Woodthorpe Investments Pty Ltd v Trek Holdings Pty Ltd
[2002] WASC 198
WOODTHORPE INVESTMENTS PTY LTD -v- TREK HOLDINGS PTY LTD [2002] WASC 198
| SUPREME COURT OF WESTERN AUSTRALIA | Citation No: | [2002] WASC 198 | |
| Case No: | CIV:1967/1998 | 28-30 MARCH 1999 | |
| Coram: | OWEN J | 8/08/02 | |
| 47 | Judgment Part: | 1 of 1 | |
| Result: | Claim and counterclaim dismissed | ||
| B | |||
| PDF Version |
| Parties: | WOODTHORPE INVESTMENTS PTY LTD (ACN 057 850 012) TREK HOLDINGS PTY LTD (ACN 009 383 877) |
Catchwords: | Contract Sale and purchase of a retail business Representations as to net profit and gross profit margin Whether representations untrue and whether relied on Allegations of fraudulent and negligent misrepresentation and breach of contract Counterclaim for fees under a licence agreement Turns on own facts |
Legislation: | Nil |
Case References: | Briginshaw v Briginshaw (1938) 60 CLR 336 Derry v Peek (1889) 4 AC 337 Gould v Vaggelas (1985) 157 CLR 215 Hedley Byrne & Co Ltd v Heller & Partners Ltd (1964) AC 465 Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563 L Shaddock & Associates Pty Ltd v Parramatta City Council (1981) 150 CLR 255 Mutual Life & Citizens Assurance Co Ltd v Evatt (1968) 122 CLR 556 Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 67 ALJR 170 San Sebastian Pty Ltd v Minister Administering Environmental Planning Act (1986) 162 CLR 340 C P Fitline Pty Ltd v Spurfolk Pty Ltd, unreported; FCA (Einfeld J); 9 June 1993 Chappel v Hart (1998) 72 ALJR 1344 Commercial Union Assurance Company of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389 Esanda Finance Corp Ltd v Peat Marwick Hungerfords (Reg) (1997) 71 ALJR 448; (1997) 188 CLR 241 Esso Petroleum Co Ltd v Mardon [1976\] QB 801 Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1 Ghazal v Government Insurance Office of New South Wales (1992) 29 NSWLR 336 Hawkins v Clayton (1988) 164 CLR 539 Hill (t/as R F Hill & Associates) v Van Erp (1997) 71 ALJR 487; (1997) 188 CLR 159 Kenny & Good Pty Ltd v MGICA (1992) Ltd (1997) 147 ALR 568 Kizbeau Pty Ltd v W G & B Pty Ltd (1995) 184 CLR 281 Koufos v C Czarnikow Ltd (The Herron II) (1969) 1 AC 350 March v E & M H Stramare Pty Ltd (1991) 171 CLR 506 Munchies Management Pty Ltd v Belpiero (1988) 84 ALR 700 Potts v Miller (1940) 64 CLR 282 Pyrenees Shire Council v Day (1998) 72 ALJR 152; (1998) 192 CLR 330 Romeo v Conservation Commission of the Northern Territory (1998) 72 ALJR 208; (1998) 192 CLR 431 Shire of Harvey v Marist Brothers Community Inc, unreported; SCt of WA (Owen J); 24 March 1993 South Australia v Johnson (1982) 42 ALR 161 |
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
- IN CIVIL
- Plaintiff
AND
TREK HOLDINGS PTY LTD (ACN 009 383 877)
Defendant
Catchwords:
Contract - Sale and purchase of a retail business - Representations as to net profit and gross profit margin - Whether representations untrue and whether relied on - Allegations of fraudulent and negligent misrepresentation and breach of contract - Counterclaim for fees under a licence agreement - Turns on own facts
Legislation:
Nil
Result:
Claim and counterclaim dismissed
(Page 2)
Category: B
Representation:
Counsel:
Plaintiff : Mr N P Hasluck QC & Mr G I Chitty
Defendant : Mr D M Stone
Solicitors:
Plaintiff : Murie Lawyers
Defendant : Williams & Hughes
Case(s) referred to in judgment(s):
Briginshaw v Briginshaw (1938) 60 CLR 336
Derry v Peek (1889) 4 AC 337
Gould v Vaggelas (1985) 157 CLR 215
Hedley Byrne & Co Ltd v Heller & Partners Ltd (1964) AC 465
Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563
L Shaddock & Associates Pty Ltd v Parramatta City Council (1981) 150 CLR 255
Mutual Life & Citizens Assurance Co Ltd v Evatt (1968) 122 CLR 556
Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 67 ALJR 170
San Sebastian Pty Ltd v Minister Administering Environmental Planning Act (1986) 162 CLR 340
Case(s) also cited:
C P Fitline Pty Ltd v Spurfolk Pty Ltd, unreported; FCA (Einfeld J); 9 June 1993
Chappel v Hart (1998) 72 ALJR 1344
Commercial Union Assurance Company of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389
Esanda Finance Corp Ltd v Peat Marwick Hungerfords (Reg) (1997) 71 ALJR 448; (1997) 188 CLR 241
Esso Petroleum Co Ltd v Mardon [1976\] QB 801
(Page 3)
Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1
Ghazal v Government Insurance Office of New South Wales (1992) 29 NSWLR 336
Hawkins v Clayton (1988) 164 CLR 539
Hill (t/as R F Hill & Associates) v Van Erp (1997) 71 ALJR 487; (1997) 188 CLR 159
Kenny & Good Pty Ltd v MGICA (1992) Ltd (1997) 147 ALR 568
Kizbeau Pty Ltd v W G & B Pty Ltd (1995) 184 CLR 281
Koufos v C Czarnikow Ltd (The Herron II) (1969) 1 AC 350
March v E & M H Stramare Pty Ltd (1991) 171 CLR 506
Munchies Management Pty Ltd v Belpiero (1988) 84 ALR 700
Potts v Miller (1940) 64 CLR 282
Pyrenees Shire Council v Day (1998) 72 ALJR 152; (1998) 192 CLR 330
Romeo v Conservation Commission of the Northern Territory (1998) 72 ALJR 208; (1998) 192 CLR 431
Shire of Harvey v Marist Brothers Community Inc, unreported; SCt of WA (Owen J); 24 March 1993
South Australia v Johnson (1982) 42 ALR 161
(Page 4)
1 OWEN J: This is an action for damages for fraudulent or negligent misrepresentation relating to a business that the plaintiff purchased from the defendant. There is a counterclaim brought by the defendant for recovery of a small liquidated sum arising from an arrangement for the plaintiff to pay a licence fee.
Background
2 The plaintiff is a company associated with Robin Fisher and Carole Fisher, who were directors during the period to which this dispute relates. I will refer to Robin Fisher simply as "Fisher" and to Carole Fisher as "Mrs Fisher". When I have need to refer to them together, I will do so by the use of the phrase "the Fishers". The defendant is a company associated with Geoffrey Macaulay, who was a director during the period to which this dispute relates.
3 The defendant operated a business as a wholesaler and retailer of games and toys. It had two divisions. One division operated the retail outlets under the name Games World at various locations. I will refer to Games World generally as "GW" and, when wishing to draw attention to a particular retail outlet, to "GW" followed by the name of the suburb. The other division was called Active Imports. It was an importer of games and novelty toys into Australia, predominantly from Asia. It then acted as a wholesaler, selling the games and toys to the GW stores and other retailers. Active Imports was not the only supplier of product to the GW stores. Sometimes the defendant purchased product from other suppliers and distributed it to individual GW stores. On some occasions the managers of the stores would order direct from the supplier and take the product into stock. Active Imports applied a profit margin on sales to GW stores and gave them discounts against its wholesale list price in the same way it did to other retailers.
4 In the last half of 1991, the defendant was operating GW stores (under management) at Perth, Karrinyup and Mirrabooka. In November 1991 it opened a new store at Whitfords. In July or August 1992 an opportunity arose to open a further store in Belmont. In order to do so, Macaulay decided to sell either the Mirrabooka or Perth store. He contacted Ron Atkinson of Gillard Hodge Realty ("GHR") and requested him to list the two stores for sale. The Mirrabooka store was advertised for sale. Fisher saw the advertisement and contacted GHR about it. He was shown some profit and loss figures. Fisher decided he had no interest in buying the Mirrabooka store but enquired whether the Whitfords store
(Page 5)
- was available. Fisher was interested in the Whitfords store because it was newer and he felt it had more scope for growth.
5 Up to that time, the defendant had not intended to sell the Whitfords store because it had only been trading for approximately eight and a half months and was then not fully established. However, after discussions between GHR and Macaulay, Fisher was advised that the defendant would consider selling the GW Whitfords business. In or about September 1992 Fisher requested the financial accounts of the GW Whitfords business. On 15 September 1992 the defendant provided to GHR a document entitled "Trek Holdings Pty Ltd Profit and Loss Statement for the year ended 30th June 1992" ("Profit Figure Statement"). On 16 September 1992 Fisher collected the document from Wendy Court of GHR. The profit figure statement provided profit and loss figures for GW Whitfords for the seven and a half month period from November 1991 to June 1992 that the store had been trading. The profit figure statement recorded a bottom line net profit of $10,420. Fisher was also provided with departmental trading and profit and loss statements for the Mirrabooka store relating to the periods of trading ending 30 June 1992 and 30 June 1992.
6 On 18 September 1992 Fisher took the profit figure statement for the GW Whitfords store and the figures for the Mirrabooka store to his accountant, Glen Longmire. From the information contained in the profit figure statement, Fisher and his accountant calculated a gross profit margin for the GW Whitfords store of 45.96 per cent. At this time Fisher decided to pursue the purchase of the GW Whitfords business rather than the Mirrabooka store.
7 On 16 October 1992 Fisher met with Macaulay to discuss in more detail the proposed purchase of the GW Whitfords store. They discussed in general the nature of the Games World business, Fisher's experience in retail businesses and the purchase price for the GW Whitfords business. Fisher was able to get the price down by $15,000. They also discussed how the business would be managed, the appropriate stock levels that would be needed coming into the Christmas period, the fact that the business was not at its peak and the licence fee that would be paid to the defendant for the use of the Games World name. The profit figure statement was not discussed at this meeting.
8 Following this meeting, the Fishers decided to purchase the business. The offer to purchase the business was signed by Fisher at the offices of GHR on 16 October 1992. The contract notes Woodthorpe Investments
(Page 6)
- Pty Ltd as the purchaser's nominee. The defendant accepted the offer on 19 October 1992. The purchase price for the business was $137,600. An amount of $25,000 was attributed to goodwill.
9 The contract to purchase the business also provided for a licence fee to be paid by the plaintiff to the defendant for the use of the Games World name. The use of the Games World name allowed store owners to obtain favourable marketing terms with a number of suppliers. Following the execution of the contract for sale, the licence arrangement was formalised between the parties by an agreement in writing dated 13 November 1992 ("the licence agreement"). Under this agreement the plaintiff agreed to pay a licence fee of $4000 per annum, adjusted to CPI on 1 January every year, commencing in 1994.
10 Following the execution of the contract, Fisher requested that a comprehensive stocktake be performed prior to settlement. The stocktake was performed on or about 14 November 1992 and a stock level of $120,508 was recorded. Fisher was unhappy with the level of stock recorded and told Atkinson that he was not prepared to pay for that amount. Following this, Macaulay contacted Fisher and they agreed that the plaintiff would be given a 5 per cent discount on the stock it retained and that the defendant would take back any stock the plaintiff did not want. As a result of this agreement, the plaintiff received a discount of $6025.41 on the total stock value of $120,508.19 and returned $30,739.16 worth of stock. On settlement the plaintiff took over the business with stock valued at $83,743.62.
11 Prior to settlement the parties were required to arrange for the lease of the GW Whitfords store to be assigned from the defendant to the plaintiff. This could not be done without the landlord's consent. On 12 November 1992 the defendant received a letter on behalf of the landlord informing him that the landlord, Albert Sertorio, would not give his consent to the assignment. Macaulay then spoke to Sertorio who expressed concern over the Fishers' lack of retail experience. In this discussion Macaulay reassured Sertorio that the Fishers had agreed to keep on the current store manager. He also told Sertorio that Mrs Fisher had retail experience and that he and other operators of GW stores would be available to provide assistance and advice to the Fishers. Consequently approval to the assignment of the lease was obtained.
12 On 14 November 1992 the plaintiff took possession of the GW Whitfords store. On 23 November 1992 Fisher printed out a departmental sales report for the past 12 months of trading. He then undertook his own
(Page 7)
- analysis of these figures on a spreadsheet. Having completed this analysis, Fisher began to have concerns that the gross profit margin might not be as high as his earlier calculation of 45.96 per cent.
13 After Fisher had run the figures which suggested to him that he would not be able to achieve a gross profit margin of 45.96 per cent he decided that he could no longer afford to retain a store manager. The store manager's contract of employment was terminated in January 1993. At this point Mrs Fisher became the store manager and principal operator. Despite an increase in turnover over the first two years the plaintiff was unable to make a profit. The plaintiff's profit and loss statement for the period from 14 November 1992 to 30 June 1993 recorded a loss of $10,198. The gross profit margin of the business on all sales for this period was 33.28 per cent. Losses continued over the next three years. The plaintiff's profit and loss statement for the year ended 30 June 1996 recorded a loss of $46,436. At no time throughout its four years of trading was the plaintiff able to achieve a gross profit margin over 33 per cent.
14 The plaintiff continued to trade and incur losses for the term of the lease. Shortly before the business closed in October 1996 the stock on hand was worth approximately $54,172. Around this time the defendant made an offer to buy back the plaintiff's stock. The plaintiff declined this offer and proceeded to sell most of the stock on hand at a closing down sale and afterwards. When the lease expired on 26 October 1996, the plaintiff ceased trading.
The plaintiff's claims against the defendant
15 The plaintiff relies on three causes of action which it claims arise out of the defendant's conduct in respect of the transaction for the sale of the GW Whitfords business in October 1992. The three causes of action are fraudulent misrepresentation, negligent misrepresentation and breach of contract. The representations said to form the basis of the plaintiff's claims are contained in pars 6(a) and 6(b) of the Further Re-Amended Statement of Claim dated 17 December 1998 ("statement of claim"). Par 6 provides that:
"On or about 16 September 1992 and before the agreement was entered into the defendant by its servant or agent represented to Fisher in circumstances where the defendant knew or ought reasonably to have known that Fisher on behalf of the plaintiff
(Page 8)
- would or was likely to rely on what was represented and be induced to buy the business that:
(a) the gross profit from trading of the business to 30 June 1992 was $86,915 being a gross profit margin of 45.96% on all sales;
(b) the net profit of the business to 30 June 1992 was $10,420."
17 The fraudulent misrepresentation claim is contained in par 9 and relates specifically to the representation contained in par 6(b) of the statement of claim that the net profit of the business to 30 June 1992 was $10,420. The plaintiff claims that the defendant knew the representation was false or untrue or made it recklessly without caring whether it was true or false because, at the time the representation was made, the defendant had the management, conduct and control of the business and would have had knowledge of the true trading figures of the GW Whitfords store.
18 The second cause of action relied on by the plaintiff is a claim in negligence arising out of the same facts. Negligent misstatement is pleaded in pars 11 and 12 of the statement of claim. The plaintiff relies on the representations contained in both pars 6(a) and 6(b) of the statement of claim, namely, that the gross profit to 30 June 1992 was $86,916, being a gross profit margin of 45.96 per cent on all sales, and that the net profit of the business to 30 June 1992 was $10,420. In par 11 the plaintiff claims that by reason of the defendant's special skill and knowledge or its special relationship with the plaintiff the defendant owed to the plaintiff a duty of care in making the representations and that the defendant breached this duty in making these representations.
19 Finally, in par 13 the plaintiff relies on breach of condition 19.5 of the contract. Paragraph 13 provided that the vendor's representations in respect of past turnover, expenses, profits, losses and other financial information were accurate to the best of the defendant's information and
(Page 9)
- belief. The breach of condition claim relates to the same representations pleaded in par 6(a) and (b) of the statement of claim.
20 In summary, the plaintiff's case is that during the discussions surrounding the sale of the business representations were made to it by the defendant. These representations were relied on by the plaintiff as reflecting the true financial position of the GW Whitfords store and because of these representations, the plaintiff decided to purchase the business. The plaintiff says that had it been aware that the representations were false, it would not have purchased the business. Had it not done so, it would not have incurred the losses it suffered in operating the business for four years.
21 In the defence, the defendant does not deny that on or about 15 September 1992 it provided the plaintiff with the profit figure statement containing the representations which the plaintiff claims are untrue. The defendant denies that any representations made to the plaintiff by it were false or misleading. It also contends that any losses suffered by the plaintiff resulted from a number of factors, in particular, the plaintiff's lack of retail experience and the plaintiff's decision to conduct its business in a manner contrary to that adopted by the defendant in its GW stores. However, while the defendant does not accept that the profit figure statement was misleading or inaccurate, the defendant admits in par 7 of the defence that the profit figure statement had been adjusted to remove certain expenses or "add-backs" which the defendant felt were of an unusual nature peculiar to the defendant or were unlikely to be repeated.
22 The common issue in all of the three causes of action is whether or not the figures provided to the plaintiff by the defendant in the profit figure statement falsely misrepresented to the plaintiff the true financial position of the GW Whitfords business as of 30 June 1992.
23 I will deal first with the plaintiff's claim in fraudulent misrepresentation and then consider the claims for negligent misrepresentation and breach of contract. Having considered the plaintiff's claims, I will then address the defendant's counterclaim under which the defendant seeks to recover an amount it claims is still outstanding under the licence agreement.
(Page 10)
Fraudulent Misrepresentation
24 In relation to the fraudulent misrepresentation claim, the plaintiff relied on the representation contained in the profit figure statement that the net profit of the business to 30 June 1992 was $10,420. The plaintiff alleges that the representation is untrue. However, to succeed in this cause of action the plaintiff will need to show not only that the figure of $10,420 was untrue but also that at the time this representation was made the defendant knew it to be false or untrue or recklessly careless, whether it be true or false: Derry v Peek (1889) 4 AC 337. In addition to these elements the plaintiff must also show that it relied on the misrepresentation and as a result of the misrepresentation was induced to enter into a contract to purchase the business: Gould v Vaggelas (1985) 157 CLR 215.
25 The first issue to be determined is whether or not the representation that the net profit for the period ending 30 June 1992 was $10,420 was untrue. The representation that the net profit for GW Whitfords for the period ending 30 June 1992 was $10,420 was made to the plaintiff in the profit figure statement. This document was prepared by the defendant and provided to GHR on 15 September 1992: par 23 of MFI 45; T508 [Atkinson]. The document was then provided to the plaintiff on 16 September 1992: par 14 of MFI 50. The profit figure statement was tendered at trial and became Exhibit 15. For the sake of clarity I will now refer to this document as Exhibit 15. The references throughout these reasons to evidence in the form of an "MFI" are references to witness statements which were received as part of the evidence at trial.
26 The plaintiff contends that the representation that the net profit was $10,420 is false and that the true position of the business as at 30 June 1992 was a net loss of $2427. The plaintiff says that had it been informed of the true position, it would not have entered the contract. The figure of a net loss of $2427 is found in the financial accounts for GW Whitfords as at 30 June 1992, prepared by the defendant's accountants, Parkinson & Co. This document was tendered as Exhibit 16.
27 Macaulay's evidence was that at some time prior to 15 September 1992 he had provided a copy of Exhibit 16, which reported a net loss of $2427, to Atkinson: par 22 of MFI 45; T398 to T400; T410. He said that following this he was then requested by Atkinson to prepare a further profit and loss statement for the GW Whitfords store ("the adjusted profit and loss statement") making a number of add-backs to the expenses, as well as excluding from the previous statement abnormal items. This
(Page 11)
- request was also made some time prior to 15 September 1992: par 23 of MFI 45. Macaulay stated that he complied with Atkinson's request and adjusted the figures in Exhibit 16 to take into account the add-backs and exclude the abnormal expenses: T399. As a result of these adjustments, a net loss of $2427 became a net profit of $10,420: see Exhibit 15; Exhibit 16.
28 Macaulay's evidence was that he faxed the adjusted statement to Atkinson on 15 September 1992: T398. The adjusted profit and loss statement is Exhibit 15. Put simply, Macaulay's evidence was that Exhibit 16 preceded the existence of Exhibit 15 but that both documents had been provided to Atkinson. However, Fisher's evidence was that he never received Exhibit 16 and that the onlyprofit and loss figures received by him were those contained in Exhibit 15 showing a net profit of $10,420: pars 57, 58 of MFI 50.
29 Having heard the oral testimony of both witnesses, I accept the plaintiff's evidence that he did not receive a copy of Exhibit 16. I also have no reason to doubt Macaulay's evidence that he provided, or at least believed he had provided, Exhibit 16 to Atkinson prior 15 September 1992. I also have no reason to doubt Macaulay's evidence that he believed both these documents had been provided to the plaintiff by Atkinson. However, GHR was the agent of the defendant, not the plaintiff. Accordingly, delivery of Exhibit 16 by Macaulay to Atkinson does not constitute delivery to the plaintiff.
30 Having said that, it seems to me that the issue to be determined with respect to this cause of action is not whether Fisher received Exhibit 16, but rather whether the representation of a net profit of $10,420 in Exhibit 15 was false or untrue. That is not to say Exhibit 16 is not relevant. It may be relevant to the issue of what was the true financial position of GW Whitfords for the trading period or it may be relevant to the state of knowledge of the defendant at the time. However, the fundamental question to be resolved is whether the representation that the net profit was $10,420 was false or misleading.
31 The defendant does not dispute the fact that Exhibit 15 was intended to be given to the plaintiff. Nor does it dispute that the document represents that the net profit of GW Whitfords was $10,420. However, the defendant submits that the plaintiff's claim is unfounded because the profit and loss statement provided in Exhibit 15 was not false or even misleading. Further, the defendant submits that even if the representation was inaccurate, the information provided to the plaintiff, as well as
(Page 12)
- Fisher's state of knowledge, were such that he would not have been misled by the representation.
32 Before dealing with the appropriateness of the "add-backs" and adjustments made to Exhibit 15, I will deal with a separate objection raised by the plaintiff. This was to the effect that the net profit figure in Exhibit 15 was inaccurate because the purchase figures adopted by the defendant in Exhibit 15 reflected a notional rather than actual figure for the GW Whitfords store.
The use of notional purchase figures in the accounts
33 At trial the plaintiff argued that the figure of $10,420 was misleading because figures adopted by the defendant in its financial accounts involved a degree of aggregation among its four stores which made it impossible to calculate an actual figure for profit in any of the individual stores. In particular, the plaintiff pointed to Exhibit 15 and the fact that the figure of $163,055 allocated for purchases for GW Whitfords did not reflect the actual amount of purchases for that store but a notional amount apportioned across all of the defendant's GW stores.
34 Fisher gave evidence that he had examined the defendant's payments and purchase records and that these were inconsistent with the profit and loss statement provided. He said that the cash payments journal (Exhibit 22) recorded a greater amount of stock purchases for GW Whitfords than indicated in Exhibit 15: T160. According to the plaintiff, the effect of this approach was that the net profit figure of $10,420, being derived from a calculation involving purchases, would be a notional figure rather than an actual or true figure. Fisher's evidence was that at no time prior to entering the contract was it pointed out to him that the figure for purchases was a notional rather than actual figure. This evidence was confirmed by Macaulay who said that at no time had he explained to Fisher that the purchase figures were allocated on a notional rather than actual basis: T389.
35 The plaintiff adduced evidence from a number of witnesses that the figures allocated to purchases were notional rather than actual: see, for example, the evidence of Lindsay Stagoll, the defendant's accountant, at T576. However, while it was generally accepted by witnesses for both parties that the allocation of purchase figures among stores was done on a notional basis, the evidence of the defendant's witnesses was that a notional figure with respect to purchases did not result in a notional net profit or loss figure.
(Page 13)
36 To support its submission on this point the plaintiff relied on a document which it described as a reconstructed version of Exhibit 16 based on what it says were the actual purchase figures for GW Whitfords as at 30 June 1992. This document was tendered as Exhibit 82. The plaintiff submitted that the correct figure for both the external and internal purchases contained in Exhibit 16 should have been $205,384. The plaintiff argued that had this figure been used in Exhibit 16, it would have produced a net loss of $44,756.
37 A great deal of time was spent at trial ascertaining the source of these figures from the cash payments journal. I do not intend to revisit that evidence here except to say that I was satisfied that the purchase figures presented appeared to have been derived primarily from Exhibit 22, the cash payments journal. Other sources included: Exhibit 16, Exhibit 68 (Memorandum of Sloan on outstanding creditors/debtors), Exhibit 69 (Fisher calculation of purchases based on cash payments journal) and Parkinson working Notes. Although the figures relied on by the plaintiff appeared to be derived from legitimate bookkeeping documentation, it is necessary also for the plaintiff to show that the purchase figures relied on in Exhibit 82 were the appropriate figures to be used for the purpose of preparing a true profit and loss statement for GW Whitfords as at 30 June 1992.
38 Apart from the evidence of Fisher on this point, the plaintiff relied on evidence given by Cathy Sloan, the defendant's bookkeeper. In cross-examination Sloan said that she had been responsible for entering the figures for purchases in the cash payments journal (Exhibit 22): T458. Sloan was taken through Exhibit 82 and confirmed that the figure of $205,384 accorded with the figures she had documented in Exhibit 22 and Exhibit 68: T470. She said that the purchase figure for each store was derived by dividing the total purchase price for goods uniformly across all four stores: T465. Her evidence was that she had concerns about this method because, in her opinion, it did not seem right that each store was having the same cost recorded against it when the sales were not the same: T465. She said she felt the books and records did not reflect accurately what was happening in the individual stores: T466. Her evidence was that at some time after 30 June 1992 she had taken this up with Stagoll, the defendant's accountant, and he had instructed her to change the allocation to a percentage of sales for each store: T465.
39 The plaintiff's submission was put to Stagoll in cross-examination. Stagoll agreed with the evidence given by Sloan relating to the allocation of purchase figures: T570. He also agreed that because of the method of
(Page 14)
- uniformly dividing purchases across all stores, the figures in the cash journal would need to be viewed with a degree of caution. However, he explained that this method of equally dividing purchase payments across all stores was done for bookkeeping purposes only: T571. His evidence was to the effect that in order to minimise the degree of artificiality in the entries in the cash journal an adjustment was made to the purchase figure for each store at the end of the period to bring purchases in line with the gross profit margin: T587. This adjusted purchase figure was then adopted by the defendant in its accounts: Exhibit 15; Exhibit 18.
40 Stagoll agreed with the plaintiff's proposition that it was impossible to be sure that the figure, once adjusted, reflected the actual purchases of GW Whitfords: T576. However, he opined it was reasonable to proceed on the basis that the gross profit margin of all stores was the same given that all four stores traded in much the same manner. His evidence was that by adjusting the purchases to reflect the gross profit margin the accounts were able better to reflect the actual level of purchases for each store: T576; T589.
41 However, Stagoll did not agree that if the purchase figures were notional, then it must follow that the gross profit figure was notional. He said that the only notional element in the gross profit figure of $10,420 was the assumption that the gross profit for each store as a percentage to sales was the same: T576/577. In his opinion and experience this assumption was, given the trading nature of the defendant, a perfectly reasonable assumption to make in preparing the financial accounts. Stagoll did not agree that Exhibit 82 accurately reflected the true position. He said that Exhibit 82 could not be used to support the plaintiff's submission because the premise on which it was prepared was that the allocation of purchases equally among stores was valid: T586. According to Stagoll, this premise was incorrect because the allocation of purchases among stores was made in line with the gross profit margin and, in any event, the allocations recorded in the cash journal were themselves notional figures.
42 Like Stagoll, Macaulay also disagreed with the proposition put forward by the plaintiff that because of the use of notional figures, in relation to the purchases attributed to each of the four stores, it was impossible accurately to calculate the actual gross profit of each store: T389. His evidence was that he personally monitored the sales of all four stores and the movement in stock between the stores and that in these respects all stores traded very closely. In relation to sales, he said that the store managers did department checks regularly to ascertain movements in
(Page 15)
- sales and that there was very little difference in movement of stock between each of the stores. His observation from his experience in operating the stores was that all four stores traded more or less on a similar level: T390. His evidence was that the figure of $163, 085, though notional to a degree, was a figure which more or less reflected, in his opinion, the actual purchases of GW Whitfords: T391. Exhibit 82 was not put to Macaulay in his oral evidence.
43 In his closing submission counsel for the plaintiff pressed the point that while notional attribution was perfectly proper in circumstances where all stores fell under the control of the defendant, it was inappropriate in circumstances where the plaintiff was not purchasing a portion of the defendant's operation but rather an individual business in the GW Whitfords store. However, the crux of the plaintiff's argument on this issue relies on the assumption that because the purchase figures were attributed between stores on a notional basis, it must follow that the figure for purchases in Exhibit 15 was illusory. In my view, the evidence did not support this conclusion.
44 I can see some logic to the plaintiff's argument. However, taking the evidence as a whole, and on balance, I am not satisfied that the assumption was made good. The evidence of Mr Thompson, the plaintiff's expert valuer, merely reiterated the assumption relied on by the plaintiff. I accept the evidence of Sloan, the defendant's bookkeeper, that the pattern of allocating purchases uniformly among all stores was changed at some time after 30 June 1992 to accord with the pattern of sales. I also accept her evidence that this was done because she had some concerns that the allocation of purchases did not reflect the percentage of sales of the stores.
45 However, while Sloan's evidence shows that there was a notional division in the bookkeeping journals, she was not involved in the management or conduct of the GW operations, nor was she involved in the preparation of final accounts. Her evidence purely relates to the manner in which the bookkeeping was done and does not shed any light on the accuracy or appropriateness of the purchase figures that were contained in the profit and loss statements. Further, Sloan's evidence was not able to give any indication of the extent, if any, that the uniform allocation of purchases differed from the actual purchases made by the GW Whitfords store in the period to 30 June 1992.
46 The defendant, on the other hand, provided evidence from two witnesses who, in my view, had a far more extensive understanding of the
(Page 16)
- nature of the business and knowledge of the patterns of trading between the four stores than the plaintiff's witnesses. The evidence of Macaulay and Stagoll was to the effect that in their experience all stores maintained similar sales and stock movements. Macaulay stated that although purchases were allocated notionally, once the figures were adjusted in line with gross profit margin, they more or less reflected the actual purchases for GW Whitfords. This is evidence that I accept.
47 The evidence presented on behalf of the plaintiff was insufficient to cause me to reject the evidence of these witnesses. Further, the plaintiff's evidence was unable to satisfy me that the adjusted figure in Exhibit 15 did in fact differ from the actual purchases for GW Whitfords for the period to 30 June 1992. Nor did the plaintiff provide evidence which I found sufficiently probative to demonstrate that the figures in the cash journal portrayed a more accurate figure than the defendant's adjusted figure. In my view, for the plaintiff to succeed on this point it would need to show that the notional figure differed from the actual purchases, the extent of this difference, and that this difference had a material effect on the net profit of $10,420. While the tenor of the plaintiff's evidence was that the use of the notional figure would have inflated inaccurately the net profit, it seems to me that the use of notional figures could just as easily have had the effect of deflating the net profit contained in Exhibit 15. The evidence was inconclusive.
48 Apart from what I have just said, there is another reason why I cannot accept the plaintiff's argument and evidence on this point. This is because it is itself based on a fallacy. On the one hand, the plaintiff complains that the notional figures in the profit and loss do not reflect the actual position of purchases for GW Whitfords. However, the plaintiff then seeks to rely on his calculation of figures in the cash payments journal which Sloan, Macaulay and Atkinson testified did not reflect reality. It seems to me that in pressing this submission the plaintiff is itself seeking to rely on what it regarded as inaccurate figures to support its claim of misrepresentation in the profit and loss statement. Further, there was no evidence from which I could conclude that the plaintiff's figures were any more accurate (insofar as they related to GW Whitfords) than the figures found in the profit and loss statements.
(Page 17)
The appropriateness of the defendant's adjustments to the profit and loss statement
49 I will now consider the primary argument submitted by the plaintiff in relation to the fraudulent misrepresentation case. The plaintiff submits that the defendant knowingly misrepresented to it that as of 30 June 1992 the net profit of GW Whitfords was $10,420 when in fact the business had suffered a loss of $2427.
50 The evidence was clear that as of 15 September the defendant had in its possession Exhibit 15 which recorded a net profit of $10,420 and Exhibit 16 showing a net loss of $2427. The evidence provided by both Macaulay and Stagoll was that Exhibit 16 was prepared by Parkinson & Co and reflected the profit and loss statement for GW Whitfords as at 30 June 1992. Exhibit 16 reports GW Whitfords having incurred a net loss of $2427. On the other hand, Exhibit 15 was prepared by Macaulay, not his accountants, at the request of Atkinson for the purpose of providing a potential purchaser with some profit and loss figures for the GW Whitfords store.
51 I accept Macaulay's evidence that the purpose of preparing Exhibit 15 was to provide the purchaser with a statement that removed any unusual or one-off expenses (non-essential expenses) that the business had incurred in the trading period from November 1992 to 30 June 1992. The adjustments made by Macaulay and his reasons for doing so are set out in his witness statement: pars 24 - 32 of MFI 45. The adjustments that made a material difference to the profit and loss outcome related to advertising expenses, bank charges, depreciation costs and legal costs. The effect of these adjustments was that a number of expenses previously included in Exhibit 16 were removed in Exhibit 15 so that the previous net loss of $2427 was converted into a net profit of $10,420.
52 Macaulay gave a copy of Exhibit 15 to Atkinson on 15 September 1992. Macaulay's evidence, which I accept, is that at this time he believed the plaintiff already had Exhibit 16 in its possession. However, Fisher's evidence was that he had never received the document. Accepting Fisher's evidence on this point, I must proceed upon the basis that the only document provided to the plaintiff was Exhibit 15, a document clearly identifiable as the profit and loss statement as of 30 June 1992 for GW Whitfords.
53 It seems to me that in light of these circumstances, to an outside observer Exhibit 15 purports to be the true profit and loss statement of GW Whitfords as of 30 June 1992. If this is the case, then the
(Page 18)
- representation that the business had operated on a net profit of $10,420 would not be correct as Exhibit 16, being the formal profit and loss account prepared by the defendant's accountant, revealed that the business in fact traded at a net loss of $2427. However, while, as a matter of objective fact, Exhibit 15 might be capable of misleading, on the evidence presented, I am not satisfied that on receiving Exhibit 15 the plaintiff was misled by the figure of $10,420. Further, I am not convinced that the plaintiff relied on the truth of this figure in making his decision to enter the contract.
54 There are a number of reasons why I have reached this conclusion. First, the evidence showed that the plaintiff was an experienced businessman in both the preparation and analysis of financial accounts. In cross-examination he stated that he had run businesses for eight years, knew how to run a business and knew how to read accounts. His evidence showed that he was familiar with the practice within business broking of adding back which involved excluding items from the profit and loss accounts to present to a purchaser the likely expenditure or expense items of a business: T128.
55 In addition to having Exhibit 15, Fisher was provided with Exhibit 26, being the departmental trading and profit and loss statements for the Mirrabooka store for the year ending 30 June 1991 and the period ending 30 April 1992 (10 months). On its face, Exhibit 26 was prepared in accordance with, and identified the use of, the add-back concept. There are significant differences in appearance between Exhibit 15 and Exhibit 26. Exhibit 26 was a four-page document providing far greater detail than the one page of information provided in Exhibit 15. Fisher's evidence was that he had closely considered both Exhibit 26 and Exhibit 15 together and examined the variations in the expense items appearing in both of these documents: T133.
56 Atkinson gave evidence that he had met with Fisher at some time around 15 September 1992 to discuss the figures. He could not remember if Fisher had a copy of Exhibit 15 with him at this meeting. Atkinson said that when he saw Exhibit 15, he had assumed it to be an interim statement because it did not contain the detail provided in Exhibit 26 and, in particular, it made no allowance for depreciation costs: par 16 of MFI 44. According to Atkinson, he told Fisher that it was an interim account, but Fisher had taken offence, telling him that he was au fait with figures and did not want to discuss them any further with Atkinson: T517 - 518. Fisher denied that this particular exchange had taken place.
(Page 19)
57 At trial it was difficult to ascertain what, if any, discussion occurred between Fisher and Macaulay or his agents surrounding the figures in Exhibit 15 and Exhibit 26. Fisher denied having any discussion with the agents or with the agents and Macaulay together. The position was further complicated due to a lack of evidence relating to the involvement of Wendy Court in the negotiations. Court did not give evidence. However, I am not prepared to draw any adverse inference from the lack of evidence surrounding any involvement of the agents. This is because there was also some evidence to suggest that Fisher himself may have taken steps to minimise the agents' involvement in the deal. According to Atkinson, Fisher had approached Macaulay about excluding the agents from the deal in order to reduce the purchase price: T511.
58 In cross-examination Fisher was taken through both sets of accounts and his attention was drawn to those expenses which appeared in Exhibit 26 but had been omitted from Exhibit 15 or appeared in Exhibit 15 as a significantly smaller expense. The expenses of particular significance related to amounts attributed for advertising, bank charges, depreciation and legal charges. In each case Fisher's evidence was that as at 18 September 1992, the date on which both documents had been considered by himself and his accountant, he was aware of the significant differences in the two sets of accounts. Fisher stated that he knew that the plaintiff would need to incur all these expenses in operating the business: T133 - 138. He said that he had not discussed the figures with the defendant's accountant as he felt he understood them: T124.
59 Fisher's handwritten notes on the bottom of Exhibit 15 indicate an anticipated allowance for advertising of $5000, as opposed to the expenditure of $428 recorded under the expenditure item in Exhibit 15. In relation to the depreciation costs which had been added back by Macaulay, and therefore did not appear in Exhibit 15, Fisher's evidence was that because he had decided to purchase the fixtures and fittings as opposed to leasing them, he was aware that a depreciation charge somewhere in the vicinity of the $5205 allocated in the Mirrabooka accounts also would need to be incurred: T135. Further, his evidence was that he expected to incur legal fees on the assignment of the lease as well as interest charges of around $11,000 per annum: T136. He also accepted that bank charges would be incurred by the plaintiff. However, he would not accept that these would be in the vicinity of some $3585, as appeared in the Mirrabooka account. He could offer no explanation why he felt GW Whitfords would not incur bank charges on a similar scale: T187.
(Page 20)
60 A comparison of the two sets of accounts clearly shows that in relation to a number of the expense items, Exhibit 26 was significantly different than Exhibit 15. In addition to this, Fisher's evidence was to the effect that at the time he considered the two documents, he was aware that those expense items omitted from Exhibit 15 would need to be incurred if he purchased the business. In terms of the expense of advertising, the evidence was capable of establishing that this item had been discussed between Fisher and Macaulay. Indeed, Fisher's notation on Exhibit 15 allowing an additional $5000 for advertising was more than likely the result of his discussion with Macaulay: T215. In my opinion, given the differences in the documents and the fact that Fisher was aware of these differences, understood them and accepted that a number of the significant expense items omitted in Exhibit 15 would need to be taken up by the plaintiff, it is highly likely that Fisher understood that the position provided for in Exhibit 15 was not a complete profit and loss statement. Further, it seems to me that a person of Fisher's experience in accounts would have been aware that the document provided to him in Exhibit 15 was an adjusted statement intended to indicate expected future operating profit or loss for the business.
61 Indeed the significance of the representation of a net profit of $10,420 contained in Exhibit 15 diminishes when it is borne in mind that Fisher was aware of certain additional expenses that the plaintiff would have to incur. If the figures contained in Exhibit 26 are any indication of the expenses to be incurred at GW Whitfords, then it should have been clear to Fisher that if those expenses were taken into account in Exhibit 15, the more likely result would have been a net loss somewhere in the vicinity of the $2427 contained in Exhibit 16. Indeed, Fisher agreed that when these additional expenses were subtracted from the net profit figure in Exhibit 15, he had not expected to make any profit in the first year of trading. In cross-examination Fisher agreed that everything really depended on his ability to improve the profitability of the business: T138.
62 For these reasons, I find that the plaintiff was not misled by the net profit figure of $10,420 contained in Exhibit 15 and was fully aware that that figure provided excluded a number of significant expenses which would need to be incurred if it was to purchase the business.
63 Even if this view is not correct, I remain of the view that the evidence does not support a finding that the defendant knew that the net profit was false or untrue or was recklessly indifferent to the truth of the figure. The plaintiff did not adduce evidence sufficient to satisfy me on the balance of probabilities that Macaulay or his agent knew the net profit
(Page 21)
- figure of $10,420 was false or untrue or were recklessly indifferent to whether it was true or not. In saying this, I have borne in mind the comments made in Briginshaw v Briginshaw (1938) 60 CLR 336 as explained in Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 67 ALJR 170 at par 2.
64 There was no evidence provided to support or even suggest that in making the adjustments to the figures in Exhibit 16 Macaulay had intended to deceive the plaintiff. Assuming that the figures contained in Exhibit 16 are correct, and I have no reason not to believe this to be the case, Mr Macaulay, both in his witness statement and oral evidence, provided a detailed explanation of each adjustment made to the figures in Exhibit 16. Both Mr Thomson and Stagoll gave evidence to the effect that the add-backs made by Macaulay were appropriate: T558. Macaulay stated that these changes were made on the request of Atkinson and that Macaulay had assumed this document was to supplement the figures provided for in Exhibit 16. Exhibit 15 was prepared with the intention of providing the plaintiff with a statement from which it could gain an understanding of the likely or necessary operating expenses to be incurred in operating the business. Given that background, there was insufficient evidence placed before me from which I could justifiably draw an inference that Macaulay had no belief in the truth of the representation contained in Exhibit 15: Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563 at 578. Again, I accept the evidence of Stagoll and Macaulay on these issues.
65 Further, on both the documentary evidence produced and the oral evidence of Macaulay, it is highly unlikely that Macaulay would have wanted to mislead Fisher. As counsel for the defendant pointed out in his closing submissions, at the time the representation was made the intention was that Fisher would be operating one of the stores coming under the Games World umbrella for the ensuing four years. The structure of the GW business was of a nature that this would inevitably require the defendant and the plaintiff to share a close working relationship. In addition to operating their businesses in the same manner, it was envisaged that the plaintiff would, over the four-year period, be purchasing its stock through the defendant. Further, as the major operator of GW stores, it was in the best interests of the defendant to see the plaintiff succeed with the GW Whitfords store because any failure would impact not only on the relationship between the parties but also on the goodwill attaching to these stores and the profitability of the defendant's distribution operations. In light of these considerations, as well as the evidence discussed above, I am not convinced that Macaulay was likely to
(Page 22)
- have misled a potential purchaser as to the net profit of the business, nor did he in fact do so.
Negligent Misstatement
66 In relation to the negligent misrepresentation claim, the plaintiff claims that the defendant owed to it a duty of care in making representations relating to the profitability of the business. The plaintiff contends the duty arises on two bases. First, by its director Macaulay, the defendant had at all material times the management and control of the business, and because of this, it was in a position of special skill and knowledge concerning the turnover and profitability of the business. Secondly, the duty is said to arise by virtue of the vendor and purchaser relationship between the plaintiff and defendant. The plaintiff claims that the defendant breached its duty as the representations that the gross profit to June 30 1992 was $86,916, being a gross profit margin of 45.96 per cent on all sales, and that the net profit of the business to 30 June 1992 was $10,420 were made negligently.
67 The defendant conceded that a duty of care arose between the defendant and the plaintiff: ,see L Shaddock & Associates Pty Ltd v Parramatta City Council (1981) 150 CLR 255. In that case it was held that a person can be liable for financial loss resulting from a negligent misstatement of fact or opinion: see also Hedley Byrne & Co Ltd v Heller & Partners Ltd(1964) AC 465 and Mutual Life & Citizens Assurance Co Ltd v Evatt(1968) 122 CLR 556. I note also San Sebastian Pty Ltd v Minister Administering Environmental Planning Act (1986) 162 CLR 340 at 357 which suggests that if the maker of a statement warrants the correctness or assumes responsibility for its correctness and the maker is known to possess or profess to possess a special skill in the relevant area of knowledge, the necessary proximity may exist.
68 The first question to be addressed in relation to this claim is whether the representations complained of were in breach of the duty of care which the defendant conceded was owed to the plaintiff. The particulars of the negligence are simply that the representations concerning the gross profit margin of 45.96 per cent and the net profit of $10,420 were inaccurate and that the defendant knew or ought to have known this to be the case.
69 I do not intend to address the negligent misstatement claim so far as it relates to the representation as to the net profit of $10,420. I have
(Page 23)
- already found that, in the circumstances of this case, the plaintiff was not relevantly misled by the net profit figure, nor did it rely upon the representation in entering the contract. Therefore, to succeed in its negligence claim the plaintiff will have to rely on its claim that the representation that the gross profit of the business was $86,915 and that the gross profit margin was 45.96 per cent on all sales was inaccurate.
70 The representation that the gross profit was $86,915 was contained in the profit and loss statement provided to the defendant: Exhibit 15. Exhibit 15 makes no express reference to there being a gross profit margin of 45.96 per cent for GW Whitfords. For clarity, I will refer to the gross profit margin as 46 per cent. The figure of 46 per cent was a figure calculated by Fisher and verified by his accountant, Glen Longmire, from the figures contained in Exhibit 15: see the evidence of Fisher at T70. The plaintiff contends that the gross profit margin of 46 per cent was incorrect and that the figure for GW Whitfords was closer to 33 per cent. The defendant denies the plaintiff's contention and submits that a gross profit margin of 46 per cent was achieved in the GW business in the year ending 30 June 1992. Further, the defendant submits that if after the sale of the business the plaintiff was only able to achieve a 33 per cent profit margin, it was due to the plaintiff's inability to perform as a retailer rather than to the inaccuracy of the figure of 46 per cent as the gross profit margin previously achieved by the defendant.
71 At the hearing a great deal of evidence was given as to the appropriateness of the structure and accounting treatment adopted by the defendant in the operation of its business: see, for example, the evidence of Stagoll T576 - 595. However, having considered this evidence, its seems to me that the real issue is not whether the accounting treatment adopted by the defendant in relation to its four stores was appropriate, but whether that treatment did in fact operate to misrepresent to the plaintiff the true gross profit margin of the GW Whitfords store and, if so, whether the plaintiff was induced to enter the contract because he believed the GW Whitfords store was operating on a 46 per cent gross profit margin.
72 Macaulay's evidence was that in the year to 30 June 1992 the four Games World stores operated by the defendant achieved a gross profit margin of 46 per cent: par 56 of MFI 45; Exhibit 18 pp8-11; Exhibit 42. The evidence of Stagoll, the defendant's accountant, was to the same effect: pars 2, 3 of MFI 78; Exhibit 18; Exhibit 80. There was no evidence to suggest that the overall gross profit margin of 46 per cent, as it applied to the defendant's group structure, was inaccurate: see Thompson's report at Exhibit 53, pg 7; Stagoll T556. Rather, the thrust of
(Page 24)
- the plaintiff's submission was that while the figure may have reflected the overall gross profit margin of all four stores, it was inaccurate in so far as it related to the actual trading of the GW Whitfords store.
73 At trial, evidence was presented by both parties as to the manner in which the gross profit margin had been calculated: T71 [Fisher]; T389 [Macaulay]. The way in which the defendant determined the gross profit margin for each of its individual stores was to calculate the overall gross profit margin for all of its four stores together and then apply this gross profit margin to each individual store. Macaulay's evidence was that the gross profit margin was found by aggregating the GW sales (turnover) across all four stores, aggregating purchases across all four stores, ascertaining the gross profit percentage over the four stores, and then calculating the purchases for each store on the basis that each store showed the same gross profit margin: par 8 MFI 45.
74 The effect of this treatment on the defendant's accounts was that each of the individual stores operated on the same gross profit margin figure as the figure for the group as a whole. The purchase figure allocated in the defendant's accounts to each individual store was an amount which would produce a gross profit margin for that store of 46 per cent. The effect of this treatment meant that the purchase figure allocated to a particular store was determined with reference to that store's particular sales turnover rather than the actual purchases made by that store: T387. So that a store with a higher sales turnover than the GW Whitfords store would have a greater amount allocated for purchases: Exhibit 18.
75 Once a purchase figure for an individual store was ascertained in accordance with the overall gross profit, then the gross profit of the individual store could be calculated. The gross profit margin for GW Whitfords for the year ending 30 June 1992 would then be calculated by going to the accounts for that store and dividing the gross profit of the store, $86,915 (which was derived from the purchase figure allocated by the defendant), by the amount for total sales, $189,084, and multiplying this by 100, arriving at 45.96 per cent: par 13 of MFI 50 [Fisher]; Thompson's report at Exhibit 53 pg 7.
76 For the plaintiff to succeed in this cause of action I would need to be satisfied on the evidence that a gross profit margin of 46 per cent was not achieved at GW Whitfords in the period of trading to 30 June 1992.
(Page 25)
The Expert Evidence of Mr Thompson
77 The plaintiff relied on the expert report by James Thompson, a business valuer. The report was tendered as Exhibit 54. The effect of Thompson's evidence was that while applying the same gross profit margin to all stores resulted in the accounts for the group as a whole being accurate, this approach led to a conclusion that the accounts for each store were inaccurate. However, his report does not provide any detailed explanation for reaching this conclusion. The brief explanation surrounding this conclusion seems to indicate that Thompson took the view that it was improbable that the gross profit margin for all stores could be the same and therefore believed that some averaging across all stores must have been done. According to Thompson, any averaging across stores would result in an inaccurate gross profit figure for each store: Exhibit 54, pg 2.
78 In cross-examination Thompson said that it was improbable that the gross profit margin would be the same over the four stores because each store would be selling a different mix of products with different gross profit margins in different stores: T293. However, he conceded that this conclusion was based on an assumption that the different stores were selling different products. He agreed that he was not personally familiar with the GW stores and had relied simply on what Fisher had told him in reaching this assumption: T295. I think this is an important feature affecting Thompson's evidence.
79 Thompson said that he had understood from Fisher that some of the store owners bought products from both Active and other outside sources. On this understanding, he believed that these stores would be selling slightly different products: T294. It was put to Thompson that the fact that some store owners may have bought from outside sources and may therefore have had differing gross profit margins was not relevant to the profit margins obtained by the defendant in its stores, and the subject of the defendant's accounts in Exhibit 18, as those stores were not owned by the defendant and were therefore not included within the defendant's business or its accounts: T294. Thompson conceded this point: T294. Counsel for the defendant then put to Thompson that if the owners stocked the same products and sold them at the same gross profit margins at the same prices, then the prospects of there being a discrepancy in the gross profit margin would be reduced very significantly. Thompson stated that in such circumstances the degree of discrepancy in gross profit margins between stores would depend on the product mix sold in each of the stores: T295.
(Page 26)
80 The underlying premise on which Thompson seems to have based his evidence on this point was directly contradicted by Macaulay. Macaulay said that insofar as the stores in the defendant's business were concerned all four stores operated in the same manner and sold the same games products at the same margins. His evidence was that there was no reason for the gross profit margin of any store to be significantly different from any other: par 6 of MFI 45; T390. Macaulay said that he was aware of the purchases made, the stock level of each of the stores, and frequently monitored their operations. He said that the gross profit margin for each store was materially the same. However, he did concede that while there was no significant difference between the stores the actual gross profit margin could have differed slightly between stores. However, he stated that the maximum difference would not have been more than a 3 per cent difference in gross profit margin between any of the four stores: T341.
81 Stagoll's evidence was that all four stores for the year ending 30 June 1992 traded at a gross profit margin of 46 per cent. His evidence was that 46 per cent was a materially correct gross profit figure for the GW Whitfords store: T587, 590. He said that where all four stores were trading under the same ownership and each was subject to the owners' overall management, then if the stores were all run on the same basis, stocking the same goods at the same prices with the same gross margins, then each store would trade at or about the same gross margin: par 4 of MFI 78. His evidence was that it was a perfectly reasonable proposition that the gross profit of each of the defendant's stores would be the same: T576.
82 In cross-examination Stagoll rejected the plaintiff's contention that the defendant's accounting treatment misrepresented the true state of the GW Whitfords store as it was unlikely that the actual trading of all stores could result in the same gross profit margin: T562; T590. Counsel for the plaintiff put to Stagoll that this approach ignored the fact that geographical or physical circumstances may intervene to materially effect the trading of one store. The plaintiff argued that while one store may be booming, another may be trading very badly as a result of renovations to the shopping centre. However, Stagoll said that while such an event may affect the actual dollar figures of gross profit for a store, it would not affect the gross profit margin as the volume of turnover had nothing to do with gross profit margin: T574, T576. He said that so long as the stores continued to trade in the same manner, selling the same goods at the same margins, then the gross profit margin between the stores would be for all material purposes the same. Once again, I accept Stagoll's evidence on these issues.
(Page 27)
83 In my view, Fisher knew that the gross profit margin achieved at the Mirrabooka store in the year to 30 June 1991 and the 10 months to 30 April 1992 had varied between 46 per cent and 41 per cent. There is a handwritten note made by Fisher on Exhibit 26 to this effect: T125. In cross-examination he agreed that in relation to GW Mirrabooka there had been a range of gross profit margin in these two years of between 41 to 46 per cent. He also stated that in relation to GW Whitfords he did not have a fixed expectation that the gross profit margin would of necessity be 46 per cent: T125.
84 However, the plaintiff took issue with the fact that it was not told that the gross profit margin was a gross profit margin for all four stores. In my view, the defendant's failure to disclose this fact can only be relevant to the plaintiff's claim if the failure operated to misrepresent the true gross profit margin of GW Whitfords. According to the defendant, the failure to disclose was immaterial as the gross profit margin for GW Whitfords remained 46 per cent as represented regardless of whether the gross profit margin was the same for all four stores: Macaulay T449; Stagoll T590.
85 The evidence showed that the defendant had not acted in any way to conceal this information. Exhibit 26 clearly indicates that at the time the plaintiff was provided with the GW Mirrabooka accounts, he was encouraged to contact Stagoll to discuss the information or obtain any further information. This opportunity was not taken up by Fisher. In cross-examination Fisher said he felt no need to discuss the gross profit margin for GW Whitfords or GW Mirrabooka, how it was calculated, for the various ingredients of it: T124.
86 In my view, the effect of the evidence of witnesses from both parties, namely, Macaulay, Stagoll and Thompson, on the issue of whether all stores could in fact have achieved the same gross profit seemed to indicate that such a situation could be achieved where the stores traded in the same manner. This would include all stores stocking the same products, obtained at the same discounts and selling those goods at the same prices with the same profit margins. Macaulay's evidence was that the defendant's stores traded in such a manner. If and to the extent that there is a conflict of the evidence of Thompson on the one hand and Macaulay and Stagoll on the other hand, I prefer the evidence of the latter. The main reason for expressing that preference is that the views of Macaulay and Stagoll are based on more detailed knowledge and understanding of the underlying data.
(Page 28)
The till roll analysis
87 To support its claim that the gross profit margin for GW Whitfords was 33 per cent rather than 46 per cent the plaintiff produced a till roll analysis of sales recorded for GW Whitfords in the period of trading to 14 November 1992. The plaintiff submitted that this analysis confirmed its claim that the gross profit margin for the period of trade to 30 June 1992 was not 46 per cent as represented by the defendant.
88 Fisher's evidence was that on 23 November 1992 he printed out a departmental sales report ("Z report") from the cash register. The Z report was tendered as Exhibit 28. Fisher said that the Z report contained information on all sales made for the past 12 months and showed a figure for total sales of $335,610: T 99; pars 29, 30 of MFI 50. The plaintiff submitted that this figure of $335,610 differed by approximately 12 per cent from the figure of $297,859 provided by the defendant in Exhibit 18: Fisher T153 - 154. The defendant's figure is $297,859, being the sum of $189,084 to June 1992 and $108,775 to June 1993: Exhibit 18.
89 Having obtained the Z report, Fisher's evidence was that he then did an analysis on the sales from November 91 to November 1992, arriving at a gross profit margin of 33.25 per cent. This analysis was tendered as Exhibit 29. Details of his analysis are set out in of his statement: pars 30 - 33 of MFI 50. According to Fisher, it was when he did this analysis at the end of November 1992 that he became suspicious that the gross profit margin was not as high as the figure of 46 per cent which he had initially calculated from Exhibit 15: par 35 of MFI 50. The plaintiff submits that the analysis in Exhibit 29 and the figures in Exhibit 28 support its submission that the gross profit margin was not 46 per cent but 33 per cent.
90 Although Exhibits 28 and 29 may provide some indication of sales between November 1991 and November 1992, I am not persuaded that I should accept the plaintiff's figure for sales ($335, 000) over the defendant's figure of $297,859 as contained in Exhibit 18. In my view, the evidence relied upon by the plaintiff is inconclusive and certainly not reaching the level of probability. There are a number of reasons why I have reached this view.
91 First, Fisher himself conceded in par 34 of his witness statement that the analysis, while in his opinion presented a very good representation of sales, was not absolutely accurate. According to Fisher, one of the reasons for a degree of inaccuracy was the fact that the analysis included four categories for which Fisher had no profit margin figures: par 31 of
(Page 29)
- MFI 50. Fisher's evidence was that although he had been provided with the profit margin percentage for the product categories by the defendant (Exhibit 4), he was unable to find departments to correlate with these four categories. Because of this, Fisher's evidence was that he proceeded to allocate a notional margin of 40 per cent to these categories.
92 However, the defendant produced evidence to show that the inaccuracy in Exhibit 29 extended beyond the matter referred to by Fisher in his statement. According to the defendant, the first problem with Fisher's gross profit margin analysis, contained in Exhibit 29, is that it rests on a different basis than that put forward by the defendant in its profit and loss statements. If the defendant is correct, then this raises a question as to the probative value, if any, Exhibit 29 can have on the plaintiff's claim that the gross profit margin was inaccurate. Fisher's evidence was that he calculated the gross profit margin of 33.25 per cent by reference to the wholesale price list and the percentage mark-ups provided by Macaulay in Exhibit 4: T149. However, Macaulay and Sloan gave evidence to the effect that the defendant's gross margin in its profit and loss statements was derived by deducting purchases at discounted prices from the total sale price which had the effect of producing a higher margin: see pars 3, 10 of MFI 45; par 7 of MFI 38; Exhibit 57.
93 Further, Fisher's evidence, both in chief and cross-examination, seemed to indicate that he was aware the defendant's gross profit margin was calculated on discounted prices rather than wholesale prices. His evidence was that when he first saw Exhibit 4, while he had suspicions that an overall gross profit margin of 46 per cent might not be achievable on the margins provided to him for the individual departments, he thought he might be able to do so by getting stock at discounted prices: par 26 of MFI 50. In cross-examination he said that he was aware the defendant relied on discounts to achieve a greater profit margin: T148. With this evidence in mind, it seems to me that as the calculation in Exhibit 29 relied on a different pricing structure, its probative value in relation to the alleged inaccuracy of the defendant's 46 per cent profit margin would not be great.
94 However, leaving the issue of the difference in gross profit margins aside, it seems to me that the real problem or issue that arises from the evidence surrounding the till roll analysis is whether that evidence provided by the Z report was a reliable source of information capable of supporting the plaintiff's claim. Put simply, if I were to accept the plaintiff's submission on this point, I would need to be satisfied that the
(Page 30)
- figures for sales produced from the cash register in the form of the Z report provided a more reliable indication of sales figure for GW Whitfords than the figure for sales provided by the defendant and contained in Exhibit 15. In my opinion, the evidence does not support such a finding.
95 The evidence of Macaulay, Stagoll and Sloan was to the effect that the figure for sales contained on pages 11 and 20 of Exhibit 18 represented the actual banking figures for GW Whitfords: T431; T462. In other words, it was the amount of money derived from sales at GW Whitfords and deposited into the bank. There was no evidence produced by the plaintiff to suggest that the banking figures were in any way notional or did not reflect the amount of actual sales for GW Whitfords. Indeed, Fisher's evidence was to the effect that it was the purchase figures, at least in so far as they were reflected in Exhibit 15, rather than the sales figures that were inaccurate: T 156. On the other hand, the defendant submitted that the figures relied on by the plaintiff were unreliable as they were derived from cash register rolls and therefore susceptible to human error. The defendant argued that the most likely explanation for the 12 per cent discrepancy between the figures was a result of human errors occurring in operating the cash register.
96 To support its argument the defendant relied on Exhibit 27 which was the cash register printout for trading on 21 November 1992, two days prior to the plaintiff printing off its Z report (Exhibit 28): T95. While Exhibit 27 showed the purchases put through the till for that day, namely, $1764.50, it also showed a figure of $411,635.03 as the total sales put through the till up to that date. This figure was some $113,776 greater than the defendant's figure for total sales of $297,859. Exhibit 27 also showed that $77,093.18 of the $411,635.03 was attributed to voided transactions. This left some $36,682.85 of sales recorded in the till unaccounted for in the banking figures. The defendant pointed specifically to a number of transactions, approximately 18 per cent of transactions, which had been voided on 21 November 1992. The defendant submitted several possible and, in my view reasonable, explanations for the discrepancies between the two figures. In particular, the defendant drew attention to discrepancies arising as a result of the use of the till for training, errors occurring in voiding transactions, as well as miscellaneous entries that could have been made by the computer technician in setting up and repairing the till.
97 Mrs Macaulay's evidence was to the effect that during the time she had worked in the GW Whitfords store voids were frequently not recorded
(Page 31)
- in the departments in which the sales had been recorded. Her evidence was that she had commenced the programming of the till for the GW Whitfords store. She said that the till was complicated and she had learnt to use it by trial and error. Her evidence was that in undertaking training on the till she had often recorded entries which were not in fact sales: par 10 of MFI 76. Mrs Macaulay also gave evidence that in the first few months of trading, being the Christmas period, the till had not been fully programmed. She said that for the till to operate as a sales record tool it would need to be operated very carefully: par 11 of MFI 76. Mrs Macaulay said that errors, both in processing sales and voiding sales, were common. She said errors would occur because of the complexity of the till, the inexperience of staff or mistakes occurring in busy periods which are not later corrected: par 13 of MFI 76. She also said that during the period she had managed the GW Whitfords store the defendant had employed 18 casual staff and that each of these persons had, at some time, operated the till: par 14 of MFI 74.
98 Evidence was also given by Lou Da San Martino, an employee of Western Business Machines. He was a qualified electronic technician specialising in checkout tills and associated equipment. He said that he had been responsible for the set up of the new till for the GW Whitfords store. His evidence was that he was responsible for installing the memory cards for the till and linking the price look up numbers ("PLU's") to the different departments. He said that the operational testing of this till was comprehensive as it was a complex till and the first of its kind: pars 1, 2 of MFI 76.
99 In relation to the accuracy of the memory of the till, San Martino said that where a person used the till for testing or training purposes, all the information entered into the till would remain in the memory unless and until a department Z report was produced: par 9 of MFI 76; T551. He said that he did not produce a department Z report at any time after he finished checking the till. In cross-examination he said that if he had installed the till and had done the training, he would normally have cleared the till at the end of this process. However, he said that he did not clear the till in this case because he knew that the sales representative responsible for the installation of the till would be putting further information in for training purposes and thought he or she would clear the till after this was done: T545. He said he had no knowledge whether this had been done. His evidence was that if no-one had cleared the till by doing a Z report, the till would include all the test information that had been entered: pars 9, 10 of MFI 76.
(Page 32)
100 There was no evidence before me to indicate that anyone who had access to the till had previously produced a Z report. Mrs Macaulay's evidence was that she was aware that the till could perform a "Z read" detailing total sales in each department. However, she stated that as the defendant did not use the till to monitor sales, she had never produced a Z report while she managed the Whitfords store: par 17.1 of MFI 74. Further, there was evidence that training had been undertaken on the till and that numerous transactions had been voided, both incorrectly and correctly, throughout the period of trading. In addition to this, it is, in my view, not improbable that in the course of a period of 12 months' trading, which included a change of ownership and a number of different persons with limited experience accessing the till, other technical mistakes and omissions may have occurred that had some impact on the accuracy of the figures stored in the till.
101 In my opinion, there are too many uncertainties and doubts surrounding the reliability of the cash register records. The plaintiff has not produced sufficient evidence to alleviate these doubts and uncertainties, nor has it produced evidence capable of challenging the reliability of the defendant's banking figure. I am not convinced that the plaintiff's till roll analysis provides any basis for a finding that the gross profit margin for GW Whitfords as at 30 June 1992 was something other than 46 per cent.
The plaintiff's trading record
102 Evidence was produced by the plaintiff showing that during its period of operating the GW Whitfords store it was only ever able to achieve a gross profit margin of around 33 per cent. The plaintiff sought to rely on this evidence to support its claim that the defendant's representation that the gross profit margin of 46 per cent was wrong.
103 Fisher stated in par 55 of his witness statement that the gross profit margins recorded by the business when run by the plaintiff were:
(a) 33.28 per cent on all sales between 14 November 1992 and 30 June 1993;
(b) 32.82 per cent on all sales for the year ended 30 June 1994;
(c) 36.85 per cent on all sales for the year ended 30 June 1995;
(d) 33.47 per cent on all sales for the year ended 30 June 1996;
(Page 33)
- (e) 33.22 per cent on all sales for period 1 July 1996 to 30 September 1996: see Exhibit 17, pp 22, 36, 54, 83, 99.
104 The plaintiff's evidence indicated that its pattern of trading did not come anywhere near the 46 per cent profit margin which the defendant had represented to have traded in the period to 30 June 1992. However, I am not convinced in the circumstances of this case that the plaintiff's trading record over its four-year period of trading necessarily provides support for finding that the 46 per cent gross profit margin was not achieved by the defendant prior to the takeover. I have reached this view for a number of reasons.
105 The evidence of Stagoll and Thompson was to the effect that the achievement of a gross profit margin was sensitive to the manner in which the stores traded. It follows, as a matter of logic, that if the GW Whitfords store were to make changes to the manner in which it traded, it may not be able to maintain the same gross profit margin as the defendant had obtained when the store was under its management and control. Of course, the reverse could also be the case. Altering the method of operation might also lead to an improvement in gross profit margin. But that is not the issue here. Put simply, it seems to me that the gross profit margin of 33 per cent achieved by the plaintiff could, as the defendant submits, have been the result of changes made by the plaintiff to the manner in which it traded. I am not satisfied to the requisite degree that it demonstrates that the defendant did not trade at a higher profit margin of 46 per cent in the period before those changes were made.
106 It seems to me that properly to address the parties' respective submissions on this point I need to consider what changes, if any, were made by the plaintiff to the manner in which GW Whitfords traded and whether those changes were likely to have impacted on the gross profit margin. In order to do this the factors which impact on gross profit margin need to be identified.
107 At trial a number of factors were recognised by the relevant witnesses as impacting on gross profit margin. These were:
(1) the store owner's ability to obtain discounts from wholesalers for the goods purchased: T141;
(2) the type of goods stocked: T143 to 144; [for example, if an owner stocked a large amount of low margin items, the gross profit margin was likely to be lower than an owner who stocked a higher proportion of high margin items];
(Page 34)
- (3) the prices the owner charged for the goods: T146;
(4) the visual appearance of the store: T146; [for example, the extent to which a store is well stocked and presents goods in an attractive manner];
(5) the store owner's ability to provide customers with friendly and knowledgeable service: T146.
108 Having said that, I acknowledge that the matters identified in points (4) and (5) are more likely to have an impact on gross profit than on the gross profit margin.
109 In his witness statement Macaulay set out the principle strategies under which he felt the defendant's GW stores operated: par 61 of MFI 45. His evidence was to the effect that to optimise profits the stores needed to stock and sell high margin items in preference to low margins items. He said that to achieve this objective GW stores tended to stock a preponderance of Asian manufactured games which sold at a higher margin. Macaulay said that stores held a limited amount of computer related stocks. GW did not concentrate on stocking or selling computer hardware, software, games or national games as these items had lower margins: pars 61.1, 61.2 of MFI 45.
110 Fisher's evidence was that after takeover the plaintiff continued to operate the business in the same manner as it had previously been operated: par 46 of MFI 50. However, in my view, the evidence, taken as a whole, portrayed a different picture. There was evidence that within months of takeover the Fishers made a number of changes to the way in which the business operated. Fisher's own evidence was that to break even in the first year he knew the business would have to improve, either by increasing the gross profit margin or by increasing sales: T138 - 140. It seems to me to follow that the most likely course to be adopted by the plaintiff in order to make improvements to the profit of the business would be to make some changes to the way in which the store traded.
111 Fisher agreed that his ability to obtain discounts from wholesalers for the goods purchased was one way that the profit margin could be increased: T142. Indeed, the importance of discounts on the overall profit margin achieved should have been obvious to him when he considered the individual profit margins applied by the defendant which were provided to him in Exhibit 4: par 26 of MFI 50. In relation to discounts from Active, Fisher said that the discounts varied between 10 per cent and 20 per cent, depending on the quantity purchased. However, Fisher agreed that if payments to Active were not made by the
(Page 35)
- due date, he could not expect to receive a discount at all. He agreed that there had been a number of occasions when he had not paid on time: T142.
112 In addition to normal wholesale discounts, the evidence provided that many wholesalers offered a further form of discount known as a settlement discount. These settlement discounts involved a wholesaler offering credit terms at trade sales sometimes months before payment and if payment is made at an earlier date, a settlement discount is given. Fisher's evidence was that the plaintiff had tried to take advantage of what settlement discounts were available but that they had only been able to do this for the first year or so: T142.
113 However, the evidence suggested that while the plaintiff had been eager to take advantage of these settlement discounts, some of the purchases obtained through settlement discounts may have been misplaced. According to Mrs Fisher, at an early stage (around March) the plaintiff had made large purchases of national brand games from Murfett Regency Games and Milton Bradley because deferred credit terms had been available: T241. The terms of purchase were such that payment was not due until September. The advantage to the plaintiff was that they would have stock available through to the Christmas period without them having to order extra stock for which payment would then have to be made: T241. The evidence showed that the gross profit margin on these games was 33 per cent, which was significantly lower than the 40 to 45 per cent margin that applied to the majority of games returned to the defendant after takeover: see Exhibit 4 and the evidence of Darren Clements, the defendant's store manager, at pars 5, 7 of MFI 39 (discussed below). In addition to having a lower profit margin, the evidence indicated that these national brand games were all stocked by the chain stores at lower prices: see, for example, the evidence of Dyer in par 12 of MFI 40.
114 Apart from an inability effectively to obtain wholesale discounts, the defendant argued that the plaintiff also made significant changes to the type of goods stocked. According to the defendant, the plaintiff seemed to place a far stronger emphasis on stocking popular but low-margin items. Macaulay's evidence was to the effect that the majority of the defendant's turnover was made in high-margin goods as opposed to low-margin goods like computer equipment: par 42 of MFI 45. He said that for GW Whitfords to operate on a gross profit margin of about 45 per cent he felt that over the Christmas period in December 1992 and January 1993 the plaintiff would need to maintain stock levels (at cost) of
(Page 36)
- $97,400 (November), $128,000 (December) and $104,800 (January): par 43 of MFI 45. He said that if an operator wanted to concentrate on lower margin/higher value games items rather than higher margin/lower value games items, it would require a higher stock level to achieve the same gross profit margin: par 44 of MFI 45.
115 Fisher's evidence was that he had a meeting with Macaulay on 16 October 1992. This was prior to the signing of the agreement to purchase. Fisher said that at this meeting Macaulay advised him that the current stock level was about $75,000 but that this would need to be increased for Christmas. Fisher then told Macaulay that the build up of stock should go ahead anyway because whoever owned the store would need to increase stock for Christmas: par 20 of MFI 50. Despite this arrangement concerning stock levels, Fisher was unhappy with the stock value on takeover which was $120,508.19 and returned to the defendant $30,739.16 worth of stock. As a result, the value of stock held by Fisher following takeover was $83,743.62.
116 According to the witness statement of Darren Clements, the store manager at the time, the majority of the stock returned by the plaintiff to the defendant was high-margin stock such as chess sets, figurines, jigsaw puzzles and adult games. Although Clements did not give oral evidence at trial, the reasons for his absence were explained and I see no reason not to accept his evidence. His evidence was that very little of the computer software stock, which sold at a lower profit margin, was sent back: par 5, 7 of MFI 39.
117 In his statement Clements said that soon after the takeover Fisher changed the stock holdings in the store. Clements said that prior to takeover the defendant had maintained three large glass cabinets near the entry of the store. In two of these cabinets the defendant displayed expensive chess sets and die cast figurines. These items sold at a high profit margin. Clements' evidence was that one of the first changes made by Fisher was to reduce the two large cabinets of chess sets and die cast figurines down to one, sending back to the defendant a large number of these items. Fisher then increased the number of cabinets holding computer software and computer related equipment to two: pars 2, 3, and 4 of MFI 39. According to Clements, Mrs Fisher also returned to the defendant a large number of small and cheap ($1 to $5) novelty items that were stocked by the defendant. These items sold at very high margins: par 6 of MFI 39. In cross-examination Fisher expressed no material disagreement with this evidence: T173.
(Page 37)
118 The plaintiff produced Exhibit 34 which compared the purchases made for GW by the defendant for an 11-month period between 1 August 1991 to 30 June 1992 and the purchases made by the plaintiff for an eight-month period between 1 November 1992 to 30 June 1993. Exhibit 34 was intended to support the plaintiff's claims that in its eight-month period of trading GW Whitfords had actually increased the proportion of purchases from the defendant (Active Imports) from $46,000 to $53,500, and that it had only slightly increased the number of electronic and computer related games, purchasing $86,000 in the eight-month period compared to $84,000 by the defendant in the 11-month period: pars 91 - 92 of MFI 50.
119 However, the defendant submitted that the plaintiff's analysis in Exhibit 34 was flawed as the analysis incorrectly included some $21,127 of purchases from GW ("Games World") as purchases from the defendant (Active Imports). The defendant submitted that this was misleading as the purchases from GW in this period had been purchases of computer equipment and should have been accounted for under the electronic and computer related games purchases. In cross-examination Fisher conceded that the analysis was wrong. He accepted that the figure of $21,127 related to purchases of computer equipment: T165 - 167.
120 Having corrected this misallocation, Fisher accepted that the analysis in Exhibit 34 indicated that after the plaintiff took over the business it had reduced the volume of purchases from Active. The figures showing that the plaintiff had purchased $32,308.12 from Active Imports in an eight-month period compared to $46, 170.74 purchased by the defendant in an 11-month period. Fisher also accepted that Exhibit 34 showed that the plaintiff had substantially increased the proportion of electronic and computer related stock purchased for GW Whitfords: T167. A comparison of the correct figures indicates that in an eight-month period the plaintiff purchased $107,009.27 worth of computer equipment compared to the defendant's $84,000 for an eleven-month period: T167. Further, Fisher conceded that a significant portion of the $107,009.27 of electronic purchases would be sold at only a 10 per cent profit margin: T168.
121 While Exhibit 34 showed that the plaintiff had substantially increased its proportion of computer-related purchases in the eight-month period from takeover, the defendant submitted that Exhibit 34 did not reveal the full extent of the plaintiff's holding in computer-related goods. Fisher conceded in cross-examination that Exhibit 34 did not take into account the $83,743.62 worth of stock the plaintiff received on takeover:
(Page 38)
- T169 - 170. While it was not possible to say what percentage of the $83,743.62 was attributed to computer-related stock, Clements' evidence was to the effect that the majority of stock sent back to the defendant had been high-margin goods and that only a small percentage of computer-related goods were returned. The defendant submitted that, as the plaintiff had retained the majority of computer stock that had been held by the defendant at takeover, the level of stocks held by it in computer-related goods would have been even higher than that put forward by the plaintiff in Exhibit 34. Fisher seemed to accept this proposition: T172 - 173.
122 There was also evidence that in the period between 23 November 1992 to 31 December 1992 the total sales for GW Whitfords had been $58,787. A breakdown of this total is found in Exhibit 33. Exhibit 33 reveals that of the total sales of $84,055, $17,943 had come from electronic hardware which at a 10 per cent profit margin had a cost value of $16148.70 and another $23,929 had come from electronic software which, having a profit margin of 25 per cent, had a cost value $17,946.75: Exhibit 33. In my view, this evidence supports the view that at least for the first six weeks of trade the trend evolving saw almost 50 per cent of the plaintiff's sales being obtained from high-cost, low-margin items. Indeed, this 50 per cent of sales occurred in the two categories of stock carrying the two lowest profit margins.
123 The evidence of Clements was to the effect that on takeover Fisher had doubled the amount of software and computer-related equipment held in the store: par 4 of MFI 39. In cross-examination Fisher denied that this change had occurred immediately after takeover. He said that while they had increased the level of computer software by about 50 per cent, it had been done over a two-year period: T172.
124 In addition to the evidence of Clements, there was evidence from Mr Martin Dyer, a sales representative for Active Imports. Dyer had worked for Active for 11 years and had 20 years' experience in the retail industry: pars 1, 2: MFI 40. Dyer said that in his capacity as sales representative he would regularly visit all GW stores. This was done on a weekly or fortnightly basis. His evidence was that after the plaintiff took over the GW Whitfords store he observed a number of differences in the way the store presented: par 11.
125 Dyer said that after takeover the store had looked considerably less well stocked than when the defendant had operated it. Fisher accepted this point. However Fisher said that the reason the store looked generally
(Page 39)
- emptier after takeover was because they had sent a great amount of stock back to the defendant. According to Fisher, they later were able to buy more stock and present the store better: T241. Dyer's evidence was that the plaintiff appeared to place a greater emphasis on computer games and products and that there was clearly a greater area of the store committed to computer games and accessories with a smaller area committed to products traditionally sold by GW stores: par 13. He also said that the plaintiff had stocked a significantly larger range of games from Murphett Regency ("National games") than other GW stores. I accept Dyer's evidence. It provides further support for the proposition that the plaintiff's trading operations were, at least in some respects, different from that which applied prior to the takeover.
126 Another significant change made by the plaintiff was its decision to terminate the employment of Clements, the store manager. The evidence of both parties showed that prior to the sale of the business, concerns had been raised by both Macaulay and Sertorio (the Whitfords City Shopping Centre Manager), over the Fisher's inexperience in the retail industry. One indication of Sertorio's concern about the Fishers' ability to run the business is that he had required personal guarantees from the Fishers before he would consent to the assignment of the lease: pars 47, 48 of MFI 45; par 75 of MFI 50; Exhibit 59; T474 (Sertorio). Macaulay said that in order to alleviate the landlord's concerns over the Fishers' retail experience it was agreed that the plaintiff would keep on the current store manager. Macaulay's evidence was to the effect that Clements had managed the GW Whitfords store for the defendant and was familiar with the GW trading formula and could assist and advise the Fishers on decisions to be made.
127 However, within three months of takeover the plaintiff had dispensed with Clements' services. From this time onwards Mrs Fisher became the store manager and operator: par 45 MFI 50. Fisher's evidence was that he decided to terminate Clements' employment when it became apparent to him that the gross profit margin of 46 per cent would not be achieved: par 44 of MFI 50. In my opinion, this decision was significant because the termination of the employment of an experienced store manager saw the Fishers assume total responsibility for the store.
128 Put in a summary fashion, the plaintiff's case is that the financial results for the period to 30 June 1992 were not as represented to it by the defendant as and before the time the sale was effected. The plaintiff bears the burden of establishing that this was so. It seeks to do so by showing that in the period after the sale was effected it was not able to achieve the
(Page 40)
- same or similar results. In my view, the fact that the Fishers assumed total responsibility for the running of the business is one of the factors to be taken into account in deciding whether the burden of proof has been satisfied. I think their decision to assume full responsibility so soon after takeover may have been ill advised. I say this for a number of reasons.
129 First, the Fishers had no experience in the retailing of games products. While Mr Fisher had no retail experience at all, the evidence showed that Mrs Fisher had had some 12 years' retail experience in the hardware industry. However, Mrs Fisher had no experience in retailing games products, nor and more importantly, did she have any experience in retail management. There was no evidence to suggest she had either managed or operated a retail business on her own: T236 - 237. However, within three months of takeover Mrs Fisher was operating and managing the store on a full-time basis. This situation was not previously contemplated by the parties.
130 Secondly, it was generally accepted by the parties that the GW Whitfords store was in its infancy and did not yet then have an established track record: see for example the evidence of Fisher at T206. It seems to me that in such a situation, a change from the defendant's trading formula at least opens up the possibility of adverse development. Indeed, the infancy of the business and the Fishers' inexperience in this type of business are factors which, taken with a myriad of other matters referred to in the evidence and in these reasons, render unreliable the reliance on the plaintiff's trading results as evidence of the inaccuracy of the figures based on trading to June 1994.
131 The defendant also submitted that a possible reason for the plaintiff's adverse trading results was a general downturn in trading at the Whitfords Shopping Centre. In cross-examination Fisher agreed that as early as 1994 he had complained to the centre management about a fall-off of trading generally in the plaintiff's part of the shopping centre. According to Fisher, trading generally had fallen off by as much as 30 per cent to 40 per cent as a consequence of either or both the renovations to the shopping centre or the completion of those renovations: T198. Fisher said the result of these renovations had been to reduce significantly the number of customers coming through the entrance closest to the plaintiff's store: T199.
132 Sertorio's evidence was to the effect that the renovations had involved the repositioning of the main entry to the shopping centre. He said that the work had commenced in early 1993 and had been completed
(Page 41)
- by August 1994. He said that throughout 1993 and 1994 a number of entries to the centre had been temporarily closed. He said that during this period the plaintiff's shop was in reasonable proximity to an entry that remained opened. However, he said that on completion of the renovations those entries that had been shut were reopened. According to Sertorio, this had created some redistribution in customer traffic because there was now more than one entry for customers within a particular area. He said that although the overall customer traffic for the centre increased from mid 1994 there had been some decline at some of the entries. His evidence was that in the particular part of the centre occupied by the plaintiff's store some of the other tenancies besides the plaintiff had experienced a decline in trade. However, he also said that some of the other tenants in that part had experienced increases in trade: T479.
133 The defendant relied on the evidence given by Fisher and Sertorio to support its argument that during the period between 1994 and 1996 the plaintiff believed that the renovations occurring at the centre were responsible for its adverse trading results rather than the defendant's misrepresentation: T191. In addition to the evidence discussed above the defendant relied on Exhibit 43. Exhibit 43 contained two letters written by Fisher to the Whitford City Shopping Centre's property agents, Raine and Horne International, in September 1995 and February 1996, objecting to the yearly rental increases for the GW Whitfords store. In both letters Fisher attributed the fall-off in trade for the years 1994 to 1996 to a fall-off in the customer numbers in the Whitford City Shopping Centre: T199. It seems to me that the defendant's argument may find some further support in the fact that while Fisher took steps to complain to centre management about the decline in trade, at no time did he ever complain to Macaulay that he had represented the business: T191. In my view, the evidence is capable of raising the possibility that a fall-off in trade at the centre may have been a reason for the trading losses suffered by the plaintiff.
134 Having considered all the evidence relating to this issue of what was the true gross profit margin for the GW Whitfords store as at 30 June 1992, I have formed the view that the decision by the plaintiff to deviate from the defendant's trading methods is a plausible explanation for the plaintiff only achieving a profit margin of 33 per cent. Put simply, and particularly in light of the evidence provided in Exhibits 33 and 34, the plaintiff's expectation that it could achieve a profit margin near 46 per cent in circumstances where the majority of its stock, and therefore sales, resulted from products which were sold at profit margins of between 10-33 per cent, may not have been soundly based. I am also
(Page 42)
- satisfied on the evidence that the defendant was able, throughout the period in which the plaintiff traded, to maintain a significantly higher gross profit margin of approximately 43 per cent in all of its stores: Exhibit 18; Exhibit 42.
135 In my opinion, the plaintiff has not discharged its evidentiary burden in relation to its negligent misrepresentation claim. The evidence tendered by the plaintiff to support its claims that the gross profit of $10,420 and the gross profit margin of 46 per cent were misleading and negligent was, in my view, inconclusive. In some respects, for example the till roll, sales and purchases analyses, I have doubts about the reliability of the evidence: Exhibits 28, 29, 34. This impacts on the burden of proof.
The Breach of Contract
136 Having already found against the plaintiff in its claims in relation to both its fraudulent misrepresentation and negligent misrepresentation claims, the plaintiff's claim for breach of condition 19.5 of the contract cannot be maintained. This is because the plaintiff's claim for breach of contract, contained in par 13 of the statement of claim, does no more than rely on the inaccuracy of the same representations complained of and pleaded in pars 6 and 7 of the statement of claim.
The defendant's counterclaim
137 Finally, I need to say something in relation to the defendant's counterclaim. The defendant claims that under an agreement dated 13 November 1992 between the plaintiff and the defendant, the plaintiff agreed to pay to the defendant a licence fee of $4000 per annum on 1 January of every year, commencing in 1994: pars 17, 18 of Defence and Counterclaim; Exhibit 6. The relevant licence fee condition is found in both condition (k) of the agreement to purchase a business, which is Exhibit 2, and the Games World Conditions which are contained in Exhibit 7.
138 Condition (k) of Exhibit 2 states:
"A licence fee of $4000 per annum is payable by the purchaser to the vendor on 1 January of each year commencing in 1994. This licence fee enables Games World, Whitfords to achieve discounts from suppliers by the use of the Games World name"
(Page 43)
139 The defendant contends that at the time the plaintiff ceased trading on 31 October 1996, the licence fee of $3596.00, for the period 1 January 1996 to 31 October 1996, was unpaid. By way of counterclaim the defendant now seeks to recover this amount from the plaintiff.
140 In its Reply the plaintiff does not dispute the terms of the licence agreement. However, in par 3(c) the plaintiff contends that by cheque dated 19 January 1996 the plaintiff paid to the defendant an amount of $4128.90 being the amount owing under the licence agreement for the year 1996.
141 At the trial the defendant admitted that it had received a payment of $4128.90 by way of cheque dated 19 January 1996. However, the defendant claimed that the proper construction of the licence agreement was that the licence fee payments were to be made in arrears not in advance. As a result, the defendant argued the amount paid over to it by the plaintiff in January 1996 was in respect of the 1995 licence fee. The defendant argued that on its proper construction the fee for 1996 would not have been payable until 1 January 1997. Accordingly, the defendant contends the licence fee for 1996 was unpaid and is still outstanding.
142 The plaintiff on the other hand contends that there was an oral agreement between the parties that the defendant would waive the licence fee for the first year. The plaintiff submits that on 16 October 1992 the defendant agreed to waive the fee for 1993 and that the first payment of the licence fee fell due on January 1994 in accordance with condition (k) of Exhibit 2.
143 Given these conflicting submissions it seems to me that the key question in determining the proper construction of condition (k), and therefore the counterclaim, is whether there was an agreement between the parties that the defendant would waive the licence fee for the year 1993 or whether the agreement was limited to the remaining two months of the 1992 year. To succeed on its counterclaim the defendant must satisfy me on the balance of probabilities that at the time the contract was entered the parties contemplated that the waiver of the licence fee related only to the remaining two months of 1992.
144 Condition (k) does not expressly state whether the licence fee payment was an amount to be paid in arrears or in advance. As a result, to ascertain what was contemplated by the parties at the time the agreement was entered, it will be necessary to consider both the documentary and oral evidence surrounding the licence agreement
(Page 44)
145 Macaulay's evidence was to the effect that the defendant charged a licence fee to those parties to whom it had sold GW stores to. The licence fee represented a charge for the right to use the Games World name. His evidence was that this fee was payable by the purchaser every 12 months: par 6 MFI 45A. His evidence was that at the time of negotiating the sale of the business in October he and Fisher had discussed the licence arrangement: T354. He said that he had told Fisher that if the sale went through in November he would waive the fee payable for the remaining period of 1992: T405. He denied that during their discussion he had agreed to waive the licence fee for 1993: T366; T404.
146 In cross-examination counsel for the plaintiff put to Macaulay that the waiver of the licence fee for 1993 would be consistent with the requirement under condition (k) that the payments commence on January 1994. Macaulay disagreed with this proposition stating that it was always explained that the licence fee would be charged at the end of a calendar year so that it could be adjusted with CPI figures: T405. He said that he had set up the arrangement so that the fee for 1993 would not be charged until 1994: T404.
147 The defendant argued that Macaulay's evidence that he had not agreed to waive the fee for 1993 and that the payments were to be made in arrears was consistent with the terms of condition (k) which required payment on 1 January each year and that the first payment was to commence on 1 January 1994. To support its claim the defendant tendered the invoices issued by it to the plaintiff for payment of the licence fee: Exhibit 61. The first three of these invoices show that the fee was required to be paid on 7 January 1994, 15 January 1995 and 21 January 1996. According to Macaulay, the invoice issued to the plaintiff on 7 January 1994 represented the licence fee required to be paid by the plaintiff in arrears for its use of the Games World name throughout 1993.
148 The defendant also relied on the final invoice dated 31 October 1996 which was sent to the plaintiff. The defendant submitted that this invoice supported its claim that the payments represented an amount in arrears. This invoice is contained in Exhibit 61 and requested payment of the licence fee for the period from January 1996 to 31 October 1996 being the date the plaintiff ceased trading. In addition to this invoice the defendant produced a letter dated 23 October 1996 addressed to the plaintiff enclosing the invoice for the licence fee for the period 1 January 1996 to 31 October 1996 and requesting payment: T366; par 12 of MFI 45A: Exhibit 61. The defendant submitted that the fact that the defendant took
(Page 45)
- steps to recover the licence fee for the period of trade up to 31 October 1996 despite receiving a payment from the plaintiff in January 1996 was evidence that the licence fee was payable in arrears.
149 However, the plaintiff denied it was ever agreed that the licence fee would be payable in arrears. According to the plaintiff the licence fee payable in January each year was an amount payable in advance. Fisher's evidence was that at their meeting on 16 October 1992, Macaulay orally agreed to waive the licence fee for the first year. The plaintiff relied on Exhibit 48 which contained handwritten notes made by Fisher following his meeting with Macaulay. The note records "$4000 being payable for access to Active Imports discounts on 1/1 each year (except first)":Exhibit 48.
150 Fisher's evidence was that the waiver was to cover the remaining part of 1992 and the whole year 1993: T84. He stated that the first payment of the licence fee was to be made in January 1994 in accordance with condition (k) and that this payment represented the amount owing in respect of the 1994 year. Fisher's evidence was to the effect that following the waiver of the fee for 1993, the licence fee would then be payable on January each year and that the first payment would therefore commence in January 1994.
151 The plaintiff relied on the invoices in Exhibit 61 submitting that, at least in relation to those issued in 1994, 1995 and 1996, these were consistent with its evidence that the parties had agreed to waive the fee for 1993 and that the fee was to be paid at the beginning of the year to which it applied. In relation to the defendant's final invoice, the plaintiff argued that it was not obliged to pay the amount requested, as on the proper construction of what was agreed between the parties, the defendant was not entitled to any further licence fee for 1996, having already received payment for that year in January 1996.
152 Before reaching my view on the defendant's claim, I first want to say something in relation to the oral evidence of the witnesses. Oral evidence on this issue was provided by Macaulay and Fisher. Both witnesses gave evidence to the effect described above. However, in reaching my decision on this issue I have chosen to give little weight to the oral evidence given by both of these witnesses. This is because, apart from agreeing that waiver was discussed, both witnesses were at complete odds as to the substance of the discussion that took place. In both cases the lack of detail in their evidence made it impossible to accept one witness's evidence over the other. Further, there was no evidence produced by
(Page 46)
- either party that, in my view, was capable of raising any adverse inferences as to either of these witnesses credibility. Indeed, it is quite possible that at the time the licence fee and waiver were discussed, Macaulay and Fisher did in fact hold different views about the period in which the fee was to have been waived. However, despite what one party may have believed, the proper construction of the agreement must be determined from an objective point of view. I must rely on what the evidence shows was in the contemplation of both parties at the time of the agreement. In my view, the contemporaneous written records and the conduct of the parties in relation to them is, in this instance a better guide.
153 Having considered the evidence presented on the counterclaim, I am not satisfied that at the time the parties entered the contract they had agreed that the waiver was only to apply to the remaining two months of 1992. In my opinion, the evidence contained in Exhibit 48 raises sufficient doubt as to the construction put forward by the defendant. In my view, the reference in Fisher's notes to the payment for the licence fee on "1/1 each year (except the first year)" provides evidence capable of supporting the plaintiff's claim that the defendant had agreed in their discussion to waive the fee for the first year.
154 In my view, the plaintiff's reference in Exhibit 48 to "except the first year" should be construed as meaning the year 1993. This is because at the time the waiver of the licence fee was discussed between the parties, it is unlikely that they would have contemplated any benefit from a waiver of the fee for the remainder 1992. It seems to me that, given the late stage in the year, the amount of use the plaintiff could have obtained from the use of the Games World name would have been minimal. This is particularly so given the evidence that the majority of stock for the Christmas trade had already been made. Further, if the defendant's construction was correct and the agreement to waive in the first year related to the remaining months of 1992, the plaintiff would obtain at most an allowance of approximately $400 compared to a $4000 benefit on the plaintiff's construction. In my opinion, it is unlikely that the plaintiff would have chosen the words "except the first year" or even taken the trouble to make note of the waiver if it had understood the waiver to relate to the remaining weeks of 1992.
155 In relation to the documentary evidence provided by the defendant, in my view, apart from the invoice dated 31 October 1996, Exhibit 61 does no more that show that the defendant issued invoices pursuant to the agreement. Indeed, the invoices relating to the years 1994, 1995 or 1996 were consistent with the plaintiff's evidence that the fee for 1993 had been
(Page 47)
- waived and the first payment was to commence in 1994. I accept that the final invoice dated 31 October 1996 and the accompanying letter is inconsistent with the plaintiff's construction. However, it seems to me that this invoice accords with the defendant's erroneous construction of the licence fee agreement.
156 Having considered the evidence on the counterclaim, the defendant has not discharged its evidentiary onus to the required standard. I am not convinced that the construction put forward by the defendant was likely to have been in the contemplation of both parties at the time of entering the contract. While I have been cautious in giving any weight to the oral evidence of the witnesses, in the end, I cannot overlook the fact that the evidence contained in Exhibit 48 is consistent with the oral evidence of Fisher that Macaulay had agreed to waive the licence fee for the first year. In my view, the plaintiff's construction is consistent with the terms of condition (k) which did not require the first payment of the licence fee until January 1994.
Conclusion
157 The plaintiff has failed to satisfy me that it is entitled to any of the relief claimed in the statement of claim. Its claim must be dismissed. Similarly, the defendant has failed to satisfy me that it is entitled to any of the relief contended for in the counterclaim. Accordingly, the counterclaim will also be dismissed.
0
26
0