Treiser v Michigan Investments Pty Ltd
[2000] VSC 301
•2 August 2000
| SUPREME COURT OF VICTORIA | |
| CAUSES JURISDICTION | Not Restricted |
No.7478 of 1998
| TREISER and BETTER BREW PTY LTD | Plaintiffs |
| v | |
| MICHIGAN INVESTMENTS PTY LTD and RODNEY MONTAGUE LASKI | Defendants |
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JUDGE: | Smith J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 9, 13, 14, 15 and 23 June, 2000 | |
DATE OF JUDGMENT: | 2 August, 2000 | |
CASE MAY BE CITED AS: | Treiser v Michigan Investments Pty Ltd | |
MEDIUM NEUTRAL CITATION: | [2000] VSC 301 | |
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Contract – misrepresentations – false, misleading and deceptive conduct – damages.
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APPEARANCES: | Counsel | Solicitors |
For the Plaintiff | Mr. A. Rodbard-Bean | Kalus Kenny |
| For the Defendant | Mr. G. Bigmore QC & Mr. M. Barrett | Franzese & Associates |
HIS HONOUR:
The initial agreements
On about 23 June 1997, the first plaintiff, David Treiser (“Treiser”), entered into an agreement ("the first sale agreement") with the first defendant, Michigan Investments Pty Ltd (“Michigan Investments”), under which Michigan Investments sold to Treiser a coffee distribution business known as "Better Brew" for the sum of $300,000.
Michigan Investments, through Mr Laski, the second defendant, claimed to have developed a business within Australia which involved the provision of coffee brewers and associated products to commercial sites using a marketing program developed by Michigan Investments. The concept involved placing Duothek brewers in offices or showrooms (the "site") free of charge, as long as the site purchased one box of coffee per month. There was also the opportunity to sell tea and biscuits. In selling the business to M Treiser, Michigan Investments sold the opportunity to sell the concept to a state distributor, and sub-distributors within each state and also the opportunity to deal directly with the commercial sites at which brewers might be placed. The purchase price of $300,000 was by agreement made up of an amount of $270,000 paid for 300 brewers purchased from Michigan Investments and $30,000 for the good will and right, title and interest in the business and the covenants entered into by Michigan Investments under the sale agreement. It was contemplated that Better Brew would operate 100 machines directly in Victoria but the business would be conducted inter-state through state distributors or sub-distributors.
On about 15 July 1997, the second plaintiff, Better Brew Pty Ltd (“Better Brew”) entered into a further agreement ("the second sale agreement") with Michigan Investments under which it purchased from Michigan Investments an additional 270 coffee brewing units for $74,498.40. This purchase was a further purchase of a kind provided for in the first sale agreement.
Plaintiff's claim - misrepresentations relating to the initial agreements
The plaintiffs allege the making of representations by Michigan Investments through Mr Laski prior to the first sale agreement. They allege, firstly, that Michigan Investments represented that it would not, within five years of signing the agreement, within Australia and New Zealand, be directly or indirectly engaged, concerned or interested in any form of enterprise which was engaged, concerned or interested in carrying out any business substantially similar to or in competition to the business sold, or supply brewers or coffee products to any third party. They also allege representations that:
(a)the assets sold with the business consisted of three hundred Duothek Brewers listed in Schedule 1 to the agreement,
(b)Michigan Investments had title in or the right to sell the coffee brewing units,
(c)units would be of merchantable quality and fit for the purpose for which they were purchased,
(d)it had 382 coffee brewing units in stock for delivery and,
(e)they would be suitable for continuous use in a commercial environment,
(f)the coffee made by the brewing unit would remain hot and fresh throughout the day,
(g)Michigan Investments would replace any faulty coffee brewing units within a period of 12 months of signing the agreement.
They also allege that Michigan Investments represented that it would assist in the selection and appointment of state and sub-distributors and that it would provide an operations manual to be used as a guide to the operation and conduct of the business. In addition they allege that Michigan Investments represented that the gross profit would be approximately $100,800 per annum.
They allege that the same representations were made or were still in operation prior to the second sale agreement relating to the additional units other than those referred to in (a) and (d) above. There was also a representation that the additional units would be delivered by 1 August 1997.
The plaintiffs allege that they relied upon those representations in entering into the agreements. They allege that the representations were false and constituted misleading or deceptive conduct or conduct likely to mislead or deceive in contravention of s.52 of the Trade Practices Act 1975 and s. 11 of the Fair Trading Act 1985 and also that some of the representations were in contravention of s. 53(c) of the Trade Practices Act and s. 12 of the Fair Trading Act in that they were false representations concerning the performance characteristics, uses or benefits of the brewers. They also allege that to the extent that the representations related to future matters Michigan Investments had no reasonable grounds for making the representations and they rely on s. 51A of the Trade Practices Act and 10A of the Fair Trading Act.
As against the second defendant, Laski, the plaintiffs allege that he knew or ought to have known that the representations were misleading or deceptive or likely to mislead or deceive, that those relating to the performance characteristics were false and that Michigan Investments had no reasonable grounds for making the representations and that he aided and abetted, counselled or procured, was knowingly concerned and was a party to or conspired with Michigan Investments in effecting the contraventions of the above sections.
The plaintiffs claim damages from both defendants.
Plaintiff's claim – non-delivery of brewers and subsequent agreement
Better Brew alleges that Michigan Investments also breached the second sale agreement by failing to deliver coffee brewing units on or before 1 August 1997 and instead delivered 209 units on or about 10 September 1997 and a further 50 coffee brewing units on or about 30 September 1997. It further alleges that on 9 October 1997 it returned 17 faulty coffee brewing units for replacement to Michigan Investments and that as at 9 October 1997 Michigan Investments had failed to deliver a total of 178 coffee brewing units (which figure included the two shortfalls in delivery and the non-replaced units).
On 9 October 1997 the plaintiffs requested Michigan Investments to refund the amount paid for the 178 coffee brewing units. Shortly after that, an agreement was reached between Better Brew and Michigan Investments under which it agreed to pay Better Brew the amount of $49,113.l76 in satisfaction of the sum due to Better Brew. There was a further agreement under which Michigan Investments sold 49 “Shaka Latte” cold drink dispensers to Better Brew for $2,950 per unit. Better Brew directed Michigan Investments to hold the sum of $49,113.76 as a deposit on the Shaka Latte dispensers. Better Brew alleges that it was a term of what it described as the “Shaka Latte” agreement that
(a)Michigan Investments had title in the dispensers;
(b)Michigan Investments would hold them on behalf of Better Brew and act as agent for Better Brew in promoting, selling and distributing the dispensers;
(c)the price for each Shaka Latte dispenser sold by Michigan Investments would be $4,500 each, or alternatively, a special distributor price of $38,500 for the purchase of 10 dispensers;
(d)when a Shaka Latte dispenser was sold the deposit of $1,000 paid by Better Brew would be applied to the Shaka Latte sale and the balance of $1,950 on the dispenser would be paid out of the sale proceeds and the profit on the sale of the dispenser of $1,900 on the special distributor price or $1,500 on the standard sale would thereafter be paid to Better Brew.
It alleges that wrongly, and in breach of the Shaka Latte agreement, Michigan Investments did not have title in nor the right to sell the dispensers, failed to hold the 49 dispensers on its behalf and failed to act as its agent in promoting, selling and distributing dispensers. It alleges that Michigan Investments repudiated the agreement and that Better Brew accepted that repudiation.
Better Brew further alleges that Michigan Investments made representations to Better Brew in similar terms to the terms of the Shaka Latte agreement referred to above, that it relied on those representations in entering into the agreements and that those representations were false and involved misleading or deceptive conduct in contravention of s 52 of the Trade Practices Act 1975 and s 11 of the Fair Trading Act 1985. It alleges that Laski knew or ought to have known that these representations were misleading or deceptive or likely to mislead or deceive and that he aided and abetted, counselled or procured, was knowingly concerned or was a party to or conspired with Michigan Investments in effecting the contraventions of the legislation. Better Brew seek orders rescinding the Shaka Latte agreement or damages. It acknowledges, however, that if it is successful in its claims for damages in respect of the representations made in relation to the first and second sale agreements, it cannot recover damages under the Shaka Latte claim; for it would be recovering damages twice.
The defendants rely on the "Shaka Latte" agreement as a defence to the claim for damages arising from the representations made prior to the first and second sale agreements insofar as it includes damages for non-delivery.
The critical issues
Mr Treiser and Better Brew allege in their statement of claim that most of the representations made prior to entering into the first and second sale agreements referred to above were also terms of those agreements. In presenting their cases, however, the plaintiffs have focused on the Trade Practices Act and Fair Trading Act causes of action based on the alleged misrepresentations not the alleged breaches of contract. The principal reason for this was that the quantum of damages recoverable was higher under the former than the latter.
The critical representations are representations as to assistance in the selection and appointment of distributors, representations as to profitability and representations as to fitness for purpose. In view of the conclusions I have reached as to those representations, it is not necessary to conduct a detailed analysis of the case on alleged misrepresentations as to title and as to non-competition. For similar reasons and because the claims in contract were not argued, I do not propose to embark upon an analysis of the entitlements or otherwise of the plaintiffs based on alleged breaches of contract. Some issues in relation to the Shaka Latte agreement also need to be canvassed. I will refer to them later in these reasons.
In their pleadings the defendants raise a variety of issues. I do not propose to address all the issues raised but only those which in the end were relied upon in argument before me. The other issues I treat as abandoned.
Witnesses
So far as the representations are concerned, much turns on the assessment of the credibility of critical witnesses. They are the plaintiff, Mr Treiser, the defendant, Mr Laski, and a Mr Cameron who was a marketing person engaged by the first defendant on its behalf in marketing its business proposals.
I regret to say that I found Mr Laski and Mr Cameron unsatisfactory witnesses. I am also satisfied that both were dishonest in their dealings with Mr Treiser. Mr Laski is someone who, to put it charitably, has been less than frank in his evidence. Mr Cameron was not an independent witness in this case. I observed him on several occasions looking for and receiving confirmation in court from Mr Laski. Mr Treiser, however, came across as a witness who was conscious of and respected his obligations as a witness and his memory was reasonably reliable. I turn to consider the alleged representations.
The representation as to assistance in the selection and the appointment of distributors.
I accept that I should proceed with caution in considering the plaintiff's allegation that there was a representation of assistance which was significantly wider than that set out in Schedule 2 of the agreement. (See Seabridge Aust. Pty Ltd v JLW (1991) 29 FCR 415, 421-422). It provided as follows:
"(1)Purchasers must advertise, screen and organise meetings with interested persons who are prospective candidates for State and sub-distributors. MI will provide sample letters to send to persons indicating an interest in becoming a State or sub-distributor.
(2)Purchaser may advise MI that it has organised persons to be selected as State or Sub-distributors and that it requires MI assistance to interview the interested persons.
(3)MI will assist in the interview of the candidates organised by the purchaser. The purchaser will be responsible for paying airfare and accommodation expenses of MI representatives where interviews are to be held outside of Melbourne.
Final selection is at the sole discretion of the purchaser."
Mr Treiser in his evidence said that in discussions with Mr Laski and Mr Cameron it was made clear to him that his role was to advertise and send out an initial letter to any potential distributor who responded, the letter to be based on a precedent to be supplied by Michigan Investment. Thereafter, he was to deliver the names of interested parties to Michigan Investments who would follow up the leads and complete "the deal". In other words all he was to do was to advertise and send a letter to any persons showing interest and Michigan Investments would then take over. I accept his evidence that Mr Laski held himself out to have a unique expertise in this form of selling. I also accept Mr Treiser's evidence that he was dependant upon the expertise of Mr Laski in selling the distributorships, which were the key to the financial success of the venture. As he pointed out the business was not an ongoing business. There was no history to it and there were no customers. I am satisfied that he would never have invested over $300,000 in such a business without the promise of such extensive assistance from the person who claimed to be the expert in the marketing of such businesses.
It is true that Mr Treiser did not complain to Mr Laski or to Mr Cameron for some time about the lack of performance by Mr Laski and Mr Cameron in closing deals with distributors. The selling of distributorships interstate appear to have proceeded slowly. I accept Mr Treiser's evidence that he thought it important to be able to point to successful operation of the business in Victoria before he attempted to market distributorships interstate. I also accept that he was concerned for some time not to fall out with Mr Laski and Mr Cameron because, as he saw it, he was highly dependant upon their support. He was, in truth, placed in a very difficult position and it is understandable that he did not make complaints for some time and from time to time allowed Mr Laski to change the rules (eg. over the "Shaka Latte" deal). Towards the end he was trying to salvage what he could and so went along with some of Mr Laski's suggestions. I accept Mr Treiser's evidence that he did not receive the alleged Operations Manual. I note that a copy of such a document was not discovered by the defendants until very late in the proceedings and no satisfactory explanation was given by the defendants for the late discovery.
I am supported in my conclusions on these issues by the improbability of Mr Laski or Mr Cameron saying nothing to Mr Treiser to suggest it was inappropriate for him to send them lists of people to be contacted, as he did from time to time, if their account of the defendant's obligations was correct. I am satisfied that Michigan Investments and Mr Laski did represent that they would assist in the manner described but failed to do so and had no intention of doing so when the representations were made. I am satisfied that Mr Treiser and Better Brew relied on the representations in entering into their respective agreements.
Representations as to profitability.
The agreed business proposal had two aspects to it. The first was the direct siting of brewers in Victoria by Better Brew Coffee. The second aspect was the sale of distributorships and sub-distributorships inter-state.
Prior to entering into the agreement, Mr Laski supplied Mr Treiser with a document setting out what appeared to be details of the financial performance of brewers of a different type operated directly by another company of Mr Laski – Mr Coffee Man. It presented a calculation of the number of boxes of coffee sold per site with the total gross profit calculated resulting in a calculation of a gross profit per brewer of $698.26 per annum. There was a note that the figures were based on coffee sales only. The material was described by Mr Laski in a letter 16 June 1997 to the plaintiffs' accountants Gaddie Metz and Kahn in the following terms:
"Document marked 'letter A' consists of (five) (5) pages pertaining to the sale of (thirty five) (35) brewers for $38,500 (financed by National Australia Bank). This document gives you location, buying price of box of coffee, selling price, profit per box and the number of brewers on each site.
Page (4) of these documents list the number of boxes taken by the sites and it is extended to show total profit per site, these figures are for a (ninety) (90) day period and they are for the actual sales of coffee only, no tea or ancillary items (biscuits, sugar, milk, etc.). Where a site has not purchased the minimum of one box of coffee per month they pay a $40 per month rental on the brewer. This has not been included on these figures."
This information was received after the initial written proposal of 6 June 1997 in course of which Mr Laski included the following:
"We believe that the Australian market could handle a minimum of 3000 brewers. We would supply the purchaser initially with 300 brewers. When these have been allocated further machines are supplied to the Better Brew distributor at $300.00 each. The ongoing income is made up of a markup of $15.00 per box of tea and $13.00 on a box of coffee that they supply to their sub-distributor network. Keep in mind coffee is sent out in 100 box lots (the same applies to tea). This keeps the freight factor at its lowest (sub-distributors pay you for their own freight)."
These figures provide the basis for the representation pleaded of by the plaintiffs of an annual gross margin for the business of approximately $100,800.00. That figure is arrived at on the basis of 300 Duothek brewers with a combined monthly gross margin of $28.00 each. The proposal then stated:
"EXAMPLE. Five hundred brewers doing two boxes of tea and coffee per month (based on minimum consumption figures).
500 boxes of tea
X $15.00 per box
= $7,500 per month.
500 boxes of coffee
X $13.00 per box
= $6,500 per month.
Total Potential Income is $14,000 per month or $168,000 ongoing per annum (gross)."
I note that, during his cross-examination, Mr Laski said that Mr Treiser should not have relied upon the material in the immediately preceding quoted passage and, in particular, should not have read the words "based on minimum consumption figures" as anything more than an assumption. The proposal also stated:
"The sub-distributed territories are sold for $8,000 each which includes (ten) (10) brewers, an operations manual to assist on the conduct of the business and a full computerised siting review of the territories. The profit on establishing 3,000 brewers will be well over 1 million dollars.
The investment for the Better Brew Australian distributor rights is $300,000.
So there you have it. The potential is there for the purchaser to make a good deal of money setting up territories and also enjoy a significant cash flow from sales through the distribution network. This cash flow has the potential of being sold off with a significant good will component.
We believe that 300 sub-distributors could be set up Australia wide over 24 months."
The plaintiffs argue that there was no reasonable basis for Mr Laski's representation about profitability. They rely on the fact the brewers sited by Mr Treiser and Better Brew Pty Ltd in Victoria did not earn a profit of $698 per brewer or for that matter any meaningful profit. That was not in dispute. The defendants argued, however, that this was the result of the failure of Mr Treiser, and anyone he employed, to adequately service the sites and sell products to them.
As to other relevant evidence, there was evidence of the performance of the sites purchased by Mr Becconsall and Mr Shaddock in their purchase of the Mr Coffee Man business from Laski. I am satisfied on the evidence that there was nothing more that Mr Becconsall could have done to promote the business and that he was assiduous in his efforts to make it a success. Mr Becconsall gave evidence that the brewer sites he purchased did not purchase the minimum of one box of coffee per month or achieve the profit represented to him. This was effectively admitted by Mr Laski. It is true that they purchased sites not distributorships, but the return on and value of the distributorship business depended ultimately on the return on the individual sites. It is also true that the brewers were a different brand. The similarities were sufficient, however, to enable comparisons to be made.
In any event, there was no factual basis for the original figures supplied. They have not been produced by Mr Laski. There is no evidence to support Mr Laski's bold assertions beyond his own assertions. On the evidence before me, I am satisfied that he had no factual basis to support the representations and had no reasonable grounds for making the representations to the extent that they related to future profits and that at the time the representations were made he did not hold the opinion that the profit represented would be achieved.
I am satisfied that these representations were false, misleading. and deceptive. I am also satisfied that Mr Treiser and Better Brew relied on those representations, including the one pleaded, in entering into the agreements.
Representations as to fitness for purpose.
I note that the plaintiffs allege a representation as to merchantable quality but this was not seriously pressed; understandably so because the brewers appeared to be items otherwise commercially saleable.
The critical question is whether they were fit for the purpose specified. Counsel for the plaintiff sought to identify, as the relevant purpose, that of using the brewers to attract sales of coffee from the brewer sites. It is put that that was the purpose for which the brewers were to be sold. It was argued that if they did not keep the coffee fresh and hot throughout the day so as to encourage consumption and so attract the sale of boxes of coffee then they were not fit for the purpose for which they were purchased. In addition it was argued that if they were continually returned back to Mr Treiser for whatever reason they were not fit for the purpose for which they were purchased.
It seems to me that to be realistic about this issue, the relevant alleged purpose for which the brewers were purchased was that of keeping the coffee fresh and hot throughout the day. I am satisfied that Mr Laski did represent, at least, that the brewers would keep the coffee hot and I am also satisfied that in fact they did not do so and to that extent were not satisfactory as producers of continuous supplies of hot coffee. I am satisfied, however, that freshness was not something that was the subject of representations.
Accordingly, the representations were inaccurate at least as to the heating characteristics of the brewers. I am satisfied that Mr Treiser and Better Brew relied on that representation in entering into the agreements.
The representations as to title
The evidence relating to representations as to title in brewers reflected badly on Mr Laski's honesty. He was never completely honest with Mr Treiser about his ownership of brewers. I am also satisfied that Mr Laski removed 50 brewers which he had sold to Mr Becconsall without Mr Becconsall's permission and delivered them to Mr Treiser in about September 1997.
I am satisfied, however, that the issue of falsity as to representations about ownership, title and availability did not, in fact, impact directly upon the dealings between the parties and, therefore, can be disregarded for the purpose of this litigation.
The representations as to non-competition
This is a reasonably complex area. The representation and term alleged are set out above. There is an issue as to whether the sale of Mr Coffee Man to Mr Becconsall constituted a breach of the non-competition clause and was contrary to the representation made and whether, it being a statement as to the future, there was a reasonable basis upon which it could be made. I am inclined to the view that, because Mr Treiser was aware that Mr Coffee Man was being sold at the time he entered into the agreements, I should proceed on the basis that the parties accepted that Michigan Investments and Mr Laski's activities in selling Mr Coffee Man were not in anyway caught by such representation. Different considerations I think apply to the subsequent activities of Mr Laski in selling additional brewers to Mr Becconsall. This was contrary to the term and representation. In view of the conclusions I have reached as to the other representations, however, it is not necessary to pursue these issues further.
Liability of Mr Laski
Plainly, Mr Laski was a party to the conduct that contravened the legislation.
The "Shaka Latte" agreement.
As I have indicated, it is not necessary to determine many of the issues raised concerning alleged breaches of the various contracts. There is one contractual aspect, however, that needs to be canvassed in these reasons. It relates to what became known as the "Shaka Latte" agreement referred to above. The plaintiff seeks rescission of that agreement or damages. The defendants rely upon it in partial answer to the plaintiffs claim for damages.
I have already referred to the defendants' failure to deliver and replace some 178 brewers. I accept that Michigan Investments had no right to refuse to compensate the plaintiffs. It declined to do so, however, and through Mr Laski proposed a new agreement relating to a new item of machinery namely the "Shaka Latte" machine. I have referred above to the terms of that agreement. I accept Mr Treiser's evidence that the agreement was that Michigan Investments would sell the Shaka Latte machines on behalf of the plaintiffs for a price between $3,800 to $4,500 per machine. The plaintiffs were to advertise the "Shaka Latte" machines using advertisements approved by Michigan Investments. Under the advertisements all enquiries were to be directed to Michigan Investments. I am satisfied that the correspondence and the advertisements were consistent with the intention of the parties that the 49 machines be sold as part of distributorship arrangements relating to Shaka Latte machines similar to those intended for Better Brew. Again, Mr Treiser had no immediate dealings with prospective purchasers.
Mr Treiser was contacted, not long after the advertisements were published, by Mr Cameron who was again involved. He advised Mr Treiser that they had sold 10 of his machines in Western Australia for $4,350 each. Again, this is consistent with an agreement under which Michigan Investment acted as agent for the plaintiff in respect of the 49 "Shaka Latte" machines.
Subsequently, Mr Treiser met with both Mr Laski and Mr Cameron in relation to the sale of the machines in Western Australia. Mr Treiser wanted to collect his profit. He was told, however, that he could not sell the machines in Western Australia and South Australia because he hadn't purchased a State distributorship. This position taken by Mr Laski and Mr Cameron was inconsistent with the original agreement. Mr Laski gave evidence that the change occurred because Mr Treiser was not prepared to outlay any money to take delivery of the machines and send them to Perth or Adelaide and collect the full retail price. This was not put to Mr Treiser when he was questioned so we do not know what his response would have been. It would not be surprising if he had been concerned about outlaying money for transporting machines to Perth or Adelaide if he was not to receive the original profit that was intended. If he had still been in the position to do so it is difficult to imagine him being other than happy to cover that cost. He would have had, as Counsel pointed out, a risk free return. It is true that when offered a commission in respect of machines sold, he accepted that offer but it would have been apparent to all that he was accepting the offer in circumstances where he was trying to salvage what he could from the wreckage. The same reasons caused him to attempt to sell "Shaka Latte" machines at the Sydney Trade Show with the assistance of the defendants, in particular Mr Cameron. A large number of leads were provided to the defendants by Mr Treiser (through his daughter who represented him at the Trade Show). The defendants did not follow them up. The supplying and accepting of such leads, however, was consistent with the defendants accepting that they were acting as agents for the plaintiffs in the sale of "Shaka Latte" machines.
I accept the submission of the plaintiff Better Brew, that the defendants repudiated the "Shaka Latte" agreement by failing to hold the dispensers on behalf of Better Brew, failing to act as its agent and failing to pay to it its entitlement. The plaintiffs have accepted that repudiation.
The plaintiff concedes, however, that if damages are recoverable for breach of the Trade Practices Act and the Fair Trading Act in respect of the representations made in relation to the first and second agreements then the damages claimed in respect of the "Shaka Latte" agreement represents quantification of the amount due upon the claim for non-delivery of the stock. It is thus a sub-claim of the total claim made under that legislation. It is, therefore, necessary to turn to the question of the quantum of damages to be awarded for the false and misleading conduct in relation to the first and second sale agreements.
Damages
The plaintiffs called an expert witness, a Mr Wight from Ernst & Young to quantify the damages claim.
The basis relied upon for the assessment of damages flowing from the false representations is the normal basis in cases of this kind – the difference between the amount paid for the purchase of the business and the value of the business. The plaintiff also seeks damages in respect of the 178 brewers not delivered, net trading losses and opportunity loss suffered by the plaintiffs as a result of making the particular investment. The defendants did not dispute the availability of these heads of damages.
Mr Wight assessed damages in the total sum of $342,113 comprising a loss involved in the initial investment assessed at $257,853 and $45,070 for over payment for the subsequent purchase of brewers pursuant to the second sale agreement. The total sum also includes $19,634 being the damages assessed for brewers not delivered and the net trading losses incurred. The opportunity cost of funds was calculated at $19,557.
Mr Wight gave evidence that he could not undertake a conventional valuation of the business sold to and undertaken by the plaintiffs because of the lack of financial data. He, therefore, calculated the loss on each element purchased namely the brewers and the business. In relation to the purchase of the brewers, he noted that the first sale agreement identified the purchase cost of the brewers at $900 each making a total value of $270,000. He then, on the basis of instructions received, assessed the actual value of the brewers, if purchased wholesale, at $109 making a total of $32,700. Those values were not disputed. That figure was deducted from $270,000 resulting in a loss in respect of the brewers of $237,300 at the time of purchase. He then attempted to calculate the loss on purchase of the good will. Taking the figures referred to above, he calculated the represented gross margin per annum of the distributorship business as being $100,800. He then proceeded on the basis that the minimum obligation of each customer was to purchase a box of coffee per month. On that basis he calculated the minimum gross margin per annum as $46,800. He then reasoned that the plaintiffs paid $30,000 for an expected annual gross margin of $108,000 and a minimum return of $46,800. He argued this gave a gross margin multiple of between 0.3 and 0.64. He then took the information available about the actual gross margin of the first year of operation which was $7,369. I did not understand this figure to be disputed. This represented a six month figure and therefore he annualised the figure to $14,738. Applying the gross margin multiple to the figure, he arrived at the value of the business of between $4,386 and $9,447. Subtracting those figures from the amounts paid for good will he said provided a range from $20,552.56 to $25,613.69. For the purpose of the assessment of damages he selected the lower figure. He added that to the loss on the purchase of the brewers of $237,300 to arrive at his figure of $257,853.
Mr Wight is criticised for adopting a represented gross margin per annum of $100,800. The defendants submit that Mr Wight has proceeded on a false assumption that this figure represented the gross margin if the plaintiffs sited and operate all brewers. The defendants submit that the intention was that there would be some siting of brewers in Victoria but as to the rest what was involved was the selling off of state distributorships and sub-distributorships.
The argument assumes that the represented margin was for the business of operating the sites not a distributorship business. That is not how I read the above representations made by the defendants. The margins of $13 and $15, on which the gross return was calculated, related to the margin chargeable by a distributor to sub-distributors who in turn, it was represented, would achieve a higher margin. Bearing in mind that the proposal envisaged the plaintiffs directly placing 100 machines on site, and thus obtaining a higher margin, there is a further conservative element in the calculation.
Ultimately the question is whether the figure arrived at is a reasonable assessment of damages for false and misleading conduct resulting in the plaintiffs paying $300,000 for the purchase of a business opportunity to be carried out using brewers supplied to them by the defendants. Realistically it seems to me that the plaintiffs may be said to have paid $300,000 for a business that was worth very little indeed. It would not be unreasonable to assess the loss as the difference between the amount paid and the value of the brewers purchased and received. That would produce a loss higher than that claimed.
The defendants have not directed any specific argument to the issue of the entitlement to or the quantum of the other heads of damages claimed and accordingly I proceed on the basis that they are not in themselves disputed.
Instead, the defendants raise issues of causation in answer to the claim for damages. A number of points were raised. The defendants argued that the losses were really the plaintiffs' own fault because they failed to do what was necessary to sell distributorships throughout Australia. It was also put that Mr Treiser neglected his brewer sites in Victoria and neglected his own interests and failed to set up appointments with the prospective distributors.
It seems to me unreasonable to be critical of the plaintiffs efforts in circumstances where I have found that the defendants failed to honour an undertaking to interview and sign up of distributors. I am satisfied that, while Mr Treiser did not do as much perhaps as Mr Becconsall did in nurturing his customers, Mr Becconsall's experience in promoting a similar business scheme would suggest that any failures on behalf of the plaintiff were unimportant. The problem lay with the business scheme. It is put that the plaintiffs failed to follow the business ' recipe' and had the opportunity to do so because they had been given a copy of the operations manual. In this the defendants rely on the evidence of Mr Cameron contained in his witness statement that this had occurred on 23 June 1997. He was not cross-examined directly on that issue but there is a clear conflict on the evidence of this matter. I prefer the evidence of Mr Treiser that he did not receive that document. It is significant, I suggest, that despite a most protracted discovery battle in which the defendants were constantly at fault, the operations manual that was produced and placed in the court book was not discovered until the 1st of June this year. There has been no satisfactory explanation for the failure to produce it earlier. It was an important document and that fact would have been well known to the defendants.
The defendants also argue that the chain of causation was broken by a change of plans initiated, it was said, by Mr Treiser under which the second plaintiff would retain ownership of the brewers and they would be licensed to distributors so that the plaintiffs could claim depreciation on the brewers themselves. I am satisfied on the evidence that the idea of going down that track came Mr Laski not Mr Treiser. I am also satisfied that the parties flirted with the idea for only a very short period of time and returned to the original plan. Thus the chain of causation was not broken in any real sense.
Conclusion
For the foregoing reasons, the plaintiffs have made out their claims for damages against both defendants, such damages to be assessed at $342,113.00.
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