that it paid the last month’s rent for the St Kilda store. Fresh Retailing’s net loss was $11,603.55. Although the landlord called on the bank guarantee in full ($18,000), the landlord later refunded a portion of the Drawn Down Amount (being the sum of $6,443.40) to Fresh Retailing, leaving a net loss of $11,603.55. Accordingly Fresh Retailing is entitled to judgment against the plaintiff in the amount of $11,603.55.
Fourth Claim – Fresh Retailing’s counterclaim for Earn Out Amounts regarding the Craigieburn store
117 This dispute arose in connection with the opening of a new Trampoline store at Craigieburn. Under an Earn Out Deed dated 4 September 2013 (the Earn Out Deed)[106] Trampoline Enterprises was obliged to pay $140,000 to Fresh Retailing if the Craigieburn store opened by 29 March 2014 being 180 days after the completion date. The Craigieburn store opened 2 days after that date on 31 March 2014. Fresh Retailing claims that Trampoline Enterprises breached its obligation to act in good faith and not unreasonably or intentionally delay the performance of any act to open the Craigieburn store.
Relevant Contractual Terms
[106] Exhibit 2.
118 Under the Earn Out Deed Trampoline Enterprises agreed:
to provide the Seller [Fresh Retailing] with an earn out incentive on the completion of, and according to the terms of, the Asset Sale and Purchase Agreement.[107]
[107] Exhibit 2, Introduction paragraph A.
119 Clause 1.1 of the Earn Out Deed provides:
(5)First Earn Out Amount means the sum of $140,000 (less any deposit received by the Seller from a new franchisee in respect of which the First Earn Out Amount is payable);
(8)Second Earn Out Amount means the sum of $40,000.
120 Clause 2 of the Earn Out Amounts provides:
2 Earn Out Amounts
2.1The Purchaser must pay the First Earn out Amount to the Seller if:
(1)a prospective franchisee is identified by the Seller that is not specified in Schedule 1 and who enters into a franchise agreement with the Seller or the Purchaser to operate a new Trampoline store within 90 days ot the Completion Date, and the store commences to operate within 180 days of the Completion Date;
(2)a prospective franchisee identified by the Seller commences to operate a new Trampoline store in any premises other than those specified in Schedule 2, whether or not under a formal licence or franchise agreement has been signed with the Purchaser, within 180 days of the Completion Date.
The reference to a prospective franchisee includes an existing Trampoline franchisee that enters into a franchise agreement, or commences to operate, a new Trampoline store.
2.2 The First Earn Out amount must be paid as follows:
(1)$40,000 (plus any legal fees or recruitment costs incurred by the Seller which are recoverable pursuant to the Franchise Agreement entered into by the prospective franchisee), but less any deposit received by the Seller from a new franchisee in respect of which the First Earn Out Amount is payable, within 30 days of the earlier of:
(a)the person paying a non-refundable franchise fee in full (subject to the franchisee fee being capped at $40,000 plus GST); or
(b) the new Trampoline store commencing to operate; and
(2) $100,000 on 31 August 2015.
2.3The Purchaser must pay the Second Earn Out Amount to the Seller if a subsequent prospective franchisee commences to operate a new Trampoline store (excluding a store in respect of which the First Earn Out Amount was paid and excluding at any premises specified in Schedule 2), whether or not a formal written licence or franchise agreement has been signed with the Purchaser, on or prior to 31 August 2015.
2.4The Second Earn Out Amount must be paid by the earlier of:
(1) 5 Business Days of the Purchaser receiving a non-refundable franchise fee in respect of a subsequent prospective franchisee of a new Trampoline store; and
(2)5 Business Days of a subsequent prospective franchisee of the new Trampoline store commencing to operate.
2.5The Purchaser must and is only required for the purpose of this Deed to:
…
(4)enter into any lease for new premises for the operation of Trampoline store that has been identified by the Seller (acting reasonably) prior to the Completion Date;
(5)offer to enter into a franchise agreement with any prospective Trampoline franchisee that has been identified by the Seller (acting reasonably) prior to the Completion Date; and
(6)act in good faith and not unreasonably or intentionally delay the signing of documentation or the performance of any other act required to recruit a new franchisee or open a new Trampoline store.
Background Facts
121 On 2 August 2013 the landlord at Craigieburn (Lend Lease) sent a letter to Fresh Retailing regarding an offer to lease premises for a Trampoline store, with approximate dates for handover of 3 October 2013 and lease commencement of 31 October 2013.[108]
[108] Exhibit 51.
122 On 4 September 2013 the parties entered into the Asset sale and purchase agreement[109] and the Earn Out Deed.[110] The Asset sale and purchase agreement referred to the Earn Out Deed and acknowledged the proposed new franchised store in Craigieburn.[111]
[109] Exhibit 1.
[110] Exhibit 2.
[111] Exhibit 1, clauses 1.1 (34)(b)(c) and 1.1(35)(b) of the Asset sale and purchase agreement.
123 On 12 September 2013, Gordon notified Lend Lease that he was to be copied into communications regarding Craigieburn, and that he would ensure that Walton was provided with a copy of all pertinent information.[112]
[112] Exhibit AD.
124 On 24 September 2013, Walton sought an update in relation to the Craigieburn store, and Gordon responded.[113] There is no evidence that Gordon provided Walton with any further updates.
[113] Exhibit AF.
125 During the relevant period Phillip Anthony Tucker (Tucker) worked for Franchised Food Company and was the head of business development. His role included lease site selection, franchise recruitment and the building of stores.[114]
[114] Transcript p 870.
126 Between 11 and 20 December 2013, Tucker corresponded with Lend Lease to obtain handover of the store so that fit out could commence.[115] Ultimately, handover was scheduled for 22 January 2014 with a fitout period estimated to take 5 weeks.[116]
[115] Exhibit DG.
[116] Exhibit DH.
127 Darren Turner (Turner), the project manager for the shopfitter, TU Projects, communicated with Lend Lease between 17 and 21 January 2014 to send them the building permit and approved drawings and to arrange a handover inspection for 22 January 2014.[117] The program was for Turner to carry out a 4-6 week build which was standard for that type of tenancy.[118]
[117] Exhibit CB.
[118] Transcript p 708.
128 On 19 January 2014 the Facebook page for Trampoline stated that the Craigieburn store was “due to open mid Feb”.[119]
[119] Exhibit BS.
129 On 3 February 2014 Gordon sent a letter to the solicitors for Lend Lease with executed lease documents and asked for the documents to be executed and returned “as soon as possible”.[120]
[120] Exhibit 29. No enclosures were discovered by the plaintiff.
130 On 14 February 2014 David Moore, business support manager for Franchised Food Company, made a stock order for the new store at Craigieburn and said “We will require this for Friday the 21st of Feb.”[121]
[121] Exhibit AQ.
131 Between 14 and 24 February 2014, various third party certificates were issued to Lend Lease (e.g. electrical, air conditioning)[122] and TU Projects (electrical, roller shutter, flooring, plumbing and tiling).[123] These certificates were required by the building surveyor as part of the application for an Occupancy Permit.[124]
[122] Exhibit CK.
[123] Exhibit CJ.
[124] Transcript pp 715-716.
132 The Occupancy Permit Application for the Craigieburn store is dated 18 February 2014.[125] On that day Turner communicated with the building surveyor to arrange a building inspection for Thursday 20 February because “Trampoline is handing over on Friday [21 February]”.[126]
[125] Exhibit 28.
[126] Exhibit CC.
133 Turner gave the following evidence about the date of the occupancy permit:
The occupancy permit that I took you to earlier ultimately was dated 21 March, so that’s about four weeks later? Yes?...Yes.
Now why did it take four weeks to actually get the occupancy permit?...We were asked to put the occupancy on hold.
Well, when you say, “We were asked”, who asked who?...Mr Tucker asked us to put the occupancy certificate on hold.
When did he do this?...That week after the original handover date, during the phone calls.
To who?...To myself. To myself.
Do you recall what he – do you recall any words he used?...Oh, not really, just to hold the occupancy certificate.
Did he say why?...Ah no, I assumed it was to do with the issue with taking handover.
In that period, and just to be precise, it’s in the period between the handover day, the handover inspection day, which I took you to earlier, was 21 Feb?...Yes.
In the period between 21 Feb and 21 March, when the occupancy permit ultimately was issued, do you recall ever being chased by anyone for the occupancy permit?...No.[127] (emphasis mine)
[127] Transcript pp 725 – 726.
134 Turner’s evidence is supported by an email dated 19 March 2014 by Con Kery on behalf of the landlord to Tucker which stated: [128]
Could you please provide me with an accurate update on the status of opening.
Suzanne Painter from our team has circulated an email advising us that your shop fitter has indicated you have asked him to withhold the Occupancy Certificate.
I was of the understanding that you were waiting for some certificates from us and that you were finalising a legal matter on the sale of the business and it would be resolved late last week.
I just need to report back what the actual situation is please. They have started the rent clock and I want to try and stall that for you if I can justify why.
[128] Exhibit 67.
135 On 18 February 2014 the shopfitter, TU Projects, forwarded an email to the franchisee, Vikramjeet Singh (Singh), attaching a “handover invoice” for $29,652.21. The email asked that payment be received “before handover on Friday 21st February 2014 to avoid any delays with handover”[129].
[129] Exhibit CP.
136 The first defendant refers to the period between 20 February 2014 and 18 March 2014 (the date on which the plaintiff announced that the store would open on 31 March 2014) as the third stage of the chronology.
137 Friday 21 February 2014 was the date scheduled for the handover from the shopfitter to Trampoline Enterprises.[130] Turner gave evidence that he and Tucker met at the shopping centre and spoke on that day and that Tucker told him that he was not able to take handover that day.[131]
[130] Transcript p 716.
[131] Transcript p 716.
138 On 21 February 2014 Burra arranged for delivery of the stock ordered for the Craigieburn store on 14 February 2014.[132] The Facebook page for Trampoline stated that the Craigieburn store would be “coming very, very soon!”[133]
[132] Exhibit AQ.
[133] Exhibit BS.
139 On 24 February 2014 Turner asked Tucker for an update, and Tucker said he would “update later today re Craigieburn situation”.[134]
[134] Exhibit CL.
140 Turner gave evidence that Tucker contacted him by phone and said there was “a legal issue that they couldn’t take handover due to … purchasing of the Trampoline from previous owners, so they weren’t able to… operate the store until a certain date” about a month later.[135] Turner also gave evidence that a week after the handover, Tucker asked him to prepare a file note about delays.[136] Turner agreed that the letter did not contain any reference to legal issues because that was not an issue of which he was aware.[137] Tucker had no recollection of any discussions with Turner in the period from late February 2014 to early March 2014 about the opening of the store at Craigieburn.[138]
[135] Transcript p 717.
[136] Exhibit 54, transcript pp 728-729.
[137] Transcript p 730.
[138] Transcript p 895.
141 26 February 2014 was the lease commencement date under the lease with Lend Lease, and there was a three month rent-free period.[139] Tucker agreed that it would have been a matter of some importance to get the store open “soon” when the rent clock was ticking.[140] Tucker could not recall any steps taken to get the store opened in that period. He could not recall anything that might have held up the opening of the store during that period.[141]
[139] Exhibit DH.
[140] Transcript p 897.
[141] Transcript p 897.
142 On 3 March 2014 TU Projects issued a Practical Completion Certificate to Turner signed by Rizk.[142] In signing the certificate, Trampoline Enterprises “acknowledges that the Contractor has duly performed the contract to the Purchaser’s satisfaction” and “agrees that the works have reached practical completion and are in good order except for the following…”. There was then a list of 20 items. Item 19 on the certificate was “final clean”.
[142] Exhibit CD.
143 When cross-examined about the 20 or so items listed as defects in the Practical Completion Certificate, Turner said that the reason why the store did not open until later had nothing to do with delays in fitting the shop out.[143] Turner said:
Oh, we had a little bit to tidy up but we also – a defect period, we have a two week whether they are trading or not and we arrange to come in after hours to fix those defects.[144]
[143] Transcript p 744.
[144] Transcript p 744.
144 On 10 March 2014 the shopfitter made arrangements for a “final clean” scheduled for the following day.[145]
[145] Exhibit CM.
145 On 18 March 2014 Trampoline Enterprises announced internally (including to Gordon and Maletsky) that the intended opening for the Craigieburn store would be 31 March 2014.[146]
[146] Exhibit CN.
146 On Tuesday 25 March 2014 Susan Ryan from Lend Lease forwarded an email to Tucker asking “Can someone please confirm when they want to open. As I will need to have the hoarding removed.” On the same day Tucker told Lend Lease that “We are opening 31st March (Next Monday).”[147]
[147] Exhibit CG.
147 Saturday 29 March 2014 was the 180-day cut-off date under the Earn Out Deed.[148]
[148] Exhibit 2, clause 2.
148 The Craigieburn store opened for trade on Monday 31 March 2014, two days after the 180-day cut-off date.
149 On 7 April 2014 Trampoline Enterprises entered into a franchise agreement with Trampoline CB Pty Ltd in relation to the Craigieburn store.[149] Trampoline CB Pty Ltd was the company set up by Singh to operate the Craigieburn store.
376 Three reports by Munday have been filed in these proceedings. The first report is dated 29 August 2016 (Munday’s first report).[402] Wright was instructed to provide a responsive critique to Munday’s first report. Wright’s report is dated 23 November 2016 (Wright’s first report).[403] The plaintiff filed a supplementary report by Munday dated 15 February 2017 (Munday’s second report).[404] The parties prepared a statement of Joint Expert Evidence dated 10 March 2017 (the joint expert report). [405] The plaintiff then produced a report by Munday dated 16 May 2017 (Munday’s third report) [406] on 17 May 2017 which was the eighth day after the trial of the hearing had commenced (with a hearing estimate of 7 days) which resulted in an adjournment on the ninth day of the trial. A report by Wright dated 19 June 2017 (Wright’s second report)[407] was filed pursuant to the orders made by the Court on 18 May 2017.
[402] Exhibit 73.
[403] Exhibit DK.
[404] Exhibit 74.
[405] Exhibit 76.
[406] Exhibit 75.
[407] Exhibit CU.
377 Munday attempted to formulate the claim in three different reports; each of which has shortcomings.
378 I regarded Munday as an unreliable witness. He gave non-responsive answers and was evasive when answering questions put to him in cross-examination. By way of contrast, Wright gave her evidence in a clear and forthright manner. She was prepared to make concessions and answered each question directly.
379 In paragraph 2.1 of Munday’s first report he listed the documents that he reviewed and considered.[408] Munday did not list the Position Statement as a document he had reviewed and considered. When cross-examined Munday said that although the Position Statement was a fundamental part of his instructions, he did not include that document in his report as something he relied upon. In oral evidence Munday said this was an oversight.[409] I do not accept Munday’s evidence. The emails passing between Comlaw and Munday indicate that Munday instructed Comlaw not to include that working paper as one of the documents he relied upon when preparing his report. By email dated 21 October 2016,[410] the solicitor for the plaintiff, Charles Leonidas forwarded the following email to Munday:
[408] Exhibit 73, [2].
[409] Transcript pp 918-919.
[410] Exhibit DJ.
Dear Russell,
In rereading your report, we need to ask you about your last bullet point on page 10 of the Report.
We attach working paper we believe is the “working paper A1” to which you refer in the bullet point.
If it is, please confirm that we can insert it into your report and let the other side know that it has been omitted in the copy provided.
You may wish to mark it in the top right hand corner as you have done on other attachments.
We thank you in anticipation.
380 On 21 October 2016 Munday forwarded the following response:
The contents of the client’s A1 working paper that I wanted to highlight are effectively set out at the bottom of page 6 and top of page 7 of my report.
Attachment A1, I referred to as Attachment 3 to show the impact of (bullet points in 4.16 of my report) on EBITDA of $108,602, and therefore the value of the business (at 3.1 times) or $333,666.
As this is different to the client’s A1 working paper, I didn’t want it to be part of my report.
I still prefer not to show that working paper in my report as it confuses things.
381 Later that afternoon Charles Leonidas replied:
Thanks, Russell,
You have cleared up my confusion.[411]
[411] Exhibit DJ.
382 The above email exchange indicates that Munday’s failure to refer to the Position Statement was not inadvertent but deliberate. The above email exchange indicates that Munday’s oral evidence was false.
383 The Expert Witness Code of Conduct provides:
General Duties to the Court
2. An expert witness is not an advocate for a party and has a paramount duty, overriding any duty to the party to the proceedings or other person retaining the expert witness, to assist the Court impartially on matters relevant to the area of expertise of the witness.
Content of Report
3. Every report prepared by an expert witness for use in Court shall clearly state the opinion or opinions of the expert and shall state, specify or provide:
…
(e) the reasons for and any literature or other materials utilised in support of each such opinion;
…
(h) to the extent to which any opinion which the expert has expressed involves the acceptance of another person’s opinion, the identification of that other person and opinion expressed by that other person.
384 By failing to refer to and attach a copy of the Position Statement to Munday’s first report, Munday has breached the provisions of the Expert Witness Code of Conduct and his overarching obligations under the Civil Procedure Act 2010.
385 The failure to disclose the Position Statement is significant. The figures set out in paragraph 4.6 of Munday’s first report are extracted from the Position Statement. As indicated in the table below, Munday transposed the EBITDA multiple of 3.1 from below the purchase price to above the purchase price. This creates the impression that the EBITDA multiple was used to arrive at the purchase price of $800,000.
Position Paper Munday’s First Report Possible EBITDA from Acquisition 257,883 Prospective EBITDA from Acquisition 257,883 Purchase Price 800,000 EBITDA Multiple 3.1X Multiple of EBITDA 3.10 Price/Business Value $799,437
Say $800,000
386 Munday agreed that the Position Statement is not a contemporaneous document from mid 2013 because it is trying to quantify the loss that by then had long since occurred.[412] Munday agreed that the document had probably been prepared in the financial year ending 30 June 2015. Munday agreed that it was that document alone that formed the basis of his opinion that the multiple of 3.1 was in the contemplation of the plaintiff in 2013.
[412] Transcript p 963.
387 Munday’s first report is also based on an incorrect assumption of fact that “the estimated increase in of the price of Gelato and Sorbet on a rise and fall basis should have been 2.0%.”[413] When cross-examined Munday agreed that the assertion of a 2% increase in price as stated in paragraph 4.13 of his first report was based on the plaintiff’s statement of claim.[414] Munday agreed that he was not provided with any empirical basis at all for the assumption that the rise and fall would have been 2 per cent.[415] Munday agreed that the IBIS report made it clear that there was a surge in milk prices in 2013/2014 which was the period Munday was referring to in the report.[416]
[413] Exhibit 73, [4.13].
[414] Transcript pp 928-929.
[415] Transcript p 930.
[416] Transcript p 933.
388 Paragraph 4.15 of Munday’s first report refers to the memorandum dated 12 August 2014 which Gordon sent to all franchise owners and corporate store managers. Munday omitted a reference to the advice contained in the email that Bulla had developed a Trampoline Base Milk Product which “will result in a new manufacturing process, and that will bring down the overall cost of goods (COGS) by between 27% and 62%.”[417]
[417] Exhibit P.
389 Munday states that “To compensate for the unease of the new Trampoline manufacturing process is more familiar, Trampoline Enterprises reduced the royalties to be paid by 1% of sales and the Marketing levy by 1%. This was to be reviewed in 6 months… The 1% Royalty reduction was 6 months from 25- Aug-14 to 1-Mar-15.”[418]
[418] Exhibit 73, [4.15] –[4.16].
Increase in operating loss corporate stores ($105,731 – third report)
390 In Munday’s third report Munday calculates the increase in operating loss for corporate stores as follows: [419]
[419] Exhibit 75, [12].
· Corporate store EBITDA loss FY 15 $(170,975)
Add internal royalties $ 17,682
Adjusted Corporate Store EBITDA $(153,306)
· Corporate store EBITDA loss FY14 $( 74,169)
Add internal royalties $110,079
Adjusted Corporate store EBITDA $ 35,910
· Difference $ 189,216
· Less additional royalties from franchised
stores at Fitzroy, Knox and Southgate in
FY2015 $ 86,805
$105,731
391 The claim for increase in operating loss is based on the assumption that the increased labour cost meant corporate stores at St Kilda, Brighton and Chadstone could not become franchised stores and needed to be closed. Brighton’s closure date was 3 August 2014, St Kilda’s closure date was 14 September 2014 and the Chadstone closure date was 29 January 2015.
392 Munday’s first report also assumed that the Darwin Central store closed due to the higher labour costs.[420] I accept Wright’s opinion that “this is an unsupported assumption to make given there is no information available to support this view or to indicate that it is a reasonable assumption.”[421]
[420] Exhibit 73.
[421] Exhibit DK, [2.2.1].
393 Munday stated that he was instructed that “a Craigieburn store opened on 31 March 2014 but this franchisee was sourced before any change to the system. As a result of the massive changes to the system the Fitzroy store was sold to the Craigieburn franchisee at a significant discount.”[422] Munday’s instructions contradict the plaintiff’s claim that it sold the Fitzroy store to Singh as a result of Fresh Retailing’s breach of confidentiality.[423]
[422] Exhibit 73, [4.16].
[423] ASC, [38]-[40]; also see above paragraphs 177-192 and exhibit 15.
394 In paragraph 5.6 Munday stated that “we consider the increase in operating loss of $96,819 is entirely due to the change in operating modus imposed on the business”.[424] When cross-examined Munday accepted that it is a question for the court to determine what was the cause of the modus operandi change. He agreed that if that cause cannot be levelled at defendant, that would impact on the assessment.[425]
[424] Exhibit 73.
[425] Transcript p 939.
395 Munday states that he was instructed that “Wages to turnover increased 25% under the new system.”[426] When cross-examined, Munday agreed that if it was the case that sales went down and everything else remained equal including wages, the ratio of wages to turnover would increase.[427]
[426] Exhibit 73, [4.16].
[427] Transcript p 937.
396 In paragraph 4 of the joint report Munday stated:
We assume that representatives of the Plaintiff will in due cause [sic] provide the evidence that the change in operating profit was due to the change in modus operandi.[428]
[428] Exhibit 76.
397 Wright analysed the information referred to in the Munday’s first report. Wright tabled the EBITDA of all company owned stores in financial year 2013. This analysis indicated that the EBITDA for St Kilda was $-32,396, Brighton $-31424 and Chadstone $-42,558.[429] I accept Wright’s evidence that the closed corporate stores were unprofitable prior to the plaintiff purchasing the Trampoline franchise from the defendants.
[429] Exhibit DK, [4.5.18].
398 I accept Wright’s opinion that as the closed corporate stores were unprofitable prior to the plaintiff purchasing the Trampoline franchise from the first defendant, the assumption that the closed corporate stores would have been converted to franchise stores is unsupported by their historical financial performance.[430]
[430] Exhibit DK, [4.5.21].
399 I accept Wright’s opinion that based on that information, the plaintiff would save cash flow of approximately $100,000 if the corporate stores were closed and that “by closing the Closed Company Stores, the Plaintiff is improving overall cash flow by reducing its operating losses (and resulting cash outflows). This amount would offset any losses claimed.”[431]
[431] Exhibit DK, [4.5.19], [4.5.21].
400 The Southgate, Fitzroy and Knox City stores became franchisee stores on 7 March 2014, 4 August 2014 and 28 March 2014.[432] Southgate sold for $130,000 plus GST.[433] Knox sold for $65,000 plus GST.[434]
[432] Exhibit 73, [4.10]
[433] Exhibit DM.
[434] Exhibit DL.
401 Munday was not told how much these stores were sold for. He was not instructed to take the proceeds from those sales into account in his calculations.[435] That would have been reflected in the “corporate store EBITDA” shown in Munday’s third report which is reflected as nil.[436]
You didn’t factor into your calculations proceeds from sale of those stores? I hadn’t, no.[437]
…
But you accept it should have been factored into your calculations and would have made a difference?...Yes, the after tax capital gain, yes.[438]
[435] Transcript p 943.
[436] Exhibit 75.
[437] Transcript p 944.
[438] Transcript p 946.
402 In Wright’s opinion an essential component of an assessment of economic loss caused by the conduct is a comparable analysis of the closed corporate stores’ financial performance prior to and after the defendants’ alleged conduct and the changed “operating modus” in July and August 2014. In Wright’s opinion an opinion of any loss caused by the defendants’ conduct cannot be formed in the absence of such analysis.[439]
[439] Exhibit DK, [2.2.1].
403 I accept Wright’s opinion that a loss of income by comparing the operating losses in Financial Year 2014 and Financial Year 2015 is not a like-for-like analysis.
404 I accept Wright’s opinion that the revised operating loss calculation set out in Munday’s third report remains inconsistent and is not a like for like analysis.[440] I also accept Wright’s opinion that Munday’s third report has still not addressed the issue of seasonality between the data he took into account in Financial Year 2014 and in the Financial Year 2015. Munday’s third report analyses Brighton’s profitability in two winter months in Financial Year 2015, compared with all of spring, summer, autumn and one month of winter in Financial Year 2014. The analysis in Munday’s third report compares the coldest months of the year in Financial Year 2015, where ice cream is less likely to be purchased with warmer periods in the prior year, Financial Year 2014.[441]
[440] Exhibit CU, [4.5.3]-[4.5.5].
[441] Exhibit CU, [4.5.6].
405 I also accept Wright’s opinion that in Munday’s third report, Munday assessed the loss in value of the business by comparing the EBITDA of $257,883 at acquisition to the prospective EBITDA of $176,546 as at 30 June 2015. In structuring the loss in this way, all differences between the financial position at the date of purchase compared to two years later in June 2015 are attributed to the defendants. That methodology does not account for changes in that period which have nothing to do with the defendants.[442]
[442] Exhibit CU, [4.3].
406 I accept Wright’s opinion that the analysis of operating losses in Munday’s third report remains an inconsistent analysis and cannot be relied upon in assessing any alleged loss suffered by the plaintiff due to the change in operating modus.[443]
[443] Exhibit CU, [4.5.7].
Loss of business value
407 Munday agreed that the figure of $231,378 stated in Munday’s first report for loss in value of franchise due to store closure was based on an assumption that “the increased labour cost meant corporate stores at St Kilda, Brighton and Chadstone could not become franchisees and needed to be closed.”[444] Munday agreed that the question of whether the stores closed because of the change in modus operandi or because of some other reason was a matter for the court.[445] Munday agreed that he based his assessment of loss of business value on the assumption that the stores closed because of the change in modus operandi. Munday agreed that if the Court finds that even one store closed for other reasons, that would impact on his calculations and, if for example, the Chadstone store closed for other reasons, the sum of $231,378 would automatically be reduced.[446]
[444] Exhibit 73 [4.16], transcript p 934.
[445] Transcript pp 934-935.
[446] Transcript p 936.
408 In Munday’s third report, Munday did not take into account the fact that rebate revenues were materially higher after the change in modus operandi compared to before the change in modus operandi.[447] Maletsky conceded that he did not ask Munday to consider the actual increased rebate streams.[448]
[447] Exhibit CU, [2.3.2(e)].
[448] Transcript p 863.
409 Under the September 2013 trading terms Burra received a rebate from Pre Gel of 35% and passed on 25% to the plaintiff retaining the other 10%.[449] Under the new system, the plaintiff received a rebate from Pre Gel of 38%.[450] The plaintiff passed on 15% to franchisees which meant that the plaintiff retained the other 23%.
[449] Transcript pp 413 and 430.
[450] Exhibit DE.
410 The plaintiff’s financial records for 2014/2015 suggest that sales were relatively stable. But they also show a material increase in supplier rebate revenue (from $69,946 in 2013/2014 to $115,209 in 2014/2015).[451] The actual supplier rebates are higher in Financial Year 2014 than the expected rebates indicated in Munday’s third report which would offset any losses allegedly suffered by the plaintiff.[452]
[451] Exhibit 75, Appendix F4.
[452] Exhibit CU, [2.3.2(e)].
411 In oral evidence Munday stated that he adopted the following method to identify the loss and damage:
Well, they paid a price of $800,000 for the business assets and I looked at the basis of how that was – the client’s workings on how that was arrived at. I then looked at other factors including what was the value of the business after the alleged misrepresentation which I did at 30 June 2015. I then factored in the fact there was a six month loss of royalty income due to the (indistinct) of the franchise, all the other franchise stores. And then I looked at the impact of the misrepresentation when it applied which was during the 2015 financial year.[453]
[453] Transcript p 905.
412 Munday gave oral evidence that he valued the business on the following basis:
I really reviewed the valuation the way the plaintiff valued it originally when they paid $800,000 and that was based on an EBITDA times a multiple.
What was the multiple you were instructed?...Well, it was 3.1 pursuant to the purchaser and I considered that reasonable at that time which was September 2013 and then I revalued at June 2015 based on a multiple of 2.625 due to the impact of the change in who supplied the business and the premixing at the store level et cetera, you know, gross prosects of the franchise would be much less. So a lower multiple would be applicable.[454]
[454] Transcript p 909.
413 Clause 4.2 of the Asset sale and purchase agreement provides:
4.2 The Purchase Price is apportioned as follows:
Plant and Equipment $503,650.00
Recipes and Goodwill $293,027.00
Balance of the Assets $ 1,000.00
414 Clause 4.2 of the Asset sale and purchase agreement sets out the apportionment of the purchase price for the sale and purchase of assets. It has not been suggested that the price attributed for plant and equipment is a sham. If this suggestion were made, it would be contrary to the provisions of Part IVA of the Income Tax Assessment Act 1936.
415 Maletsky gave evidence that the purchase price of $503,650 for plant and equipment as set out in clause 4.2 of the Asset sale and purchase agreement was apportioned in accordance with a document prepared by the plaintiff.[455] The following figures are set out in that document:
[455] Exhibit DC, transcript p 857.
Fresh Retailing Pty Ltd Retail Stores
Store Cost Equip Fitout Equip to Us BRUNSWICK 381,067 172,556 208,511 84,650 St Kilda 569,399 277,256 292,143 121,700 SOUTHBANK 392,286 186,280 206,006 105,850 KNOX 252,753 106,611 152,142 81,250 BRIGHTON 250,177 82,881 167,296 53,100 CHADSTONE 90,898 74,453 10,945 57,100 1,936,579 894,037 1,037,043 503,650
416 Gordon himself gave evidence about how at least one part of that apportionment was done. That is, how he personally ascribed values to items of plant and equipment which line by line added up to the amount of $84,650 that appears in the fourth column of the Brunswick (Fitzroy) store. Accordingly, far from being some kind of tax-driven afterthought, Gordon’s evidence is that the apportionment of the purchase price set out in clause 4.2 of the Asset sale and purchase agreement was a considered calculated number.
417 In Munday’s second report, Munday offers by way of explanation:
The actual split between plant and equipment, goodwill and other assets per the Agreement would not necessarily reflect each component’s value but reflect what each party would prefer. The higher the ascribed plant and equipment value, the more a purchaser can depreciate such for tax purposes, whereas it cannot claim any amortisation of goodwill. Therefore purchasers of assets typically prefer to ascribe a higher value to plant and equipment.[456]
[456] Exhibit 74, [2.5.3.2.1.1].
418 Munday’s explanation is contrary to the terms of the Asset sale and purchase agreement and, in particular, clause 4.2. Further, clause 25.6 provides that the Asset sale and purchase agreement:
(1)contains the entire agreement, arrangement and understanding between the parties on everything connected with the subject matter of this Agreement, including the sale and purchase of the Shares.
419 As stated in paragraph 4.5.3 of Wright’s first report.[457]
[457] Exhibit DK.
Based on the above and our review of the Agreement, we note the following:
(a) The Agreement is an asset sale and purchase agreement;
(b) Based on clause 4 of the Asset Sale and Purchase Agreement dated 4 September 2013, the purchase price was based on the value of the assets sold to the Plaintiff, and not based on a business valuation using an FME [future maintainable earnings valuation methodology] approach.
(c) The definition of the Purchase Price in the Agreement does not refer to future maintainable earnings; and
(d) There are no specific warranties on the financial information disclosed per Schedule 1 of the Agreement. In particular, there are no warranties regarding future earnings or revenue of the business being purchased.
Consequently, the Agreement does not appear to contemplate future maintainable earnings as a basis for the purchase price.
420 I accept Wright’s opinion that the purchase price was based on the assets sold to the plaintiff and not based on a business valuation using an FME (Future maintainable earnings valuation methodology) approach. Consequently the defendants’ alleged misrepresentations and conduct would not have had an impact on the value of the assets purchased by the plaintiff.
421 Maletsky gave the following evidence:
Did you when calculating the purchase price based on an EBITDA of $257,000-odd and a multiple of 3.1, did you take off any amount for plant and equipment?...No, we didn’t.
Why not?...Well, for us we felt it was irrelevant. The book value of the plant in the books that were disclosed to us was $186,000 for the written down value.
Yes?...So we felt that if we could sell the stores, the corporate stores as franchises then we could make a little bit extra money. So that was how we justified the higher multiple of 3 as opposed to 2. [458]
[458] Transcript p 347.
422 I do not accept Maletsky’s evidence that the purchase price was based on an EBITDA of a multiple of 3.1. His evidence is contrary to the terms of the Asset sale and purchase agreement. The plaintiff was asked to discover and produce contemporaneous working documents and failed to do so. The Position Statement[459] was marked as confidential and only produced as an exhibit on 11 May 2017 (the fourth day of the trial).
[459] Exhibit 39.
423 The Position Statement was clearly not a contemporaneous working document. The Position Statement was clearly drafted after the price rise and some time after the settlement date in September 2013. Munday gave the following evidence in cross-examination:
…just to be clear [the Position Statement] is a document that obviously is not a contemporaneous document from middle of 2013, is it, because it is trying to quantify the loss that by then has long since occurred, isn’t it?...Yes.
This is a document that’s been prepared probably in financial year ending probably in 30 June 2015?...The date of the preparation, yes.
But it is this document and this document alone, is it, that forms the basis of your opinion that in fact back in 2013 the multiple of 3.1 was actually what was in the contemplation of the decision-makers within your client?...That’s how I construed it.[460]
[460] Transcript p 963.
424 I do not accept Munday’s opinion that the price paid for the business was based on an EBITDA multiple of 3.1 for the following reasons.
(1) The terms of the clause 4.2 of the Asset sale and purchase agreement.[461]
[461] Exhibit 1.
(2) Munday omitted to state that he relied on the Position Statement as a basis of ascertaining the business value of the franchise.
(3) Munday deliberately did not refer to the Position Statement as a document he relied upon in the preparation of his report.[462]
(4) Munday’s version of the calculations set out in the Position Statement conveys the impression that the multiple of 3.1 was reverse engineered from the purchase. Contrary to the calculations set out in the Position Statement, Munday reversed the basis of calculating the purchase price as set out in clause 4.6 of Munday’s first report[463] and clause 3 of Munday’s third report.[464] Munday’s presentation of changing the order suggests that the purchase price was derived from a contemporaneous assessment of the multiple.
[462] Exhibit 73, [2].
[463] Exhibit 73.
[464] Exhibit 75.
425 In Munday’s third report, Munday states:
As franchisees are making less EBITDA due to additional pre-mix costs we consider there would be a slowing in the overall growth of the franchise (number of stores). This has been the case.
This would lose growth in the franchise overall and suggest overall EBITDA multiple may need to be reduced from 3.1 times to 2.5 to 2.75, say 2.625.[465]
[465] Exhibit 75, [12].
426 There is no evidence to support Munday’s assumption that the franchisees are making less EBITDA due to additional pre-mix costs. Munday provides no analysis of the revised multiple of 2.625. For the reasons stated above, I do not accept Munday’s analysis that the plaintiff has suffered a loss of $336,500. I am not satisfied that the plaintiff has suffered loss and damage on the basis claimed in Munday’s third report.
427 The plaintiff also submitted a further alternative basis of calculating its loss in paragraph 163 of its written submissions after the evidence had concluded. The defendants objected to the plaintiff running this new quantum analysis. I refused to admit the plaintiff’s further alternative claim because of the circumstances of this case, the obvious prejudice to the defendants and the overarching obligations of the plaintiff under the Civil Procedure Act 2010.
Summary of the seven claims
428 I refuse the plaintiff’s application for an order setting aside the Independent Accountant’s Determination. The plaintiff’s claim for payment of the sum of $83,878.76 for moneys had and received is dismissed.
429 The plaintiff’s claim that the Fro Yo Yoghurt soft serve powder was not fit for purpose or of merchantable quality is dismissed.
430 Having regard to the matters referred to in the above paragraphs 94-116, the first defendant is entitled to judgment on its counterclaim for damages regarding the St. Kilda bank guarantee in the amount of $11,603.55.
431 Having regard to the matters referred to in the above paragraphs 117-166, Trampoline Enterprises is liable to pay the sum of $140,000 to the first defendant on its counterclaim for the First Earn Out Amount.
432 There be judgment for the plaintiff against the first defendant for breach of confidentiality in the sum of $40,807.
433 The plaintiff’s claim for damages for defective Plant and Equipment is dismissed.
434 The plaintiff’s claim for damages for false and misleading representations and conduct is dismissed.
435 The plaintiff’s claim that the defendants’ conduct was unconscionable is dismissed.
Orders
436 I propose to make the following orders:
1 There be judgment for the first defendant against the plaintiff in the amounts of:
(a) $200,000 together with interest.
(b) $140,000 together with interest.
(c) $11,603.55 together with interest.
2. There be judgment for the first defendant against Stanley Gordon and Franchised Food Company Pty Ltd in the amounts of:
(a) $200,000 together with interest.
(b) $140,000 together with interest.
(c) $11,603.55 together with interest.
3. There be judgment for the plaintiff against the first defendant for breach of confidentiality in the sum of $46,485.00.
4. The plaintiff’s claim:
(a) for payment of the sum of $83,878.76 for moneys had and received is dismissed.
(b) that the Fro Yo Yoghurt soft serve powder was not fit for purpose or of merchantable quality is dismissed.
(c) for damages for defective Plant and Equipment is dismissed.
(d) for damages for false and misleading representations and conduct is dismissed.
(e) that the defendants’ conduct was unconscionable is dismissed.
437 I will hear counsel on the question of costs, interest and the terms of the order.
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