Varndell Pty Ltd as trustee for the Abbey Family Trust v Patney Pty Ltd

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION: VARNDELL PTY LTD as trustee for the ABBEY FAMILY TRUST -v- PATNEY PTY LTD & ORS [2000] WASC 238

CORAM: McKECHNIE J

HEARD: 25-27 & 30-31 AUGUST 1999

DELIVERED : 27 SEPTEMBER 2000

FILE NO/S: CIV 1790 of 1997

BETWEEN: VARNDELL PTY LTD as trustee for the ABBEY FAMILY TRUST (ACN 008 863 269)
Plaintiff
AND
PATNEY PTY LTD (ACN 009 020 900)
First Defendant
GARY IAN BUTTERWORTH
Second Defendant
ANTHONY PATERNITI
Third Defendant
(BY ORIGINAL ACTION)
PATNEY PTY LTD (ACN 009 020 900)
Plaintiff
AND
VARNDELL PTY LTD (ACN 008 863 269)
First Defendant
ANTHONY NORMAN HOLMES
JUNE MARGARET HOLMES
Second Defendants
(BY COUNTERCLAIM)

Catchwords:

Trade Practices - Misleading conduct - Purchase of business - Profit representation - Burden of proof - Valuation of business - Valuing with hindsight - No new principles

Legislation:

Trade Practices Act 1974 (Cth), s 51A, s 52

Result:

Claim allowed

Representation:

Original Action

Counsel:

Plaintiff:     Mr D F Beere
First Defendant             :     Mr K J Martin QC & Mr N R Stagg
Second Defendant         :     Mr K J Martin QC & Mr N R Stagg
Third Defendant           :     Mr K J Martin QC & Mr N R Stagg

Solicitors:

Plaintiff:     Beere May & Meyer
First Defendant             :     Freehills
Second Defendant         :     Freehills
Third Defendant           :     Freehills

Counterclaim

Counsel:

Plaintiff:     Mr K J Martin QC & Mr N R Stagg
First Defendant             :     Mr D F Beere
Second Defendants       :     Mr D F Beere

Solicitors:

Plaintiff:     Freehills
First Defendant             :     Beere May & Meyer
Second Defendants       :     Beere May & Meyer

Case(s) referred to in judgment(s):

Gates v City Mutual Life Assurance Society Ltd (1986) 1 CLR 1
Gould v Vaggelas (1985) 157 CLR 215
Kizbeau Pty Limited v WG & B Pty Limited (1995) 184 CLR 281
Walker v Henville [1999] WASCA 117

Case(s) also cited:

Abrahams v The Federal Commissioner of Taxation (1944) 70 CLR 23
Bowler v Hilda Pty Ltd (1998) ATPR 41-625
Cannane v Official Trustee in Bankruptcy (1996) 136 ALR 406
Corbidge v The Bakery Fun Factory Fun Shop Pty Ltd (1984) ATPR 40-493
Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158
Elders Trustee & Executor Co Ltd v EG Reeves Pty Ltd (1987) 78 ALR 193
Elmslie v The Federal Commissioner of Taxation 93 ATC 4,964
Famel Pty Ltd v Burswood Management Ltd (1989) ATPR 40-962
Frith v Gold Coast Mineral Springs Pty Ltd (1983) 65 FLR 213
Garvey v Vahamu Pty Ltd (1998) ATPR 41-656
Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (No 1) (1988) 79 ALR 83
Kabwand Pty Ltd v National Australia Bank Ltd (1989) ATPR 40-950
Kenny & Good Pty Ltd v MGICA (1992) Ltd (1999) 73 ALJR 901
Lake Koala Pty Ltd v Walker [1991] 2 Qd R 49
Longworth v Commissioner of Stamp Duties (1953) 53 SR (NSW) 342
Marks v GIO Australia Holdings Ltd (1998) 158 ALR 333
McAllister v Richmond Brewing Company (NSW) Pty Ltd (1942) 42 SR (NSW) 187
McCathie v The Federal Commissioner of Taxation (1944) 69 CLR 1
Page v Watson [1924) VLR 330
Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191
Potts v Miller (1940) 64 CLR 282
R v Lock (1926) 26 SR (NSW) 272
Selman v Minogue (1937) 37 SR (NSW) 280
Spencer v The Commonwealth of Australia (1907) 5 CLR 418
The Commonwealth of Australia v Amann Aviation Pty Limited (1991) 174 CLR 64
Trustees Executors and Agency Company Limited v The Commissioner of Taxes (Victoria) (1941) 65 CLR 33
Weldon (Commissioner of Taxes for Victoria) v The Union Trustee Co of Australia Ltd (1925) 36 CLR 165
Wheeler Grace & Pierucci Pty Ltd v Wright (1989) ATPR 40-940

McKECHNIE J:

Introduction

This action arises out of the sale of a waste disposal business known as Busselton Liquid Waste. The business was sold by Patney Pty Ltd to Varndell Pty Ltd in 1996.
As part of the contract of sale, Varndell Pty Ltd was required to pay the balance of the purchase price, $180,000 by 10 July 1997. It did not do so. Instead, after the exchange of solicitor's letters, Varndell Pty Ltd commenced action for damages and other relief arising from the misleading and deceptive conduct of Patney Pty Ltd and its directors Mr Gary Butterworth and Mr Anthony Paterniti. Patney Pty Ltd in turn claimed payment of the $180,000, together with interest, including interest payments that had not been made by 10 July 1997, and an order for sale of certain property arising out of a charge held by it over that property.
The principal issues to be resolved concern representations said to have been made relating to the sale of the business between 31 August 1996, when the business was advertised for sale, and 31 October 1996, when settlement was concluded.

The parties

Varndell Pty Ltd is a company whose directors are Mrs June Margaret Holmes and her mother who plays no part in these proceedings. It is the trustee for the Abbey Family Trust. The shareholders in the company are Mrs Holmes and her husband, Anthony Norman Holmes. Varndell Pty Ltd was the vehicle by which Busselton Liquid Waste was to be purchased. The business was to be operated by Mr and Mrs Holmes.
Before embarking on the Busselton Liquid Waste enterprise, Mr Holmes had operated a number of businesses over the years in the south‑west. These included Yallingup Rural Supplies, Rivendell Gardens and the Lobster Pot Restaurant.
Over the years Mr Holmes suffered from a medical condition which from time to time left him unable to take an active role in business. He asserts this condition has not affected his memory.
Mrs Holmes is a member of the Real Estate Institute of Western Australia. She did not play a great part in the earlier businesses because she was bringing up the family. Nevertheless, she agrees with her bank manager's assessment of her as astute and knowledgeable, an assessment with which, having seen and heard her in the witness box, I would agree.
Patney Pty Ltd is the family company of the Paternitis and the Butterworths. Mr Anthony Paterniti and Mrs Barbara Paterniti are shareholders with their daughter Linda Butterworth and their son‑in‑law, Mr Gary Butterworth.
The directors of Patney Pty Ltd are Mr Gary Butterworth and Mr Anthony Paterniti. A claim is made against Mr Paterniti on the basis that he had engaged in misleading and deceptive conduct in trade, or was knowingly concerned in the conduct of Patney Pty Ltd in making a particular representation known as the profit representation.
There is no evidence that Mr Anthony Paterniti was knowingly concerned in any representations and the claim against him must be dismissed.
Mr Gary Butterworth is a self‑employed civil engineering and drainage contractor who, after a period of work in the Public Service, ran a caravan park and worked as a real estate agent, before entering the plumbing, civil engineering and liquid waste disposal businesses through Patney Pty Ltd. Patney Pty Ltd ran businesses other than Busselton Liquid Waste.
Mrs Linda Butterworth worked for a time as a public servant before running a caravan park with her husband. She is secretary of Patney Pty Ltd and assisted in the running of Busselton Liquid Waste, taking most of the telephone calls from customers and giving instructions to the driver, as well as doing some clerical and administrative tasks.
Although at law the business of Busselton Liquid Waste was sold by Patney Pty Ltd to Varndell Pty Ltd, the practical reality was that this was a business suitable for a husband and wife team. Mr and Mrs Butterworth had been involved for about four and a half years, were getting tired of taking telephone calls for the business at home, were busy with other things, and so they thought it was a good time to sell. Mrs and Mrs Holmes were in the market for a suitable business which they could operate together, having previously looked at a similar type of business in Margaret River. This was, for practical purposes, a sale from Mr and Mrs Butterworth to Mr and Mrs Holmes.
In order to facilitate the sale, Mr Butterworth placed the matter in the hands of a business agent, Andrew King Realty of Scarborough, and Mr Christopher Dee of that firm dealt with the matter.

A business is purchased by the Butterworths

In February 1992, Patney Pty Ltd acquired Busselton Liquid Waste from Mr Geoff Brooker for $150,000. The business was then known as Busselton Septics.
As its name suggests, the business involved the collection, removal and disposal of liquid waste throughout the Busselton Shire region. The principal equipment of the business was a truck fitted with tank, vacuum pumps and hoses. For a time after settlement, Mr Brooker drove the truck but from about August 1992 to about January 1994, Mr Butterworth drove the truck. When business picked up at the end of January 1994, a full‑time driver was employed and this continued to be the position through to the time of sale to Varndell Pty Ltd.

An advertisement is placed and a response is made

Mr Dee had been employed as a business agent from 1992. In June 1996 he was employed by Andrew King Realty. Mr Butterworth told him that Patney Pty Ltd may be interested in selling the business. Mr Dee asked for information to be provided. As a result, Mr Butterworth faxed to him:
(a)a profit and loss statement for the business for the years 1992 to 1996;
(b)a document entitled "Licence Agreement for the Removal of Nightsoil"; and
(c)a colour brochure produced by the Main Roads Department of Western Australia which gave details of proposals for an upgrade of the Perth Busselton roadworks to deal with the growth of the south‑west region.
Following delivery of that material there were a number of telephone conversations between the two men. In the course of one of those conversations, Mr Butterworth explained that the licence agreement showed the fees which the Shire had approved for the business as from October 1992. On that page was the following handwritten note:
"A review of charges to be made in September 1996 - look at a possible 20% increase."
Mr Butterworth told Mr Dee that he was intending to seek the approval of the Shire in September 1996 to increase the fees because they had not been increased since October 1992.
Mr Butterworth also told Mr Dee that the figures for the 12 months to 30 June 1996 were very good because of a very profitable contract which the business had at Dunsborough Lakes but he did not think that would continue. Mr Butterworth expected that the future turnover would be in more in line with the turnover for the 12 months to June 30, 1995.
Using all that information, Mr Dee assessed an asking price for the business.   That is set out in a letter to Mr Butterworth on 24 July 1996. As one of the issues in this case is a representation as to profit, said to have been made by Mr Butterworth, it is important to set out the advice he received:
"Dear Gary
Re: SALE OF BUSINESS - BUSSELTON LIQUID WASTE
Further to our recent discussions in respect to the sale of your business, we have appraised the business, taking into account the following considerations:-
1.Turnover during the last three years has been inconsistent, and based on your advice, 1997 will be more in line with 1995. Accordingly, we have taken the average Net Profit based on the last three years which coincides with the 1995 Net Profit;
2.A business of this nature is not generally in high demand;
3.There is an element of risk associated with the Licence not being renewed.
Based on this information, we consider an asking price of $360,000.00 would be achievable, calculated on the following adjusted Net Profit:-
Average Annual Net Profit (based on last three years) 230,000
Add-Backs:
Interest Paid  3,000
Wages  43,000    46,000
Adjusted Net Profit per annum  276,000
======
This price would allow the Purchaser a return on their investment of 75% in the first 12 months (excluding owners' salaries), which would enable them to pay for the business in less than 18 months. Further, an additional 18 months profitability would be achieved before the expiration of the Licence.
Of course, there is a possibility that the Licence may be renewed, however the argument that it will not be renewed will present itself during the marketing of your business. Consequently, unless a guarantee, or convincing Testimonials can be obtained from the Shire, a higher asking price cannot be entertained.
We look forward to discussing the above with you at your earliest convenience.
Yours sincerely
ANDREW KING REALTY
(Signed) _________________
Christopher J Dee"
Mr Dee worked on the information which Mr Butterworth supplied to form his opinion of the worth of the business in order to arrive at a sale price.
Following receipt of that letter, Mr Butterworth advised Mr Dee that he wanted to market the business for sale. Mr Dee said that he would prepare a document to be sent to prospective purchasers and thought that the business should be advertised. Mr Butterworth agreed.
On 31 August 1996, the following advertisement appeared in the pages of The West Australian newspaper:
" SERVICE INDUSTRY
SOUTH WEST
Located in Busselton this easy to Operate Monopoly Business has an exclusive operating licence which covers the entire shire of Busselton and includes Dunsborough and Yallingup. Currently run semi under Management, will also operate fully under Management.
•Trades 5-1/2 days p/wk
•Staff (driver/admin)
•Guaranteed Income
•No stock
•Under Mangt Represents 60% return on investment
•Owner op represents 75% return on investment
•Funds required: $360,000
•A Plumbing Background is desirable but not imperative.
For Further Details Contact
Christopher Dee
ANDREW KING REALTY"
From records kept by Mr Dee it appears that there were 10 telephone responses to the advertisement, the first one listed being "Tony and Jean Holme (sic)".
In response to the telephone call, the material which Mr Dee prepared and which became known in the trial as the Information Memorandum was supplied to Mr and Mrs Holmes. There is a dispute on the evidence as to how it was supplied. Mr and Mrs Holmes assert that material was faxed by Mr Dee to the home of a friend of theirs, while Mr Dee does not remember a request to fax information and says it would have been unlikely that he would have done so.
It is unnecessary to resolve this issue because whether they received the information prior to a visit to Mr Dee's office or not, both Mr and Mrs Holmes attended at Mr Dee's office at Andrew King Realty in Scarborough. He says that he took Mr and Mrs Holmes through the Information Memorandum item by item. This accords with Mr and Mrs Holmes' recollection that they discussed with Mr Dee, all of the matters contained in the advertisement, the Information Memorandum and the licensing agreement.

A contract is entered into

There is again some dispute between Mr Dee, on the one hand, and Mr and Mrs Holmes, on the other, as to the place and circumstances whereby the offer and acceptance came to be executed. But again, the differences are immaterial. The original conditions imposed by the Holmes were altered. The offer and acceptance was executed on 4 September 1996.
The gross purchase price of Busselton Liquid Waste was $360,000, of which $297,000 was assigned to goodwill and $63,000 to "fixtures as per schedule (sic)". The original offer and acceptance had fixtures at $62,000. There does not appear to have been a schedule, but the information memorandum listed the plant and equipment as follows:
"1998 Mitsubishi Turbo 9 tonne truck, complete with
8,000 litre tank, vacuum pumps and hoses. All fully
serviced and in excellent condition  60,000
NEC Mobile Telephone  )
Cleaning Aids  )
Assorted Tools and Spare Parts                )             2,500
TOTAL  62,5000"
Nothing turns on the discrepancy.
The manner of payment was by a deposit of $10,000 on acceptance and settlement to be completed on 31 October 1996. The special conditions of the contract (as opposed to the general conditions of sale) were as follows:
"2)This offer is subject to the Shire of Busselton Liquid Waste licence being transferred to the Purchasers.
4)This offer is subject to the Purchasers' Accountants Harvey Partners verifying all books and records of the said business within 2 weeks from acceptance.
5)Manner of payments of Purchase Price
The balance of the purchase price (after the initial deposit of $10,000 paid on acceptance) shall be paid as follows:
I.$170,000 is payable on or before 31st October 1996, being the date of settlement, and is conditional upon the completion of the sale of Lot 128 Marrinup Drive, Yallingup by Anthony Norman and June Margaret Holmes.
II.The balance of $180,000 to be made payable on the 10th July 1997 and is subject to vendor finance of 10% per annum, interest only of $1500.00 is payable monthly in arrears, on the last business day of the month.
The vendor is to hold a charge over the purchasers' assets to the value of not less than $180,000 to secure the above loan."
In due course Mr and Mrs Holmes nominated Varndell Pty Ltd as the purchaser.

An inspection of the books is made

Harvey & Partners is a firm of accountants practising in Busselton.
For some time prior to 1996, Harvey & Partners had acted for Patney Pty Ltd as its accountants. Mr Ian Meiklejohn was the partner responsible for Patney Pty Ltd.
From time to time Harvey & Partners acted for Varndell Pty Ltd and Mr and Mrs Holmes. In 1995, Mr Royer became the partner responsible for their affairs.
Mr Royer's instructions from Mr and Mrs Holmes were to verify that the turnover quoted in the Information Memorandum for the year ending 30 June 1996 was accurate. The turnover was $445,728.
Mr and Mrs Holmes relied upon Mr Royer.
Mr Royer had access to certain material within Harvey & Partners. He arranged for Mr Butterworth to produce to him the invoice books relating to the financial year ending 30 June 1996 together with the bank deposit records in respect of that year. On his review, he confirmed that the turnover figure was correct.
On 3 October 1996, Mr Royer wrote to Mr and Mrs Holmes as follows:
"Dear Tony and June,
RE:   PURCHASE OF BUSSELTON LIQUID WASTE
Further to our recent discussion, I herewith confirm that we have reviewed the invoices provided by Busselton Liquid Waste for the 12 months ended 30 June 1996 and confirm that invoices raised support the amount shown as gross receipts for the year.
As I said to you in our discussion, quite a large proportion of the gross receipts for the 1996 financial year have come from the one source, that being the Dunsborough Lakes Subdivision.
I have now reviewed that aspect more closely and it would appear that the gross receipts for the 1996 financial year have been generated roughly as follows:-
•     Dunsborough Lakes Subdivision                   249,060.00
•     Other Subdivisions/WAWA work                   61,055.00
Grease Traps  17,030.00
Households and Other Pumping  118,583.00
445,728.00
•     It is rather fundamental to confirm the ongoing availability of this subdivisional work. Whilst subdivision work may come and go in the future, you need to confirm for yourselves the significance of the Dunsborough Lakes activity for the past few years and its impact on ongoing income and profits.
Assuring you of our best attention at all times.
Yours sincerely
(Signed) WAYNE ROYER"
Attached to the letter were two schedules giving a more detailed breakdown of invoices relating to the "Dunsborough Lakes" subdivision and to "Other" subdivisions.
Subsequently, Mr and Mrs Holmes signed the following waiver:
"RE: BUSSELTON LIQUID WASTE
In respect to the above mentioned business I/we have inspected the books and records pertaining to Condition (4) of the 'Agreement to Purchase a Business' contract through Harvey and Partners Accountants.
I/we are satisfied with our inspection and of the records and hereby waiver (sic) Condition (4)."

The contract proceeds to settlement

At some stage there was an amicable meeting between Mr and Mrs Butterworth and Mr and Mrs Holmes at the Butterworths' house. Mrs Holmes brought strawberries. I will deal in detail with this meeting shortly and refer to it as "the handover meeting".
At another stage, Mr and Mrs Holmes became aware that the licence for waste disposal issued by the Busselton Shire was not an exclusive licence. They were given the opportunity to withdraw from the contract. Although Mr Holmes does not recollect it, it appears that Mrs Holmes had thought that the purchase price could be renegotiated. However, in a telephone conversation to Mr Holmes, Mr Steven Paterniti, a solicitor, and the brother of Mrs Butterworth, made it clear that there would be no reduction in price. However, the option to withdraw was left open for a short period.
At all events settlement occurred on 31 October 1996 and the Holmes became the new owners of Busselton Liquid Waste.
According to Mr Holmes, after they took over the business it was immediately apparent that the turnover was nowhere near the figures which had been stated by the vendors. Mr and Mrs Holmes started to make various inquiries to try and determine why. The monthly interest payments due to the Butterworths became tardy and in due course ceased.

The action commences

On 10 June 1997 the solicitors for Mr and Mrs Holmes wrote to the first defendants complaining about various matters.
Ultimately a writ was issued and a statement of claim dated 14 August 1997 was filed. A substituted statement of claim was filed on 6 October 1997 and amended on 30 March 1998 and further amended at trial.
The plaintiff complains of four representations, not all of which lead to damage. They are:
1.The monopoly representation
This is pleaded as a representation that the business operated on a monopoly basis by reason of it having an exclusive operating licence which covered the entire Shire of Busselton.
2.A profit representation
This is pleaded that the business would generate
(i)a "60 per cent return on investment" of $360,000 namely a profit of $216,000 per annum if managed by a person other than the owner;
(ii)a "75 per cent return on investment" of $360,000, namely a profit of $270,000 per annum if managed by the owner operating the business 5‑1/2 days per week with a staff of two persons, being one person handling the administrative aspects of the business and the other carrying out driving duties.
3.The business level representation
This is pleaded as a representation made that notwithstanding the absence of an exclusive licence from the Shire of Busselton, there would be no diminution in the work available to the plaintiff from the Shire of Busselton, the business would get sufficient new contracts to make up any loss of income of the business which occurred as a result of any existing contracts held by the business coming to an end or not being renewed.
4.The charge‑out representation
At the same meeting it is pleaded that there was a representation made that the plaintiff should charge the Water Corporation the sum of $130 a truck load, being the same price charged by Patney Pty Ltd to the Water Corporation at that time.
In support of the monopoly representation and the profit representation, the plaintiff pleads that Mr and Mrs Holmes relied upon the Information Memorandum which was:
(a)a document entitled "Busselton Liquid Waste";
(b)a profit and loss statement of the first defendant in respect of its operation of the business for the year ended 30 June 1996; and
(c)a document entitled "Licence Agreement for the Removal of Nightsoil" and expressed to have been made on 28 August 1995 between the Shire of Busselton of the one part and the first defendant of the other part.

The monopoly representation

Part of the Information Memorandum was a document purporting to be a Licence Agreement between Busselton Liquid Waste and the Shire of Busselton made on 28 August 1995.
The inclusion of this document within the Information Memorandum has ramifications in my assessment of the credibility of Mr Butterworth in relation to the profit representation. But for present purposes it is sufficient to note that cl 11 of that document stated:
"Exclusive Privilege
The contractor shall have the exclusive privilege of collecting, emptying, removing and disposing of the contents of systems within the District of the Shire of Busselton."
It is common cause that the actual 1995 agreement between the Shire of Busselton and Busselton Liquid Waste was not an exclusive license agreement at law, in that cl 11 was not a part of the agreement. However, in fact Busselton Liquid Waste did have the only licence to use the Shire ponds to dump waste during all relevant times and indeed up until trial.
It is common cause that prior to settlement on 31 October 1996, Mr and Mrs Holmes were made aware of the lack of a monopoly. Inquiries were made with the Shire. They obtained legal advice.
They were offered the opportunity to withdraw completely from the contract but, in full knowledge that there was no monopoly, nevertheless continued.
Consequently, they did not place any reliance upon this representation and so much was conceded by counsel for the plaintiff.
Any cause of action based on the monopoly representation must fail.

The business level representation

In order to come to a conclusion about the business level representation and the charge‑out representation, it is necessary to make findings concerning the handover meeting which was held between the parties. This is so because it was at this handover meeting that Mr and Mrs Holmes allege the representations were made as to the business level representation and the charge‑out representation.
The business level representation is a representation as to a future event and is therefore similar to the profit representation in that s 51A of the Trade Practices Act applies, but only if the plaintiff first establishes that a representation was made.
The procedure at trial was that the witness statements of witnesses called for each party were tendered in evidence and each party was thereafter cross‑examined.
In Mr Holmes' witness statement, Exhibit B, he recounted a conversation with Linda Butterworth on the telephone on or about 24 October 1996 concerning the lack of an exclusive licence. He then said:
"…Linda said to me that notwithstanding the absence of an exclusive licence there would be no reduction in the work available within the Shire of Busselton and that the business would get sufficient new work to make up any loss of income which might occur as a result of any existing work coming to an end or not being renewed. She also said that the profits of the business which they had previously represented in their advert and in the statement I had received from Dee would still be achieved, notwithstanding the lack of any exclusive licence."
Mr Holmes averred that, subsequent to that discussion, he had a discussion with Steven Paterniti, the solicitor, and that subsequently a meeting was arranged with the Butterworths and the Holmes on 27 October 1996 to discuss the problems they were having and the lack of exclusivity with the Shire of Busselton licence and the possible handover of the business. In his witness statement, Mr Holmes was sure the meeting did not take place on 19 October:
"… because at that time we were unaware that the Shire of Busselton licence was not exclusive since we did not receive it until later and at the meeting we discussed that at length. Had the meeting taken place on 19th October 1996 no such discussion would have occurred. Another reason I am reasonably sure the meeting occurred on 27th is that the telephone discussion with Linda Butterworth in which she gave me 24 hours to reconsider was certainly before the handover meeting and as that discussion occurred on 24th the meeting could not have been on the 19th."
Mrs Holmes' witness statement was in almost identical form, being nearly word for word that of Mr Holmes.
Mr Butterworth in his witness statement denied that the meeting occurred on 27 October 1996, as that is the date of his wedding anniversary, and he was certain there was no meeting on that date with Mr and Mrs Holmes.
He asserts that the meeting occurred on 19 October 1996. He said:
"It began at approximately 2pm and lasted for about two hours. We sat at our dining room table. Linda and I and Mr and Mrs Holmes were present. The meeting was very friendly. Mrs Holmes had brought a basket of strawberries to the meeting as a gift for us."
Mrs Butterworth's recollection of the meeting date was even more specific than that of her husband. In her witness statement, exhibit 6, she said:
"In the afternoon of 19 October 1996 there was a meeting at our old house at 42 Blue Crescent Busselton. I know the date of the meeting because it was the same day as a school fete which I attended. Gary told me that a meeting had been arranged with Mr & Mrs Holmes for the morning of Saturday 19 October 1996 to discuss the day to day running of the Business. I asked Gary to change the meeting to the afternoon because I had to go to the fete in the morning. The meeting with Mr and Mrs Holmes did not occur on 27 October 1996. That was our wedding anniversary."
The significance of the difference between the parties as to the date of the meeting has a relevance beyond mere recollection of a particular Saturday, three years before. Mr and Mrs Holmes were certain that the question of the exclusivity of the licence was at the forefront of the discussions. If they did not discover the lack of exclusivity until after the meeting, then their recollection is plainly flawed. Their evidence as to what was said as to the business level representation and the charge-out level representation would be similarly rendered very suspect.
Mr Holmes was cross‑examined. In the course of cross‑examination he was shown a fax of some documents which he had sent to Mr Dee on 22 October 1996.
The faxed documents included a copy of portion of a licence agreement undated between the Shire of Busselton and Busselton Liquid Waste.
The exclusivity clause is absent from that document.
Mr Holmes wrote:
"NB,clause 11 of original contract, ie, exclusivity!"
He agreed that there was a flurry of communications. He was then asked:
"Q:Which would all seem to suggest that the exclusivity issue only emerged after the handover meeting?
A:It would."
A little further on in the trial the following passage of cross‑examination occurred:
"You accept that these phone calls regarding rescission and the exclusivity happened after the handover meeting now?---Yes.
The way you put this originally, your statement read that in fact they had all been made by Linda Butterworth prior to the handover meeting on the 27th?---No, I was wrong. They were definitely made after the handover meeting."
Mrs Holmes was cross‑examined about the timing of the exclusivity issue and the handover meeting. In cross‑examination she was asked:
"The way the case has been put on behalf of the defendants is that at that handover meeting there was no discussion of the terms of that licence whatsoever and, in fact, that issue about clause 11 only blew up in the week after the handover meeting which was in the week of Monday 21 October?---My recollection is not like that, sir.
No, and your recollection is that the exclusivity issue blew up and there were telephone calls with Linda Butterworth and Christopher Dee and Steven Paterniti?---Yes.
That was all before the handover meeting at the Butterworths' house?---To my recollection that is how I remember it, to the best of my recollection."

Findings as to changeover meeting

Mr Holmes conceded that his evidence as to the date was wrong. Mrs Holmes did not make such a concession in cross‑examination, but relied on her recollection. The fax sent to Mr Dee was obviously sent upon discovery by the Holmes, after inquiry with the Shire of Busselton, as to the actual terms of the licence. There would have been no reason for such a fax, with the annotation of Mr Holmes to which I have referred, if the lack of exclusivity had been known prior to the handover meeting.
I find that the handover meeting occurred on 19 October 1996 at about 2 pm at the Butterworths' house. Present were Mr and Mrs Butterworth and Mr and Mrs Holmes. As at the 19 October, Mr and Mrs Holmes were unaware of the position in relation to an exclusive licence.

Conclusions on business level representation

Mr and Mrs Holmes both gave evidence that Mr Butterworth made representations as to the business level, in effect, that it would be maintained notwithstanding the lack of an exclusive licence.
Because I have found that the lack of an exclusive licence was unknown to the Holmes at the time, it follows that I am unable to accept their evidence as to representations made by Mr Butterworth at the handover meeting, concerning the continuing business level.
Mr Holmes also asserted that similar representations were made by Mrs Butterworth to him in the course of a telephone conversation on 24 October 1996.
This allegation was not pleaded. The business level representation was pleaded as being made only by Mr Butterworth and only at the handover meeting. The further and better particulars of claim do not mention this telephone call.
Mrs Butterworth denies such call with Mr Holmes. She said that she had a discussion with Mrs Holmes by telephone after they had found out about the lack of exclusivity and that the Butterworths would let them out of the contract if they wanted.
On the whole of the evidence, I am not satisfied that Mr Holmes had any telephone conversation with Mrs Butterworth during the course of which she made representations about the continuing business level. On this point I prefer the evidence of Mrs Butterworth to the effect that such conversations as she did have were with Mrs Holmes, not Mr Holmes. The plaintiff has not established that a business level representation was made.

The charge-out representation

This representation is said to arise in this way:
"[At the meeting] Mr Holmes asked what rate we should charge Water Corp for the emptying of their pits per truck. Mr Butterworth indicated $130 per load, that related to an 8000 litre load being the capacity of the truck concerned. As a result of those assurances we told the Butterworths on that day that we would proceed to settlement. …"
There are a number of difficulties with this alleged representation. As it is pleaded, and indeed as Mr Holmes put it in his statement, it is a response to a request for advice, rather than a statement of an existing fact. Furthermore, in Mr Holmes' statement, Exhibit B, the charge‑out representation is inextricably linked with the conversation at the handover meeting about the lack of exclusivity, a conversation which I have found did not occur.
It appears that Mr Holmes initially did follow the advice of Mr Butterworth, charging out loads to the Water Corporation at $130, but became aware that he was not getting further orders, noticing a competitor Capel Liquid Waste doing work for the Water Corporation within the Shire of Busselton. As a result he contacted the Water Corporation and reduced the charge to $64 per load.
The rate of $130 was being charged by Busselton Liquid Waste to the Water Corporation in respect of the Dunsborough Lakes project. However, it was known to the Holmes that the Dunsborough Lakes project, though it had been extremely profitable, was at that stage winding down. Mr Holmes acknowledged that the Dunsborough Lakes work was gone before settlement. This is confirmed by the evidence of Mr McCutcheon of the Water Corporation.

Conclusions on the charge-out representation

I am sure that in the course of the handover meeting, the charge-out rate for the Water Corporation was discussed. Mr Butterworth said in respect of the discussion:
"I told [Mr Holmes] that I had worked out that the … truck could do about three loads per hour, so that $150 per hour was a good profit. On that basis, I worked back to a tender price of $50 per truck load which equated to $6.25 per cubic metre based on the truck's capacity. I told Mr Holmes that the rate of $6.25 per cubic metre had been a good rate for the Dunsborough Lakes contract because it was easy work, the quantities were big and it was only a short distance to the Water Corporation's disposal site. But I also said that every job was different and so you had to work out a tender price depending on the nature of the job. I told him that different rates were quoted for different Water Corporation jobs. I also told Mr Holmes that I would help him tender for future Water Corporation jobs if he wished."
The actual rate which the Water Corporation seemed to have accepted, on Mr Holmes' evidence, equates more closely to the $50 rate per load referred to by Mr Butterworth than the $130 rate per load. It is pleaded, and appears common cause, that in any event whatever figure was quoted by Mr Butterworth, it related solely to the Dunsborough Lakes project which had either finished or almost finished at the time of settlement. In the circumstances I do not accept the Holmes' recollection of the conversation to the extent that Mr Butterworth said they should charge $130 per load.
In any event, I do not consider that any statement by Mr Butterworth relating to the charge-out rate was a representation. It was simply information or advice.
Finally, I find there was no reliance upon this information by Mr and Mrs Holmes in their decision to continue with the purchase of the business because their recollection of the conversation, tied as it is to the handover meeting, cannot be right.

Summary as to the monopoly, business level and charge‑out representations

I conclude that the plaintiff has not established that there was misleading and deceptive conduct in relation to the monopoly representation, the business level representation or the charge‑out representation.

The profit representation

This representation stands in a different category from the others because the burden of proof in respect of the profit representation is on the defendants. This is so by reason of the Trade Practices Act s 51A which provides:
"51A Interpretation
(1)For the purposes of this Division, where a corporation makes a representation with respect to any future matter (including the doing of, or the refusing to do, any act) and the corporation does not have reasonable grounds for making the representation, the representation shall be taken to be misleading.
(2)For the purposes of the application of subsection (1) in relation to a proceeding concerning a representation made by a corporation with respect to any future matter, the corporation shall, unless it adduces evidence to the contrary, be deemed not to have had reasonable grounds for making the representation.
(3)Subsection (1) shall be deemed not to limit by implication the meaning of a reference in this Division to a misleading representation, a representation that is misleading in a material particular or conduct that is misleading or is likely or liable to mislead."
The profit representation is a representation in respect of a future matter and so it is for the corporation to adduce evidence that it had reasonable grounds for making the representation.
The profit representation is said to have been made in both the advertisement and the Information Memorandum.
It is pleaded in par 8 of the statement of claim as follows:
"The Advertisement conveyed the following representations to Mr. And Mrs. Holmes on behalf of the Plaintiff:
(a)…
(b)the Business would generate:
(i)a '60% return on investment' of $360,000.00, namely a profit of $216,000 per annum if managed by a person other than the owner;
(ii)a '75% return on investment' of $360,000.00, namely a profit of $270,000.00 per annum if managed by the owner.
operating the Business 5-1/2 days per week with a staff of 2 persons, being 1 person handling the administrative aspects of the business and the other carrying out driving duties (the 'Profit Representation')."

By par 10 it is asserted that they read the Information Memorandum which contained words which conveyed to them the profit representation.
Paragraph 11 pleads:
"11.1Subsequently, on or about 4 September 1996 Mr. and Mrs. Holmes acting in reliance on the truth and accuracy of the:
(a)Monopoly Representation; and
(b)Profit Representation
and each of them, and induced thereby, entered into an agreement in writing ('purchase agreement') in their own names, or that of their nominee, with the First Defendant to purchase the Business from the First Defendant in consideration of a payment by Mr. and Mrs. Holmes, or their nominee, to the First Defendant of the sum of $360,000.00."
I find that a profit representation was made in the advertisement and in the Information Memorandum.
The profit representation is quite specific.
The basic information in the advertisement is expanded in the Information Memorandum where, having mentioned the asking price of $360,000, the memorandum concludes:
"This price would allow the Purchaser a return on their investment of 75% in the first 12 months (excluding owners salaries), which would enable them to pay for the business in less than 18 months.
If operated under management and allowing for a $60,000 salary, the return on investment would still be excellent at 60%."
This repeats the advice given to Mr Butterworth by Mr Dee in his original letter (op cit).
The defendants admit that the advertisement was approved for publication by Mr Butterworth on behalf of Patney Pty Ltd and that the bundle of documents collectively referred to at trial as the Information Memorandum was given to the Holmes by Mr Dee with the knowledge and authority of Mr Butterworth on behalf of Patney Pty Ltd.
The evidence led on behalf of the defendants as to the profit representation comes almost entirely from Mr Gary Butterworth.
Mr Dee gave evidence that he arrived at the market value of $360,000 and that this was his own assessment and not a figure suggested by Mr Butterworth. He based the figure on the profit and turnover of the business for the year ended 30 June 1995 and on the average of the figures for the three preceding years which was consistent with the 1995 performance.
This figure was, however, also based on all the information he had been given, including some written information from Mr Butterworth and a number of telephone conversations with Mr Butterworth.
The source of Mr Dee's information therefore was Mr Butterworth. Mr Butterworth was the defendants' principal witness and it is he who undertook the burden of establishing there were reasonable grounds for the profit representation.
In his witness statement from par 106 onwards, Mr Butterworth details the basis for his belief that in the future, the business should be able to turnover at least $290,000 per annum and also that the sum would gradually increase.
Mr Butterworth expanded on each of these matters, but the summary reasons for holding his view in late August 1996 were as follows:
"(a)With the exception of Water Corporation work, the Business had and would continue to enjoy a monopoly on all liquid waste disposal work in the Shire of Busselton.
(b)The Business had established very good relationships with its customers, including the Water Corporation and the Shire of Busselton.
(c)The Business would in all likelihood be able to increase its fees for all its work, with the exception of work for the Water Corporation, by about 20% as soon as it made an application to the Shire of Busselton.
(d)There was strong growth in population and economic activity in the Shire of Busselton and that was expected to continue. The Business would benefit from that growth.
(e)While the Business had earned a substantial part of its revenue from the Water Corporation at Dunsborough Lakes in the previous 12 months and that source of revenue was not to continue, I expected that there would be some substantial additional work for the Business (although not enough to make up for the loss of the Dunsborough Lakes work) especially as a result of the infill sewerage program in the Town of Busselton. I expected that work as a result of infill sewerage connections would increase over time.
(f)The Business had opportunities to pick up other work that it had not been able to take up while the Dunsborough Lakes work was being done. Since I had not been following up these opportunities, it seemed to me that the Business would now be able to do so."
Mr Butterworth had run the business in Busselton for some years and might be expected to be in the position to make reasonable forecasts as to the likely future growth of the business. Mr Dee was acting as agent for Patney Pty Ltd in disseminating the profit representation. Even though Mr Dee valued the business at $360,000, Mr Butterworth, as the person on behalf of Patney Pty Ltd who had the most intimate knowledge of the true position, accepted Mr Dee's valuation and took responsibility for it. Mr Dee sent him the Information Memorandum for approval and he did approve it.
Mr Butterworth's credibility as to his belief in the representations he made is an issue, together with the reasonableness of the representations.

Mr Butterworth's credibility

In several important material aspects, some of which are not directly related to the profit representation, I found Mr Butterworth to be an implausible witness such that I do not accept parts of his evidence in relation to the profit representation.
Much of Mr Butterworth's evidence was spent justifying the figures in the Information Memorandum. His explanations are to be found in his statement of evidence, Exhibit 2, "Item H, Prospects for the Business in Mid-1996" from par 104 onwards.
Mr Butterworth did not do any detailed calculations in preparing the figures given to Mr Dee for inclusion in the Information Memorandum. He did not appear to consult any document. He conceded that he did no proper analysis to calculate turnover and the effect of the Dunsborough Lakes project.
There are some matters not directly relevant to his calculations which do reflect on his credibility in his witness statement, Exhibit 2. He set out turnover figures:
"15 Feb 1992-30 June  $27,627
1992 (4-1/2 months)
1 July 1992-30 June  $106,084
1993
1 July 1993-30 June  $161,368
1994
1 July 1994-30 June  $290,239
1995
1 July 1995-30 June  $444,760
1996
1 July 1996-31 October  $138,827
1996 (4 months)"
These figures differ somewhat from the invoice summary Schedule 1 to his statement. Exhibit 2, Schedule 1, appears to have been taken from the work of Price Waterhouse Coopers, a firm of accountants engaged to give expert evidence on behalf of the defendants.
In particular, the period from 1 July 1995 to 30 June 1996 in Schedule 1, and the Price Waterhouse Coopers' report, shows a turnover of $429,000, and from 1 July 1996 to 31 October 1996, a figure of $95,000 (rounded up to the nearest thousand).
Portions of Mr Butterworth's explanation as to certain statements in the Information Memorandum lack credibility. A reading of the whole of page 1 of the Information Memorandum would leave the reader with the impression that there was a licence agreement held with government departments such as the Water Corporation, Department of Agriculture and CALM. In fact this was not the case. Mr Butterworth agreed that reading the advertisement, there was nothing to lead a person to understand that Busselton Liquid Waste did not have a monopoly business with the Water Corporation and nothing in the Information Memorandum would have alerted the purchaser to that fact.
Mr Butterworth sent to Mr Dee a copy of what purported to be the licence agreement. In fact it was not the licence agreement which had been executed in March 1996. Rather, Mr Butterworth had taken the licence which he had been given at the time of purchasing his business from Brooker. He had whited out relevant names and replaced them with "Patney Pty Ltd" trading as "Busselton Liquid Waste". This licence agreement had the exclusive privilege clause in it. He further altered the document by changing the schedule of rates to reflect the 1996 rates. However the schedule was preceded by a paragraph:
"The Busselton Shire Council at the meeting held on 28th October 1992 approved the following schedule of fees in relation to the removal of night soil by Bayside Plumbers trading as Busselton Liquid Waste."
This alteration has significance because one of the matters relied upon by Mr Butterworth in support of the figures for the profit representation in the memorandum is his assumption that new purchasers could obtain a 20 per cent increase in rates from the Shire. His explanation for this extraordinary conduct was given in the following question and answer:
"At the time you came to send a document to Mr Dee you realised you didn't have a copy of the 96 document so rather than ring the shire and get it you photocopied the 92 document, made some alterations and sent that to Mr Dee?---That's correct.
Have I got it right?---Yes."
This explanation is at variance with a letter on the subject written on 20 June 1997 by the defendants' solicitors, where it said:
"…
2.Our client believes that the licence agreement annexed to the information memorandum (the Information Memorandum) provided to Mr and Mrs Holmes prior to their execution of the Contract was an unsigned draft dated 28 August 1995 (the 1995 Draft).At that time, the business of Busselton Liquid Waste (the Business) was operating under a licence agreement with the Shire of Busselton dated 20 March 1996 (the 1996 Licence). Our client did not have a copy of the 1996 Licence (no copy having been forwarded to our client by the Shire). Our client provided Andrew King Realty with a copy of the 1995 Draft in the honest but mistaken belief that its terms were identical with the terms of the 1996 Licence.
3.Unbeknown to our client at the time, the 1995 Draft differed from the 1996 Licence in, relevantly, the following respects:
(a)the 1995 Draft had the following clause which did not appear in the 1996 Licence:
'The contractor shall have the exclusive privilege of collecting, emptying, removing and disposing of the contents of systems within the District of the Shire of Busselton';
(b)the schedule of rates to the 1995 Draft provided for tipping charges payable to the Shire of $3,000 whereas the schedule of rates to the 1996 Licence provided for tipping fees payable to the Shire of $7,500 per annum. …"
Mr Butterworth asserted that his version given under cross‑examination was correct.
Although the lack of exclusivity came to the Holmes' attention and they were given an opportunity to withdraw and did not do so, nevertheless the alteration to this document has significance adverse to the credibility of Mr Butterworth and the reasonableness of his beliefs in the profit representation. At the same time he was expressing an opinion on future on profitability he was altering the licence agreement in such a way as to paint a misleading picture of the true situation so far as the business monopoly was concerned.
Another matter which bears on his credibility, albeit to a lesser extent, is whether there had been an increase in fees.
On 8 May 1995 Mr Butterworth wrote to the Busselton Shire, pointing out that they had replaced the existing truck with a new truck. The holding capacity on the previous truck was 6800 litres, but the holding capacity on the new truck was 8000 litres. He sought an increase in the fee from $100 to $150. This was subsequently granted. In his witness statement when dealing with the hand‑over meeting with Mr and Mrs Holmes he said at par 73:
"… I explained to Mr and Mrs Holmes that the Business had not increased its fees since October 1992. I said words to the effect that I had intended to put a proposal to the Shire in September 1996 for approval to increase the fees of the Business by at least 20%. …"
Earlier in his witness statement he said he had delivered the invoice books for the year ending 30 June 1996 to Mr Royer. He said that the invoices for work at Dunsborough Lakes from 19 February 1996 showed that the business was charging the Water Corporation $6.25 per cubic metre, or $50 per truck load for that work after that date. He agreed in cross‑examination that if Mr Royer did not know the truck size, he would have no idea what it worked out at per truck load. He did not know the content of any discussions that Mr Royer may have with the Holmes. He said the Holmes knew the size of the truck.
At best, the assertions as to the fee increase are careless.

Conclusion upon Mr Butterworth's credibility

My conclusion about Mr Butterworth's general credibility is that he is, at the least, careless with the statements he has made in earlier documents and in his witness statement, Exhibit 2. This carelessness is such that when I come to examine the matters of substance upon which the profit representation is supported, I view his evidence with considerable caution and do not in general accept his evidence that he had a reasonable belief in the profit representation.
I note that the Butterworths extended vendor finance terms to the Holmes. Mr Butterworth pointed to this fact as demonstrating his reasonable belief. Otherwise, it is suggested, why would Mr Butterworth offer this facility if he did not believe the return on investment could be achieved.
I do not consider that Mr Butterworth acted fraudulently. He may have had some belief in the figures sufficient to extend vendor finance terms to the Holmes. However, as I set out below, that belief was not one based in reason. It was formed carelessly.

The profit representation and the justification: particular matters

Point (c) of Mr Butterworth's summary (op cit) relates to the rates increase. The matters I have just set out are relevant to this issue. Mr Butterworth conceded that he had made no enquiries of the Shire about the possibility of a rate increase. There is no evidence that the Shire would have looked favourably on a rate increase. He made what he called "an assumption" that the Shire would approve an immediate rate increase, but without any reasonable basis for that assumption, bearing in mind the increase in 1995 which had been granted. The evidence of Mr Simpson, the Health Services Manager for the Shire of Busselton, is that following a letter from Mr Holmes, probably in May 1997, he recalled telling him that an increase was not due because there had been one increase in 1995 at the written request of Mr Butterworth. Subsequently, however, the Busselton Council did approve an increase, which appears to be about 20 per cent, the increase taking effect from 1 August 1997. While to some extent this bears out Mr Butterworth's assumptions, I still regard the use of a possible 20 per cent fee increase to justify the profit representation as careless, because no reasonable enquiry had been made of the Shire officers. There is no evidence as to how the Shire would have viewed the increase if one had been proposed in November 1996.
Mr Butterworth's summary point (d) in his justification for the profit representation is that there was strong growth in the population and economics of the Shire.
However, in the previous three years the core business averaged $121,000. The in‑fill sewerage program was in existence, so the new developments would be deep sewered and require no sewerage services. Mr Butterworth makes a series of statements in his witness statement, Exhibit 2, about the growth of Busselton, including the new airstrip and terminal, the upgrade of the dual carriageway from Bunbury, the growth of the wine industry, the Port's Geographe Canal project, including other major tourist developments. At par 109 he said:
"This anticipated growth could only have a positive impact on the revenue of the Business."
This contrasts with the letter written by him on 8 May 1995 to the Shire wherein it is stated:
"… It should also be noted that this type of work is not a growth industry but rather a diminishing one due to the Government commitment to the Infill Sewerage Programme. …"
The fact that an area may be growing strongly provides no reliable indicator that a business such as waste disposal will grow strongly with it. Other factors, chief among them the in‑fill sewerage program, will undoubtedly have an influence.
Mr Butterworth explained the reasons why he considered the core business would grow. For example, there was potential for the business to obtain additional work in the Nannup Shire. He was confident that with promotion and willingness to undertake the trip from Busselton to Nannup, the business could pick up one house in the Nannup Shire every two weeks at a minimum.
However, the company was already operating in Nannup. As he conceded, this forecast was nothing more than a "guesstimate". I regard it an ex post facto attempt to justify the profit representation when no real analysis or enquiry was made in July 1996 at the time that the profit representation was made. It was an unreasonable assumption.
He gave further examples that there was the potential to promote an arrangement of emptying systems on a regular basis rather than only after they became overloaded. However, he acknowledged that this promotion was already undertaken to some degree by telephone and was therefore reflected in the core business figures. Further, there is a real prospect that customers would be out of pocket if they paid to have their waste emptied regularly rather than as needed.
Mr Butterworth relied on subdivisional work for private developers as an area of growth, but conceded that he had no idea whether any new works were coming on as at July 1996 and in fact was not aware of any new works coming on.
An important change to the business during Mr Butterworth's time was the Water Corporation's apparent move from reliance upon Busselton Liquid Waste within the Busselton region to a system of tendering. Busselton Liquid Waste had tendered for, but lost, a contract known as "Moore Street". Another contractor from Capel had won that contract. This meant there was no guarantee of further work with the Water Corporation. Of course there was the expectation of such work, but no guarantee.
Mr Butterworth's statement: "I expected that the business would win the bulk of the Water Corporation work even if some work went to competitors" is a hopeful statement with some basis, having regard to the geographical location in which the company operated. Nevertheless, in a profit representation, a cautious view should be indicated. Mr Dee calculated the value of the business in part by averaging out the previous three years, making adjustments for the Dunsborough Lakes project. During much of that period, Busselton Liquid Waste had, to all intents and purposes, an exclusive arrangement with the Water Corporation. The Dunsborough Lakes project and the Moore Street project indicated how that arrangement could no longer be relied upon.
Mr Butterworth makes much of the in‑fill sewerage program. Various plans and letters were produced to back up his opinion. In 1996 he had no documents. All he knew, as a result of his other work, was that as part of the government's in‑fill sewerage program, tenders were being called for the installation of the sewer mains and man‑holes. This was particularly in the areas known as "14B", generally regarded as the east end of Busselton, and "17A" at the west end. He says the source of his knowledge that the Water Corporation was proposing to make new sewer arrangements to approximately 136 residential properties in Busselton was provided by the Water Corporation and by GHD & BSD Consultants, the engineering consultants appointed by the Water Corporation to design the sewers in Busselton. This knowledge seems to have come his way due to his interest in Bayside Civil & Drainage.

Of course it is not necessarily negligent for Mr Butterworth to rely on his knowledge rather than documents. If, subsequently, the documentary material confirms that his profit representation, insofar as it relied on the in‑fill sewerage program, was reasonable, then that would be sufficient for the discharge of the onus of proof on the defendants on this aspect.
However, a person who makes a representation in these circumstances, without any apparent enquiry from relevant authorities, is at risk. Mr Butterworth said that the information which had been provided to him by August 1996 was that the installation of the sewer to the 1360 properties in question would commence towards the end of 1996 and be completed by mid‑1998. The first properties would be able to hook up to the sewer by the beginning of 1997. Mr Butterworth did not explain clearly what this information was, apart from some information which had come his way from the civil engineering business and a pamphlet dropped in his letterbox at some stage, but apparently discarded.
There is no doubt that an extensive in‑fill sewerage program was planned in 1996. On 19 March 1996, the Manager, Infill Sewerage Program for the Water Corporation, wrote to the Shire of Busselton attaching detailed plans of the proposed in‑fill. The letter said in part:
"The Infill Sewerage Program is now well into the second year of the ten year program. To date some 178 construction contracts have been awarded and $100 million has been expended.
To assist Local Authorities with coordinating their program of works, information will be provided on a regular basis showing the infill sewerage projects scheduled for construction in the ensuing three years. The attached plan sets out the program proposed for your Council.
It should be clearly understood that the projects listed are an indicative program only. Other projects may be advanced or added if funding and availability of designs permit."
If Mr Butterworth had made basic enquiries he would have realised the caveat upon the predictions being made by the Water Corporation. In the circumstances the absence of proper enquiry by him before preparing revenue forecasts was negligent.
The schedules attached show that for the program 1996/1997 and 1997/1998, there were a possible 1184 lots. Although Mr Butterworth said:
"To my working knowledge before connecting to a sewer, the owner of a property is required to have all septic tanks, soak wells and leach drains emptied completely. …"
he conceded that this was not a requirement but accepted as the practice. The plaintiff led evidence that in fact not every house has all three drains pumped out. The attempted justification by the use of Water Corporation documents after the event does not alter the fact that the infill sewerage program has proceeded less quickly than Mr Butterworth assumed. Of course this hindsight is not by any means decisive but it does point to the need, at the time of the profit representation, to have made proper enquiries. Those enquiries would have shown the caution necessary in making predictions as to future connections.

Revenue projections

Mr Butterworth justified the profit representation in the end by a conclusion in his witness statement at par 136:
"136.In August 1996, taking all of the factors referred to above into account, I thought that the Business should turnover at least $290,000 per annum. I knew that the business had turned over $445,000 in the year ended 30 June 1996. At the time I thought (although I had not done a precise calculation) that approximately half of that revenue had come from work at Dunsborough Lakes. Therefore, assuming the Business would start from a base of 50% of $445,000, my knowledge and experience as well as the information then available to me, led me to think that there was no reason why the Business could not achieve the following annual revenue in the future:
1996 revenue  $445,000
Less 50%$222,500
$222,500
plus 20% fee increase  $ 44,800
plus sewerage connections  $ 73,000
Annual revenue  $340,000
137.Allowing for some further loss of revenue from the Water Corporation because of the tendering process, introduced mid way through the financial year ended 30 June 1996, I thought the Business should achieve a turnover of at least $290,000 being on a par with the performance of the Business in the year ended 30 June 1995."
There are a number of problems with these figures. The 1996 revenue was not $445,000, but in fact, on the Price Waterhouse figures prepared subsequently, $429,000.
The 20 per cent fee increase of $44,800 was, for reasons previously expressed, an unwarranted assumption based on no enquiry at all. Furthermore, Mr Butterworth sought to bring it to account from November 1996 to have a full year effect. The estimate of income to be derived from sewerage connections as $73,000 per annum related to the in‑fill sewerage program. Therefore, on Mr Butterworth's conclusion, that amount would be available more or less from November 1996 and thereafter. However, this figure does not even tally with Schedule 2 to his witness statement entitled "Anticipated Pumpouts from Infill Sewer Conversions (Monthly Averages)" which for the period ended:
30 June 1997  7.5
30 June 1998  189
30 June 1999  336.5
30 June 2000  276.4
30 June 2001  226
30 June 2002  221
On an assumption of $270 per connection, it is obvious that the figure of $73,000 per annum bears no resemblance to reality to such an extent that it is an unreasonable figure. Using his own calculations, the purchasers of the business from 1 November 1996 would achieve only approximately $19,000 in the ensuing 12 months.
Another calculation within par 136 was to halve the revenue of $445,000 to $222,500 to take account of Dunsborough Lakes.
Mr Butterworth conceded that he did not look at the books to work out the exact figures. In his words:
"I didn't think I had to because I had a pretty good feel of the business. I knew that Dunsborough Lakes was 50 per cent."
However, in the period under consideration, the contribution of the Dunsborough Lakes project was 58 per cent.

Conclusion on profit representation

I am satisfied that when Mr Butterworth gave instructions to Mr Dee for the inclusion of material within the Information Memorandum and, subsequently approved that document, he, personally, and as a director of Patney Pty Ltd and acting on its behalf, did not have reasonable grounds for making the profit representation. His attempts after the event to justify the figures clearly expose the carelessness with which he approached the original task. He made no relevant enquiries at the time in order to substantiate any of his projections. His efforts at substantiation subsequently are in some parts contradictory and in other parts implausible. I find that the profit representation was misleading, indeed deceptive. If Mr Butterworth had properly applied his mind to the task, the profit representation would have been significantly below that represented in the Information Memorandum. There would have been a qualification on the extent to which the growth of the south‑west region, described as "phenomenal" in the Information Memorandum, could translate into new business in Busselton. The 20 per cent increase in projected fees from the Shire of Busselton was speculative only. Work from the Water Corporation was not certain and expansion to other geographical areas, such as Nannup, was problematic. Consequent upon this finding, and by operation of the Trade Practices Act s 51A, the profit representation is misleading.

Reliance

It is necessary for the plaintiff to establish that they relied upon the misleading representation and that damage was in consequence caused to them.
The defendants contend that the Holmes have at all times relied upon their own enquiries.
Under the heading "An inspection of the books is made" earlier in this judgment, I have set out the details of the involvement of Mr Royer in examining the books. It is clear that the Holmes relied upon Mr Royer. They also made their own enquiries.
However, I am satisfied that they relied upon the profit representation in entering into the business. Mr Holmes had previously operated small businesses successfully and Mrs Holmes was an astute person.
However, they had not previously operated a waste disposal business and specifically had not operated such a business in Busselton. The inspection of the books of account would have raised some warning signals as indeed the letter of Mr Royer in part suggests.
Much of the profit representation was justified by Mr Butterworth on matters about which he might be expected to know and which would not be reflected in the books of account. The in‑fill sewerage program is one such example. The potential for work in other districts, such as Nannup, is another example, as is the possibility of obtaining future work from the Water Corporation and subdivisions. There is no evidence that Mr and Mrs Holmes were aware of any of these matters. Mr Holmes has said in his witness statement:
"… I particular (sic) noted the claim that based on those figures any purchaser would be able to pay for the business in less than 18 months. This was of some importance to my (sic) because my wife and I were not in a position to pay the purchase price up front and would need to finance some of it, at that stage probably at least half and obviously I wanted to be in a position to repay that debt and preferably from the business income itself."
I accept this evidence. It accords with commonsense. The Holmes were entering into a new business in an unfamiliar area of operation. While they sensibly required their accountant to examine the books of account, this is not incompatible with a reliance upon the profit level representation for the future. Of course some representations as to the future may be so vague as to indicate that in truth no reliance could be placed upon them. In this case the representations were made by a man who was selling the business and had been in business for some years. The representations were to an extent confirmed by the figures so that they did not appear manifestly unreasonable on sight. I find that the Holmes relied upon the profit representation.

Causation

There must of course be a causative link between the misleading conduct relied upon and the damage suffered by Varndell. The cases and principles have been recently set out by the Full Court in Walker v Henville [1999] WASCA 117 from par 34.
It can be acknowledged that the Holmes did not ask for assistance from the Butterworths after the handover. Furthermore, due to Mr Holmes' medical condition, there were times when he did not attend to the business. Another driver was engaged at those times.
The business was not a complex one once the basics were mastered and there was no evidence of ineptitude on the part of the Holmes. There were some complaints about service but I do not regard them as reflecting a material impact on the business profitability.
The Holmes were induced to enter the contract by reason of the profit representation. They have suffered loss as a direct consequence of entry into the business. I do not find any other factor was causative of loss.
It is submitted that the plaintiff fell behind on its interest payments shortly after handover and that the threat and subsequent institution of these proceedings was an attempt to deflect the need to make the final payment for the business.
The profit representation assumed a return of 75 per cent in the first 12 months if business was operated by the owner.
In circumstances where, as I have found, this was misleading and wrong, it is unsurprising that the cashflow difficulties were immediately evident.

Damages

Damages arising from the purchase of a business as a result of a misleading statement are assessed by reference to the difference between the value of the business at the date of purchase and the price paid for the business: Gates v City Mutual Life Assurance Society Ltd (1986) 1 CLR 1 at 12.
There is a conflict in the evidence between the evidence of the plaintiff's expert valuer Mr Barrett and the evidence of the defendants' expert Mr Edwards.
Mr Edwards for the defendants made certain assumptions. For example, in his report, Exhibit 1, at par 30 he has assumed an increase in the approved rates of an average of 20 per cent could have been obtained within a period of three months after 31 October 1996.
He has also assumed that the ongoing level of other contract work would be between "$40,000 and $60,000, say $50,000". He made other assumptions in relation to the impact of proposed in‑fill sewerage program at Busselton. In short, he has worked substantially on the same assumptions made in the profit representation which I have held to be unreasonable assumptions. In the end of his cross‑examination, Mr Edwards answered the following question:
"… essentially the significant difference between your report and Mr Barrett's is that you've relied on what you would call anticipated future turnover for the business as at 31 October based on information supplied by Mr Butterworth whereas he's relied on what actually happened in the two years after the event?---Yes. I've made a judgment as to the expected future turnover and expected future earnings of the business having regard to information supplied to me, yes, of the historic earnings and discussions about the expectations that might continue into the future." (My italics)
On this basis I cannot accept his valuation that the business is assessed to have a value of $313,000 as at 31 October 1996, and with a premium for the licence, a value of $363,000. He has relied upon information from Mr Butterworth which I have found to be misleading and unrepresentative of the true position.
Mr Barrett was the plaintiff's expert valuer. He valued the business at $105,000 and the goodwill acquired as part of that business at $80,000 as at 31 October 1996, when it was acquired from Patney Pty Ltd.
The actual turnover and profitability was calculated by the plaintiff's accountants, Anderson Mountford Down. I accept the evidence of Mr Down as to the general accuracy of these figures. Mr Barrett used these figures to prepare his valuation.
The method which Mr Barrett chose to value the business was the capitalisation of income method, cross‑checked with the comparison sale.
As Mr Barrett described it in his report:
"The principle of the capitalisation of income method revolves around working backwards from the income that a business can produce and applying a desired rate of return a potential investor could be expected to require from the investment to calculate the amount that they would be prepared to pay for that investment (ie the value)."
An important qualification to his valuation is as follows:
"In this instance we have been requested to value the business with hindsight and knowledge of the actual turnover and profitability of the business at 31 October 1996."
Although Mr Barrett conceded that it was the normal practice to value a business as at the date of purchase based on past performance, he pointed out that in using for example a discounted cashflow method one would use an anticipated income and bring it back to a present net value. Rather than anticipate what the 12 months turnover is going to be and knowing in hindsight what the turnover was, he calculated with accuracy what the value of the business was at the date of purchase.
The defendants criticised this approach which uses hindsight to calculate value. In many cases a court decides the value of an asset in artificial circumstances. So, for example, in the valuation of land which has been resumed, there is in fact no sale and so forecasting must be used in determination of value for land suitable for subdivision or other business purposes. There is nothing to hindcast.
The situation may be different in the sale of an asset such as a business where there is knowledge of the subsequent trading history of that business. Provided that the variables can be excluded, there is no reason in principle why actual figures should not be used. In Kizbeau Pty Limited v WG & B Pty Limited (1995) 184 CLR 281 the High Court considered the position of a motel business and lease which were purchased in reliance upon a false representation. At 291 the court held:
"In an action for damages for deceit for inducing a person to enter a contract of purchase, which is an action that is closely analogous to an action for damages for breach of s 52, the courts have consistently held that the proper measure of damages is the difference between the real value of the thing acquired as at the date of the acquisition and the price paid for it…Nevertheless, although the value is assessed as at the date of acquisition, subsequent events may be looked at insofar as they illuminate the value of the thing as at that date…A distinction is drawn, however, between subsequent events that arise from the nature or use of the thing itself and subsequent events that affect the value of the thing but arise from sources supervening upon or extraneous to the fraudulent inducement…Events falling into the former category are admissible to prove the value of thing, those falling into the latter category are inadmissible for that purpose. Thus, the takings of a business subsequent to purchase are generally admissible, not only to prove that a representation concerning the takings was false…but also to prove the true value of the business as at the date of purchase…Even when some difference exists between the conditions under which the business was conducted before and after purchase, evidence of subsequent takings may be admissible, 'subject to due allowance being made for any differences in relevant conditions'."
Mr Barrett conceded in cross‑examination that if he had not been specifically requested to adopt a hindsight approach, he would not have adopted it. He would have used a future maintainable earnings profit method based on past historical transactions, adjusted for extraordinary abnormal items and capitalise that amount.
Mr Barrett is a very experienced chartered accountant and despite the fact that it would not have been his preference to use hind‑casting, nevertheless he was prepared to do so and took responsibility for it.
Nothing in cross‑examination fundamentally swayed his reliance on this method.
I find that Mr Barrett's approach to the capitalisation of income method of valuation using the actual trading figures subsequent to sale was appropriate and I accept his valuation.

Measure of damages

In Gould v Vaggelas (1985) 157 CLR 215, Gibbs J said at 220:
"It is well established that in an action of deceit where the plaintiff has been induced by the fraudulent misrepresentation of the defendant to enter into a contract of purchase, the measure of damages usually applicable is the difference between the real value of the property at the time of the purchase and what the plaintiff paid for it…Events that happen after the time of purchase may throw light on the real value of the property at that time."
The other judgments within the case were to like effect.
In this case Varndell purchased the business of Busselton Liquid Waste for $360,000.
Accepting as I do the evidence of Mr Barrett, I find that the actual value of the business as at the handover date of 1 November 1996, was $105,000.
The plaintiff's claim is for:
"1.Damages pursuant to section 82 of the Trade Practices Act and/or section 79 of the Fair Trading Act.
2.Such orders under section 87 of the Trade Practices Act and/or section 77 of the Fair Trading Act as this Honourable Court may deem appropriate.
3.Interest as a component of the damages awarded herein or alternatively pursuant to statue (sic) at the rate of 8% per annum from the 31st day of October 1996 until judgment."
The plaintiff has paid $180,000 and was due to pay the balance of the purchase price, $180,000, by 10 July 1997. Interest at the rate of 10 per cent per annum was payable in sums of $1500 monthly in arrears until payment of the balance was made.

Although the Holmes gave evidence that the plaintiff in fact suffered a loss for the first year of operation, no specific claim was made in respect of this and I consider that such a claim ought to have been made and quantified within the pleadings. Therefore I do not propose to award damages for such loss.
I find the plaintiff entered into the contract for $360,000 in reliance upon a profit representation which was misleading. As a result it has suffered damage, that damage being the amount which they have paid, or are contracted to pay in excess of the true value of the business as at 1 November 1996, namely $105,000.
There should therefore be orders for:
1.the repayment of $75,000 by the first defendant Patney Pty Ltd and the second defendant Gary Ian Butterworth;
2.the repayment of interest payments of $6000;
3.interest at the rate of 8 per cent per annum on the sum of $81,000 from the date of issue of the writ;
4.an order that the plaintiff is relieved from its further contractual obligations to pay the balance of $180,000.

Conclusion

There will be orders as outlined in the previous paragraph. In addition I order that the plaintiff's claim against the third defendant Anthony Paterniti be dismissed.
I order that the defendants' counterclaim against the plaintiff and Mr and Mrs Holmes be dismissed.

[2000] WASC 238

27/09/2000