Woodworx (Aust) Pty Ltd v Woodworx Pty Ltd
[2005] VSC 34
•16 February 2005
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMON LAW DIVISION
No. 450 of 2003
| WOODWORX (AUST) PTY LTD | Plaintiff |
| v | |
| WOODWORX PTY LTD AND ORS | Defendant |
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JUDGE: | GILLARD J. | |
WHERE HELD: | GEELONG | |
DATE OF HEARING: | 14, 15 and 16 February 2005 | |
DATE OF JUDGMENT: | 16 February 2005 | |
CASE MAY BE CITED AS: | Woodworx (Aust) Pty Ltd v Woodworx Pty Ltd and ors | |
MEDIUM NEUTRAL CITATION: | [2005] VSC 34 | |
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CONTRACT – Sale of two businesses – s.52 Estate Agents Act 1980 – Trading statements – Alleged errors and false financial figures – Statement part of contract – Effect of statement in contract – proof of breach.
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APPEARANCES: | Counsel |
| For the Plaintiffs | Mr A Fairchild, the Second Plaintiff, appeared on his own behalf and, with leave of the Court, for the First Plaintiff |
| For the Defendants | No appearance |
TABLE OF CONTENTS
The Parties........................................................................................................................................... 2
The Dispute......................................................................................................................................... 5
i. Claim for Money Had And Received:.................................................................................. 10
ii. Claim for Software:................................................................................................................. 11
iii. Unpaid Leave:........................................................................................................................ 12
iv. Warranty Type Claims:......................................................................................................... 13
v. Restraint of Trade:.................................................................................................................. 14
vi. A Breach of Contract re Plant and Equipment:................................................................. 16
vii. Misrepresentations as to Value:......................................................................................... 16
HIS HONOUR:
This is a proceeding instituted by writ in which two plaintiffs are seeking damages from four defendants arising out of the sale by two defendants of two businesses to the first plaintiff.
The plaintiffs have relied on a number of causes of action as set out in their amended statement of claim delivered 1 June 2003.
The Parties
The first plaintiff, Woodworx (Aust) Pty Ltd (“Woodworx Aust”) is a company established by the second plaintiff Allan John Fairchild (“Mr Fairchild”), who is a director of that company. The company was registered on 10 January 2002 to acquire two businesses which had been conducted in Geelong and surrounding areas. Mr Fairchild was at all relevant times the sole director and shareholder of the company. He was also its secretary. Although he has been joined as a plaintiff, upon proper analysis none of the pleaded causes of action disclose any claim by him. He should not be a plaintiff and I will order that his name be removed as a party to this proceeding.
The first defendant, Woodworx Pty Ltd (“Woodworx”) is a company which at certain times conducted a furniture manufacturing business at North Shore, Geelong. The second defendant, U-Neek Products Pty Ltd (“U-Neek”), is a company which was controlled by the third defendant, Gregory Ross Goodwin, and which owned certain premises. The third defendant, Gregory Ross Goodwin (“Mr Goodwin”) was a director of Woodworx and at all relevant times prior to 1 February 2002 was the person in charge of the business of furniture manufacturing and also the business known as Matilda’s which was a retail business. He was a director of Woodworx and the husband of the sole director of U-Neek Products and of the fourth defendant. The fourth defendant, Worx With Wood Pty Ltd (“Worx”), was registered on 28 March 2002 after the contracts the subject of this proceeding were entered into, and whose sole director and secretary was Alma Goodwin, the wife of Mr Goodwin.
There were a number of preliminary matters that had to be dealt with prior to the commencement of the trial. At all material times until 3 February 2005 Woodworx Aust and Mr Fairchild as plaintiffs were represented by a firm of solicitors. The solicitors ceased to act on 3 February 2005. Mr Fairchild wished to conduct the proceedings on behalf of Woodworx Aust and himself. A problem arose so far as Mr Fairchild appearing for Woodworx Aust, a corporation, because he is not a legal practitioner.
The second problem arose as a result of Mr Fairchild informing the Court that the first defendant, Woodworx, was in liquidation. No application has been made to this Court for leave to continue this proceeding against that defendant. The liquidation occurred when Senior Master Mahoney ordered on 13 August 2003 that the company be wound up. This proceeding was commenced on 13 March 2003. Section 471B of the Corporations Act 2001 precludes this proceeding continuing against that defendant without leave being obtained. No application was made and Mr Fairchild accepts that the proceeding cannot continue against Woodworx Pty Ltd in liquidation. It follows that no relief can be granted against it.
The third problem which arose came about because the other defendants have not appeared at the trial. The issue about which I have to be satisfied is whether they received notice of the hearing.
Rule 1.17(1) of the Rules of Court provides that:
“ ... a corporation, whether or not a party, shall not take any step in a proceeding save by a solicitor.”
However it is open to the Court in the exercise of its inherent power to regulate its own proceedings, to permit a person to represent a corporation, see Hubbard Association of Scientologists International v Anderson[1].
[1][1970] VR 340 at 342.
I am satisfied the Court does have power in an appropriate case to permit an unqualified person toappear on behalf of a corporation. Mr Fairchild frankly told the Court that although he had retained solicitors on behalf of the company and himself right up to the beginning of this month, the business and he could not afford the cost of the hearing and hence he wished to present the case himself. He is the sole director and shareholder of Woodworx Aust. The case has been prepared for the hearing. I am prepared to grant him leave to appear on behalf of Woodworx Aust, but I do so on the basis that the Court will not assume the role of assisting Woodworx Aust in this litigation or indeed conducting the litigation. Mr Fairchild has the responsibility of conducting the case on behalf of Woodworx Aust.
As I have already stated, there are four defendants to this proceeding. At one stage they were represented by a firm of solicitors, McIntyre & Statton, solicitors at Geelong, however those solicitors ceased to act on behalf of the defendants by notices dated 16 December 2003 in respect to the third and fourth defendants, and on 14 January 2004 in respect to the second defendant. It appears because of the liquidation of the first defendant, namely Woodworx, that no notice has been given in respect to it.
On 27 May 2004 after those solicitors had ceased to act for any of the defendants, the plaintiff’s then solicitors gave notice of trial which was sent to the defendants. When application was made by the plaintiff’s former solicitors for an order that they be permitted to cease to act, they served the material on the second, third and fourth defendants at the hearing before Justice Teague on 3 February 2005. Mr Goodwin appeared at Court. One of the affidavits relied upon by the solicitors was sworn by Mr Fairchild in which he stated words to the effect that Mr Goodwin was aware that the proceeding was to be heard in Geelong in February 2005 and indicated he did not propose to appear.
I am satisfied in all the circumstances that Mr Goodwin was aware that the proceeding would be brought on at the Geelong sittings of this Court which commenced Monday on 14 February 2005. This proceeding was called on, on 14 and 15 February and outside the Court, and none of the defendants have appeared.
I am satisfied in the circumstances that the defendants have been made aware of this proceeding coming on for hearing and accordingly I heard the matter as an undefended proceeding.
The Dispute
The facts which led to this dispute can be briefly summarised.
Mr Fairchild and Mr Goodwin had discussions in late 2001 which culminated in Mr Fairchild making an offer on behalf of his wife and himself to purchase two businesses operated by Woodworx and Mr Goodwin. The business operated by Woodworx was a furniture manufacturing business. The business operated by Mr Goodwin and apparently owned by him was a retail furniture outlet known as Matilda’s which carried on business at two locations in North Geelong and Drysdale.
The Fairchilds offered to buy both businesses, and on 18 December 2001 sent a letter to Mr Goodwin offering to purchase both businesses for $170,000 plus stock. It is noted that the offer was a combined one for both businesses, in other words a package offer for both businesses. It soon became apparent, at least by 22 December 2001, that there were in fact two separate businesses, one operated by Woodworx and the other by Mr Goodwin, however for all practical purposes Mr Goodwin ran, operated and managed both businesses; so from a very early stage, the offer made by Mr and Mrs Fairchild was a package type offer based upon both businesses and was a single price of $170,000.
What happened then was, as was required by s.52 of the Estate Agents Act 1980, trading statements in respect to both businesses were prepared on behalf of both vendors by Mr Roger Davies, an accountant, and were handed over to the prospective purchasers on or about 21 December 2001. It was clear that there had to be two contracts, and indeed two contracts were executed on 16 January 2002. I say that was essential because the vendor for each business was different.
As stated, the first contract concerned the sale of a furniture manufacturing business; the vendor was Woodworx and the purchasers were Mr and Mrs Fairchild or nominee. The business was carried on at 3-7 Seaforth Street, North Shore, and the price according to the contract, was $170,000 plus stock. According to the terms of the contract, the business was to be taken over by Mr and Mrs Fairchild or their nominee on or about 1 February 2002. On the same date, namely 16 January 2002, the second contract was entered into. The vendor was Gregory Ross Goodwin and the purchasers were Mr and Mrs Fairchild or their nominee. The business was a furniture retail outlet known as Matilda’s and was carried on at two premises, namely 169 Melbourne Road, North Geelong, and 16 Collins Street, Drysdale. According to the contract, the price was $100 plus stock. The business was to be handed over to Mr and Mrs Fairchild or their nominee on or about 1 February 2002.
As I stated, prior to the execution of these contracts, the trading statements required by s.52 of the Estate Agents Act 1980 were handed over to the prospective purchasers, and the evidence revealed that this was on or about 21 December 2001. The trading statement for the manufacturing business covered trading up to 30 September 2000, and covered the financial years 1 July 1999 to 30 June 2000, 1 July 2000 to 30 June 2001, and three months from 1 July 2001 to 30 September 2001. The trading statement for the retail business revealed trading from 1 July 2000 for that financial year, together with the three months from 1 July 2001 to 30 September 2001.
I emphasise at this stage and note that the trading figures finished as at 30 September 2001 in relation to both businesses and this is relevant when I consider whether or not these figures contained any errors which were material.
It appears that shortly after taking over the two businesses there were a number of issues which were outstanding or which became a source of conflict between Mr Goodwin and Mr Fairchild. I should say at this stage that prior to the contracts being completed, the parties agreed to vary the agreements. The first matter was that the Fairchilds nominated Woodworx Aust as the purchaser of both businesses. It was registered on 10 January 2002 for that purpose.
Secondly, the purchase price for the furniture manufacturing business was amended to a price of $70,000 comprising plant and equipment of $60,000 and good will of $10,000. The purchase price of Matilda’s was varied to plant and equipment $100 and good will $100,000.
The fact that these prices were varied and appear to have been chosen at random was a further problem that had to be confronted when considering the causes of action, and whether or not damages had been suffered, and more particularly how to quantify the damages. It is fairly apparent that the variations were made at the request of Mr Goodwin, and this was agreed to by the Fairchild interests, but it does raise the issue of a false valuation at settlement in relation to both businesses. As I have already said, and this becomes important hereafter. It is clear that the businesses were purchased as a combined package and that the purchase price was determined on the basis of it, in effect, being one business, even though it had two separate operations namely furniture manufacture and retail sale.
In order to transfer possession of the business, it was necessary for Woodworx Aust to enter into a lease, and a lease was in fact entered into with the second defendant, U-Neek. Some disputes arose in relation to matters under the lease and at one point a proceeding was brought in this Court over an attempt to evict Woodworx Aust because of unpaid rent.
Mr Fairchild gave evidence that Woodworx Aust still carries on the manufacturing business from the same premises. He gave evidence that the retail business in North Geelong was closed and the business now operates from one outlet at Drysdale. Mr Fairchild also gave evidence that the premises where the manufacturing business is conducted was owned by U-Neek Products Pty Ltd, but some time after settlement the company sold the premises to a third party.
The cause of action in relation to any leasehold disputes is hard to follow, and the relief clause seems to suggest that a declaration is sought that the lease is void, however, events have overtaken any complaints that may have happened in the past. As I read the amended statement of claim and upon proper consideration of the evidence, I am satisfied that no claim has been proven against U-Neek Products Pty Ltd arising out of a lease, and accordingly no judgment will be entered against that company.
The amended statement of claim can hardly be described as a model of good drafting, and it is somewhat difficult to comprehend the various causes of action because they appear to cover a number of complaints in no particular order. Reference to the relief clause shows orders sought in the form of declarations that the defendants or one of them in trade or commerce have contravened s.52 of the Trade Practices Act 1974; a declaration that the furniture manufacturing and retail contracts and the lease are void ab initio; and alternatively an order varying the contracts so the purchase price payable by the plaintiffs to the defendants be reduced by $135,000; in the alternative claims were made for damages under the Trade Practices Act for damages for breach of contract.
Some of the difficulty that arises concerns the identity of the particular parties to the causes of action. There are a number of errors in the statement of claim as to who did what, however, they were clarified in the course of discussions between the Court and Mr Fairchild. I do not know the basis upon which Mr Fairchild had any claim in his own personal capacity even though the amended statement of claim claims relief on his behalf. As I stated I do not accept that there is any viable claim against U-Neek arising out of the lease.
The Court discussed with Mr Fairchild what appeared to be the causes of action, and I will deal with each separately.
It is convenient at this point to deal with the fourth defendant, Worx, and the claims brought against it. I refer to paragraphs 6, 7, 24(v-ix), 27 and 30 of the amended statement of claim. There is a restraint clause in the furniture manufacturing contract. Special Condition 5 restrains the first plaintiff, Woodworx, from carrying on a business in Victoria for five years. Evidence revealed that a business was commenced in Moama in the state of New South Wales. The fourth defendant, Worx, was registered on 28 March 2002 to conduct a business. Its sole director and shareholder is Mrs Goodwin. The claim against Worx is that the company induced Woodworx and Mr Goodwin to break the restraint clause, see paragraph 30 of the amended statement of claim. There is no evidence that it did, and accordingly in my view, the claim must be dismissed. I will consider the claims brought against Mr Goodwin concerning the restraint of trade clause later.
It is also necessary at this point to say something about the claims based on the alleged false financial figures. As I have stated, problems have arisen because of the different contracts, different parties, and the fact that this case proceeded without separately considering the effect of the two contracts. The offer that was made was $170,000 plus stock, plant and equipment for the two businesses. After taking possession of both businesses on or about 1 February 2002, it emerged in the following months that the income derived by each business was substantially less than the amounts which appeared in a number of financial statements produced at the time the contracts were entered into. The offer made by the Fairchild interests on 18 December 2001 was for both businesses. Each business was conducted by a different entity. As things turned out and as was necessary, there were two separate contracts. The price of $170,000 was primarily in respect to the contract for the manufacturing business, but variations took place thereafter.
One matter that assisted Woodworx Aust is that although Mr Goodwin was not a party to the furniture manufacturing contract, he nevertheless signed a guarantee in respect to that contract. The guarantee is dated 14 January 2002 and Mr Goodwin guaranteed the performance and observance by Woodworx as the vendor company of all covenants and agreements made by it, and to indemnify the purchaser against all losses, damages, costs, expenses or otherwise which may be incurred by reason of any default on the part of the vendor. It follows that claims brought by Woodworx Aust against Woodworx are also against Mr Goodwin personally. The proceeding cannot continue against Woodworx because it is in liquidation, but that does not in any way affect the personal guarantee given by Mr Goodwin. The facts are that there is one plaintiff, namely Woodworx Aust, and there is one defendant, Mr Goodwin, and this overcomes some of the difficulties that I have foreshadowed about the way the case has been presented and the way the plaintiff, Woodworx Aust, has put its case without differentiating between the contracts.
The amended statement of claim makes a number of claims on behalf of Woodworx Aust, and it is convenient to deal with each one separately. Claims are brought against different defendants and as I have stated, Woodworx cannot obtain judgment in any claim brought against Woodworx because it is in liquidation. Nevertheless, Mr Goodwin guaranteed performance of the obligation of Woodworx pursuant to the contract. I now propose to consider each claim separately:
i. Claim for Money Had And Received:
This claim is pleaded in paragraphs 33-33 of the amended statement of claim. It arises in this way:
Woodworx Aust took over possession of both businesses on 1 February 2002, and thereafter operated both businesses. It sold furniture to two organisations, namely Mountain Pine Furniture of Wodonga, and Timberline Furniture of Penrith New South Wales. The sales occurred after 1 February 2002. Despite letters being sent by the new company, purchasers mistakenly paid the accounts to the former company. The sales were definitely made by Woodworx Aust and it was entitled to be paid.
However, a problem was encountered in relation to this cause of action. The actual destination of the wrongful payments is somewhat vague. The evidence before the Court show that the moneys were in fact paid into two separate accounts. Mr Fairchild in his evidence told the Court that he believed they were the accounts of the company Woodworx, however there was some doubt about this, and he was not in a position to establish who actually received the money. That being so, it is not possible to say which of the defendants mistakenly received the money and was therefore obliged in good conscience to repay the money to the rightful payee. Because this was not proven it follows that the claim for money had and received must fail. Of course if in fact Woodworx, the company in liquidation received it, then because of the liquidation no judgment could be entered against it.
That claim fails.
ii. Claim for Software:
This claim is found in paragraphs 24(3) and 28(3) of the amended statement of claim. It is based upon two terms of the manufacturer’s agreement, namely clauses 2.3 and 2.4.
Clause 2.3 is in these terms:
“(2.3) The vendor must deliver the assets to the purchaser on the settlement date in the same state of repair (fair wear and tear accepted) as at the day of sale and in proper working order unless otherwise agreed.”
Clause 2.4 obliged the vendor to sign all documents prepared by the purchaser and to:
“do whatever else is necessary for the vendor to do to enable the transfer on the settlement date of any”
and there were a number of items mentioned including “licences, permits, approvals and registrations necessary for the business”.
Attached to the contract was an asset register which set out all the assets which were to be transferred on settlement. One item was “office equipment” and item 59 was “a computer system”. The total value put on the office equipment by Mr Goodwin was $3000. The complaint made by Woodworx Aust is that although the computer system was actually handed over, what was not handed over were the various disks which were used initially to install the software into the computer and which would be necessary if it was ever required thereafter to reinstall the software equipment.
Mr Fairchild put to the Court that the two sub-clauses required the vendor to provide those disks for the computer system. Mr Fairchild gave evidence that he had discussions with Mr Goodwin and he believed that these disks would be handed over, however, the question is whether there was any contractual term which obliged the vendor to hand over the disks.
This depends upon a proper construction of the agreement, and in particular what is meant by “computer system”. Reference to the amended statement of claim, being Particulars B at page 21 of the amended statement of claim, sets out the particular software which was installed in the PC system. The original disks which were not handed over are identified. The software items and serial numbers are set out in the amended statement of claim at page 21, and Mr Fairchild gave evidence that the software was installed on the computer system and the disks were not handed over. It becomes a question of proper construction of the agreement, and in my view the clauses in the contract did oblige the vendor to provide these disks because they are an essential part of the computer system, and were crucial to its operation. The remaining question is the value or the cost of the disks and the quantum of damages. Evidence was given that the replacement cost was $2589.90, and one must compare that with the values agreed between the parties as to the total office equipment. However, I think in the circumstances, Woodworx Aust is entitled to recover the full amount of the cost of replacing the disks.
I am satisfied that Woodworx Aust has established the claim and is entitled to damages in the sum of $2589.90.
iii. Unpaid Leave:
This claim related also to the manufacturing contract. Special Condition 6 provided:
“(6)All staff at Woodworx Pty Ltd will be paid all accrued entitlements and superannuation as at 1 February 2002 and may be approached by the purchaser to offer new work place working contracts prior to possession”.
The claim is set out in paragraph 17 which refers back to paragraph 13. Paragraph 13 asserts that it was an express term of each contract that Woodworx and Mr Goodwin represented that the vendor statements under s.52 of the Estate Agents Act were true and correct. Paragraph 17 asserts that they were not true and correct. I refer to paragraph 17.5 on page 10 of the amended statement of claim. On page 10 six persons are referred to as being entitled to annual leave. $2000 has been paid, evidently by Woodworx’s solicitors. The amount claimed is $1859. I must say I had enormous difficulty understanding the true nature of this cause of action, but it appeared to me that it could be a cause of action based upon a breach of Condition 6, though it does not quite read that way. However, in my view the claim must fail. Mr Fairchild gave evidence that the six persons named had not been paid and indeed it was his view, and probably correctly, that it was not the obligation of Woodworx Aust; in other words the obligation rested elsewhere.
Even though it was an express term of the contract and if it had been properly pleaded I would have been satisfied the term was breached, the fact is that Woodworx Aust does not suffer any loss. Mr Fairchild frankly stated that he was pursuing the claim on behalf of the six persons, however in my opinion because the contracting party, named Woodworx Aust, has not suffered any loss, this claim must also fail.
iv. Warranty Type Claims:
After Woodworx Aust took possession of the manufacturing business, a number of claims were made on the company by persons who purchased goods from Woodworx prior to 1 February 2002 relating to alleged defects in goods sold.
This claim is also brought under paragraph 17. It is asserted again that the vendor’s statement in respect to the contracts was not true and correct in that, and one of the claims is a Faulty Product Claim Summary. Again, I have difficulty in just how this claim is being put. It does not appear to me to be properly pleaded. Items had to be repaired or replaced, and Woodworx Aust took the view, and in my view a correct one, that if not fixed and repaired, significant adverse impact on good will was likely to occur.
It is also asserted, and Mr Fairchild gave evidence to this effect, that Mr Goodwin had promised a number of customers he would repair items prior to settlement, and on settlement he advised that as far as he was concerned it was Woodworx Aust’s problem.
The question immediately arises as to what is the basis of the claim. Mr Fairchild gave evidence that after possession he advised Mr Goodwin, who was aware of these problems, and that Mr Goodwin agreed to pay for repairs at cost with no provision for profits. That is not the way it has been pleaded. I have difficulty understanding how it is pleaded in paragraph 17, but in paragraphs 25 and 26 there is a further pleading. It is said that the original contract was varied, so that it was agreed that Woodworx would meet the cost.
However, I am not persuaded on the evidence that the discussion had with Mr Goodwin amounted to a variation of the original contract dated 16 January 2002. It may have amounted to a new contract although it would have been difficult to determine who the correct parties were, but in any event that is not the way the claim has been pleaded. Because this proceeding was undefended, it was not open to the Court to permit an amendment to the claim in the absence of the defendants. As the claim was against Woodworx, it must fail because of the liquidation. I am not persuaded that the original contract was varied, so it follows that the guarantee provision is irrelevant. But in any event there does not appear to be any provision in the contract which supports the claim. Mr Fairchild referred to Clause 7.1 concerning the conduct of the business, but that clause only obliged the vendor to carry on the business until settlement date.
This claim also fails.
v. Restraint of Trade:
Clause 10 of the manufacturing contract is concerned with restraint of trade. It restrained the vendor, namely Woodworx which is now in liquidation, from being involved “in any way” in a business of the same or similar type. “Involved in any way” was very widely defined. Further, Woodworx was obliged to ensure that each officer or shareholder who had the capacity to exercise substantial control of the corporation entered into a written agreement. There is no evidence that that provision was complied with.
The claim is made in paragraphs 7, 24(5), (6), (7) and (8). It is further alleged that the fourth defendant, Worx, induced a breach of the restraint clause and a claim for damages was made against it. I have already dealt with that claim.
It is difficult to know what is sought by Woodworx Aust in relation to this claim; one assumes that it is a claim for damages for breach of contract. The fourth defendant, Worx With Wood Pty Ltd, was registered on 28 March 2002 and Alma June Goodwin was the sole director and secretary. She was also the sole shareholder. The business, according to the company search, was carried on in Moama, New South Wales.
Clause 10 of the contract, namely the restraint clause, specified restraint for a period of five years within Victoria. The evidence revealed that a furniture type manufacturing business was carried on by Worx in Moama, New South Wales. Evidence also revealed that Mr Goodwin, when he worked in Victoria, was a tradesman and was a person heavily involved in the manufacturing business in Victoria. Evidence also showed that he has resided in Moama.
The first question is whether the clause was breached in any way. Despite its width I am not persuaded that the wife who was the sole director, secretary and shareholder of the new company, was in any way restrained by the clause; in fact, I am satisfied she was not. Neither was Worx. There is no evidence therefore of breach. However, if the business was carried on, it was carried on in New South Wales, and if that be so the clause again was not breached. Mr Fairchild however, said that he believed from hearsay sources that the company was seeking to sell its product in this state. The evidence however was hearsay and I refused to admit it. That claim must also fail, but in any event, even if the clause had been breached, there was no evidence placed before the Court that Woodworx Aust has suffered any damage.
The claim fails.
vi. Breach of Contract re Plant and Equipment:
This cause of action is pleaded in paragraphs 24(3) and 28(3). The claim is based upon an express term, namely Clause 2.3 of the manufacturing contract. I have already set out Clause 2.3. It obliged the vendor to deliver the assets to the purchaser.
As stated, attached to the contract was a two page document setting out all the assets, plant and equipment that were to be delivered to Woodworx Aust. The evidence revealed that some of the plant and equipment was either not delivered or delivered in a bad state of repair, or required repairs. Particulars of the equipment concerned are set out on page 20 of the amended statement of claim. Mr Fairchild has given evidence relating to this claim, and I am satisfied on that evidence that certain items were being repaired at the time, and Woodworx Aust was obliged to pay the repair cost of $348.19. In addition, inspection of the plant and equipment showed that there were two sanders which were not worth repairing, and they were valued at $200. Investigation also revealed that certain items, namely a Dewalt sander and two nail guns were missing, as were three batteries. I accept the evidence that the value of these items is $907. In addition, certain items had to be repaired, namely a nail gun and a grinder, and two batteries were not operative. I am satisfied that there has been a breach of contract and I am satisfied that the damages have been proven at $1707.42.
Woodworx Aust is entitled to recover that amount against Mr Goodwin pursuant to the guarantee.
vii. Misrepresentations as to Value:
It appears that the claims made in relation to the value of both businesses, namely the causes of action, are an alleged breach of s.52 of the Trade Practices Act 1974, and in the alternative, damages for breach of contract. It is asserted that certain representations were made which are set out in paragraph 15 of the amended statement of claim. It is further alleged that Woodworx Aust was induced to enter into the agreements on the faith of the representations and the representations were not true and correct, that is that they were false, and as a result Woodworx Aust has suffered loss and damage.
The other way the case appears to be put is that it is pleaded that the two statements forwarded pursuant to s.52 of the Estate Agents Act 1980 formed part of each contract. That is, the statement concerning the manufacturing business was part of the contract concerning that business. It is alleged there was a breach of the express term, namely that the financial statements were wrong in some respects, and as a result Woodworx Aust suffered damage.
I do see a problem with the trade practices claim, and that is because it is a claim which is antecedent to the execution of the agreements. It does involve considering each contract separately. Insofar as a contract was entered into by Woodworx Aust on the representations made in relation to the furniture manufacturing business, the alleged representations were made on behalf of Woodworx which of course is now in liquidation. That, in my view, does create a problem, because the guarantee in the contract is irrelevant to any claim under the Trade Practices Act. It is the inducement to enter into an agreement which allegedly constitutes the breach under s.52, and therefore there are real difficulties with the trade practices claim. On the other hand, because of the way the two contracts were entered into with a personal guarantee by Mr Goodwin, the claim for breach of a term in both contracts eventually sheets home if proven against the one defendant, namely Mr Goodwin, and the problems that I have adverted to are overcome.
The first question in relation to the trade practices claim is whether representations were made. The evidence revealed that certain financial documents were handed over to Mr Fairchild in the negotiation period. He referred those to his accountant Mr Paul Bongiorno. Mr Fairchild also had discussions with Mr Goodwin in which it is said certain oral representations were made. There is a convenient summary of the oral representations in an exhibit before the Court.
Mr Fairchild said he relied upon those discussions and documents in order to arrive at a contract price which he discussed with Mr Bongiorno, and after considering all the documents they arrived at a figure for both businesses. Mr Goodwin asked for $218,000 for both businesses, and in a letter dated 18 December 2001 Mr Fairchild offered to purchase both businesses for $170,000. When that figure was ascertained the s.52 statements had not been prepared or exchanged. This was not done until about 22 December. On the other hand, those documents were in existence at all times leading up to the execution of the agreements, and I accept Mr Fairchild’s evidence that they played their part in inducing him and his wife to execute the contracts on 16 December. There was no further discussion about the total overall price. The problem that does exist comes about because there were two businesses with two different vendors, and the result was two different contracts.
The alleged errors, according to the evidence given this day, related to the manufacturing business accounts, but in presenting the case the financial statements combined both businesses. I accept that up to 16 January 2002 certain representations were made by the vendors as to the financial position of both companies. I am also satisfied that those representations were relied upon and induced the purchasers to enter into the two contracts. Mr Bongiorno, the accountant retained by Mr Fairchild, in fact proceeded on the basis of considering both businesses and their accounts to determine the overall price. He said that his calculation proceeded on the basis of what he thought the future maintainable profits would be. He considered the trading of both businesses for the 15 months up to 30 September 2001, and came to the view that the future maintainable profits for both businesses was in the order of $39,601. He then had to consider what was the appropriate multiplier, which he considered was a range between three and five, and in the end he gave his professional opinion that the proper multiplier was 3.5 which equated to about 29 per cent return on the money in respect to both businesses. He ended up with a price of approximately $170,000 for both businesses.
The difficulty I have stated is that this assessment is based upon the combined businesses. After Woodworx Aust took over both businesses in February 2002, the accounts were amalgamated and it, as the new owner, proceeded to operate the businesses as one, and as a result the accounts thereafter were for both businesses. Mr Bongiorno produced accounts to 30 June 2002, and according to the accounts for this five month period, the returns were substantially less than had been understood were the returns for both businesses up to 30 September 2001.
It was therefore put that it must follow that the figures provided by Mr Goodwin and his accountant must have been false or wrong in some way. The mere fact that the new trading reveals figures less than the old trading, does not, in my view, establish that the trading figures for the old trading must have been wrong. It does not follow as a matter of logic that because the purchaser trades at a loss thereafter, the earlier figures for the previous trading period must be wrong. Logically that cannot be so because the businesses may have operated in a different way. I raised this at one point with Mr Fairchild but no evidence was put forward to show that the businesses before and after were operated substantially in the same way. There could be any number of reasons why, in the first five months of the new trading, the figures may be different. One must compare apples with apples. One thing that immediately comes to mind is that to compare a trading of five months with previous trading covering a longer period, is hardly a true reflection of the returns of the businesses.
To meet this contention the figures for the following financial year were placed before the Court after Mr Bongiorno had given his expert evidence, but despite those figures, I would not draw the conclusion that the mere fact that there had been a downturn in profit, even a substantial downturn in profit, demonstrates that the figures put forward by the vendors must have been wrong. There was some evidence that during the following 17 months of trading by Woodworx Aust, Mr Fairchild reduced his staff numbers. I raised this with Mr Bongiorno, and he indicated that Mr Fairchild took some steps to reduce expenses. This then raises the real issue as to whether or not the businesses were operated in substantially the same way, and unless there is evidence of that, it is not possible to draw a conclusion that the later returns reflected the true position of the business prior to the takeover.
I would not be prepared to draw that conclusion in relation to whether or not there has been a breach of s.52 in relation to representations, or a breach of any term based upon those trading statements.
In my view, the claim under the Trade Practices Act must fail.
The claim in respect to the furniture manufacturing business is against the first defendant, Woodworx, which is now in liquidation. That claim cannot proceed. Mr Bongiorno’s evidence demonstrated that if there were any errors in relation to figures, they related to that business. Any claim under s.52 in respect to the retail business on the other hand must be against Mr Goodwin. However, on the evidence, assuming I was satisfied that there was any error in the financial statements, I cannot determine whether any damage was suffered by Woodworx Aust because of any alleged errors in the financial statements produced for the retail business. So it must follow that any claim based upon s.52 of the Trade Practices Act must fail. Indeed, the thrust of Mr Bongiorno’s evidence was that if there were any errors they related to the trading statements concerning the manufacturing business, although it may be said in fairness to him, that because the accounts were amalgamated for his exercise both before and after, some may be reflected in the retail business accounts. I am not in a position to make any finding as to that. In my view the claim under s.52 must fail.
That brings me, however, to whether or not there is a claim for breach of contract. Because of the way the case has been presented, it is convenient to focus on the furniture manufacturing contract. This contract, like the other contract, includes, “statement by a vendor of a small business”. Reference to the contract identifies that as the statement made under s.52 of the Estate Agents Act 1980. That provision requires a person seeking to sell a small business to provide a statement of the financial position of the business to the prospective purchasers.
The question that immediately arises is, the statement being part of the contract, what effect does it have as a contractual promise? The difficulty I see arises because it is nothing more than a statement of the financial position of the business to be sold for a preceding period. In relation to the manufacturing business it is some two years and three months. In relation to the retail, 15 months; so what does it mean in a contractual sense?
I think it means, and it is a question of construction of the agreement, that the vendor is warranting as a term of the agreement that the figures are true and accurate. If the figures are not true and accurate, then there is a breach of that term, and if it causes damage the purchaser is entitled to receive damages.
The problems that were associated with the s.52 claim do not exist in relation to this claim because of the guarantee provision. The Court can proceed on the basis that Mr Goodwin is the party against whom any judgment would be entered if there has been a breach in respect to either contract. In other words, Woodworx, if it is in breach of its contract, would be required to pay damages. Because of the guarantee clause Mr Goodwin would be obliged to pay the damages. If there is a breach of the retail agreement Mr Goodwin would also be liable.
I think that is how one should proceed, that it is a term of each contract that the trading statement setting out the financial details of each business are true and accurate. If they are not true and accurate, there is a breach of the term.
Woodworx Aust sought to prove its claim by first of all relying upon its own trading as an indication leading to the conclusion that the figures must be wrong. As I have already stated, I am not prepared to draw that inference.
Nevertheless, the evidence did reveal that there were a number of errors in the financial statements. I refer to exhibit PL4, the trading statement for the furniture manufacturing business. It reveals that for the three month period from 1 July 2001 to 30 September 2001, the then owner derived a net profit in the order of $19,652. One of the headings in the trading statement is “Liabilities”, and the part of the statement dealing with liabilities is blank. In other words, looking at this document as representing the true financial position of the furniture manufacturing business, it is said that there were no liabilities as at 30 September 2001. As Mr Bongiorno pointed out, if there were liabilities and they were not revealed, then they would have a substantial effect upon the net profit. That being so, the liabilities would have an effect upon his future maintainable earnings calculation.
The evidence revealed that there were a number of trade creditors as at 30 September 2001, and they were of the order of $11,029.77. They involved a number of creditors. I note that one of them may be a creditor of the retail business, but for present purposes it is unnecessary to differentiate, because in the end result I am approaching this question on a combined basis, namely combining the two businesses together. Also I am considering any damages that have to be calculated on the basis of the total original price of $170,000.
In addition, it would appear that there were liabilities for superannuation. Mr Bongiorno said that they also should have been revealed, and doing the best I can from the evidence, it would appear that about $5400 was owing for superannuation at the relevant time, namely 30 September 2001. This meant that liabilities of $16,429.77 had not been revealed. If these amounts had been revealed, it would have shown that a true net profit was of the order of about $3000 for four months, giving an annual return of about $12,000 for the furniture manufacturing business. As I have said I have proceeded on the basis of looking at those figures in the manufacturing contract, even though one of the liabilities may have related to the retail business. If one looks at the retail business, the net profit for that three month period is $14,256.
What Mr Bongiorno said was that he made some adjustments from the figures that he had been given to arrive at his future maintainable earnings, which he put at $49,601. He said that if these other amounts had been revealed, he would have had grave doubts about the liquidity and financial flow of the business, which would have raised some queries as to the viability of the businesses, but on a simplistic approach he accepted that if those errors had been taken into account, then his future maintainable earnings would have been of the order of $33,172. He said if one then multiplies the figure by his original multiplier, 3.5, he was of the view that the proper purchase price was $116,102. In other words, what he is saying is that if he had been apprised of the true financial position, his future maintainable profits would have been less, and he would have advised his clients that the purchase price was of the order of $116,102.
It follows that there has been, on his evidence, an overpayment of $53,898, being the difference between $170,000 and his revised figure based upon true and accurate accounts. He said the value of the business was in the order of $116,102.
I am satisfied that Woodworx Aust is entitled to recover damages. I am proceeding on the basis of amalgamating the two contracts, because the parties proceeded on a packaged deal. They in fact fixed the values of both businesses for contractual purposes only but without any real attempt to properly value either business. Any problems relating to parties is overcome because Mr Goodwin would be liable personally for the retail business, and liable under the guarantee for breach of the furniture manufacturing business contract.
The normal principle of the measure of damages is that the injured party is to be put in the same position it would have been in if the breach had not occurred. It follows that the damages are the difference between the price paid and what the price should have been if the breach had not occurred. I accept the evidence of Mr Bongiorno. The difference in value was in the order of $53,898. In my opinion Woodworx Aust is entitled to recover that sum of money as damages against Mr Goodwin.
Conclusion
Woodworx Aust is entitled to recover the sum of $2589.90 for the failure to hand over the software disks, this being a breach of the contact; it is entitled to recover the sum of $1707.42 for plant and equipment which was not handed over in proper condition, again contrary to a term of the contract; and it is also entitled to recover the sum of $53,898 damages for breach of contract, in relation to the accuracy of the figures stated in the trading statements.
I am prepared to enter judgment for the total of those amounts, being $58,195.32.
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