Wright v Rare Import Export Co Pty Ltd
[2006] QDC 372
•21 September 2006
DISTRICT COURT OF QUEENSLAND
CITATION:
Wright & Anor v Rare Import Export Co Pty Ltd & Anor [2006] QDC 372
PARTIES:
DAVID WRIGHT and SHARON WRIGHT trading as RARE IMPORT/EXPORT CO
Plaintiff
and
RARE IMPORT EXPORT CO PTY LTD
(ACN 056 014 352)First Defendant
and
MARK CARY
Second Defendant
FILE NO/S:
No BD4380/03
DIVISION:
Civil
PROCEEDING:
Claim
ORIGINATING COURT:
District Court, Brisbane
DELIVERED ON:
21 September 2006
DELIVERED AT:
Brisbane
HEARING DATE:
7-10, 14 August 2006
JUDGE:
Robin QC DCJ
ORDER:
Judgment for plaintiffs against the defendants
CATCHWORDS:
Successful claim under s 52 of the Trade Practices Act by purchasers of a business who relied on misleading statements about it.
COUNSEL:
G O’Sullivan for the plaintiffs
P Mylne for the first defendants
SOLICITORS:
Rigby Lawyers for the plaintiffs
Sajen Legal for the first defendants
This is in form a claim by disappointed purchasers of a business for rescission of the contract under which they paid $218,000 for it, outlaying further sums for stock, stamp duty and legal costs, for which damages in addition are claimed. There is an alternative claim in damages for “$234,490 for misrepresentation and/or pursuant to section 82 of the Trade Practices Act for contravention of section 52” associated with mandatory orders for provision pursuant to the contract of access to a CD burner, a complete and uncorrupted data base, listing certificates for various items in the Australian Register of Therapeutic Goods maintained by the Therapeutic Goods Administration and “documentation to allow registration and transfer of MYOB 10.5 software program to the Plaintiffs”. Those mandatory orders were not mentioned at the trial, nor was the pleading that the defendant “knew that the MYOB 10.5 software supplied on the computer was ‘pirated’ and infringed the intellectual property rights of the owner of that software, that it had no licence for its use and that its use was unlawful”.
Although the claim to rescission seemed to have been abandoned at the beginning of the trial, it was revived again somewhat perfunctorily in closing submissions. The trial was conducted as one about damages, not only under the (Commonwealth) Trade Practices Act, but also in negligence and deceit. There were breach of contract claims pleaded underlying the prayer for mandatory orders described above. The first defendant is also known as Keenfilly Pty Ltd. There was a name change in connection with the plaintiffs’ acquiring the trading name of the business.
The Wrights had a modest record of success in small business. This began with a “fuel injection” business based on practical skills acquired by Mr Wright during air force service. Their partnership in that field operated very successfully; upon its sale, the Wrights were financially secure. Their next “business” built upon Mr Wright’s interest in natural therapies, in which he undertook a good deal of study, and teaching activity. They successfully built up a motel in Gympie which they had acquired, improving its “star” rating, but, by their choice, not to the level that required 24 hour service; Mr Wright had some experience as a motel broker.
In early December 2002, the plaintiffs’ interest was aroused by the following advertisement in a Sunshine Coast newspaper:
“Nutriceutical
GOLDMINE
This well established distribution network has an Australia wide client base and contacts worldwide. The current owner works only 20 hours per week, based from home, and the business is showing genuine nett profits in excess of $130,000 PA.
As we all know, health and well being products are booming worldwide and this business offers opportunities not normally available. Genuine buyers are urged to call now.
$250,000 + stock
(approx $35,000)
Rod Russell 0409 931 600”
Their requirement was for a business they could operate themselves, leaving plenty of time free for other interests, such as family and grandchildren, bringing in $100,000 per annum. The nature of the first defendant’s business, which was the one advertised, matched their own interests and experience. Having made arrangements by telephone for a formal meeting on 10 December 2002, the Wrights attended Mr Russell at a firm called Greenfields a day earlier, and, having signed a “confidentiality agreement”, had some financial information released to them. Some brochures about the products the business handled were handed over, and a purchase order from “Golden Glow Natural Health products (a Mayne Group Limited company)” due 2/12/02 for Power Labs Colloidal minerals in the amount of $10,575, before tax (Exhibit 3).
The financial information (Exhibit 2) was a Trading, Profit and Loss statement for the year to 30 June 2002 prepared by Kurvink Accountants. It read:
“ 2002
$ $ Sales 358,388 LESS COST OF GOODS SOLD Opening Stock 48,500 Purchases 178,144 226,644 Closing Stock 45,000 181,644 LESS DIRECT EXPENSES Freight 22,747 GROSS PROFIT FROM TRADING 153,998 EXPENDITURE Accounting Fees 2,549 Advertising 3,374 Computer Expenses 535 Electricity 194 Insurance 444 Office Supplies 320 Postage 1,360 Printing & Stationery 4,473 Repairs & Maintenance 300 Telephone 7,340 Travel & Accommodation 1,123 22,012 OPERATING PROFIT BEFORE INCOME
TAX131,986
”
This information appeared to bear out the newspaper advertisement, and was doubtless the basis of it. The case is really about adverse developments occurring late in and following the accounting period which rendered the persistence of trading at the same level impossible. One hint of a need for care (on a different basis) came from Kurvinks’ accompanying notes that certain items of expenditure had been excluded - namely, bank fees, motor vehicle expenses, depreciation, business registration, leasing expenses, interest and employment expenses.
On 10 December 2002, the Wrights turned up armed with a prepared list of topics about which they sought information. This document became Exhibit 5. I am satisfied it correctly records the essence of questions asked and answers given. At the meeting Exhibit 6, another Kurvinks document, was supplied:
“The Cary Family Foundation
Trading, Profit and Loss Statement
For the Period Ended 31st October, 2002
2003 2002 $ $ $ RARE IMPORT EXPORT CD Sales 125,033.41 358,388.30 LESS COST OF GOODS SOLD Opening Stock 45,000.00 48,500.00 Purchases 78,199.26 178,143.66 123,199.26 226,643.60 Closing Stock 47,000.00 45,000.00 Cost of Goods Sold 76,199.26 181,643.66 LESS DIRECT EXPENSES Freight 10,143.53 22,746.83 Packaging 175.32 - GROSS PROFIT FROM TRADING 38,515.30 153,997.81 EXPENDITURE Accounting Fees 854.36 2,548.84 Advertising 1,161.40 3,373.56 Computer Expenses - 535.40 Electricity 51.48 193.95 Insurance 682.42 444.38 Office Supplies - 320.00 Postage 283.26 1,360.23 Printing & Stationery 60.81 4,472.56 Repairs & Maintenance - 300.00 Telephone 3,703.97 7,339.67 Travel & Accommodation - 1,123.35 6,797.70 22,011.94 OPERATING PROFIT BEFORE INCOME TAX 31,717.60 131,985.87”
This document was mistakenly taken on both sides of the case (including by an accounting witness) to embody results for a quarter, rather than the four months actually covered. There is scope for gathering a warning from Exhibit 6 that the business was falling short of its earlier performance, but this was not discussed at the meeting; I am satisfied that the plaintiffs did not have any such understanding. Their focus was on sales, which seemed to be keeping up. The Wrights, after consideration together that evening, found themselves wildly enthusiastic and next day made an offer of $200,000 which was rejected. They accepted the first defendant’s counter offer of $218,000. It might be noted that, throughout, the second defendant, Mr Cary, represented the company. It did nothing relevant, except by him. The plaintiffs seek to saddle him with accessory liability under the Trade Practices Act. It was not contended otherwise than that he was a person involved in any contravention of s 52 within the meaning of s 75B(1), with the exception that he sought (unconvincingly) to distance himself from Kurvinks’ work and the newspaper advertisement.
A written contract was signed, about which the Wrights took no professional advice, although it names their solicitor. It was apparently prepared by Mr Russell’s firm. It is dated 13 December 2002. It called for completion on 30 January 2003, a date in the event extended to 3 February 2003, apparently to accommodate difficulties arising under No 8 of the Special Conditions, which included the following:
“1. Irrevocable Authority
To: Greg Ploetz – MA Kent & Associates
I, Mark Carey of 43 Marawa Drive, Buddina, in the State of Queensland hereby irrevocably authorise and direct you to pay to Greenfields Business & Commercial Brokers all commissions payable, namely 10% of the first $100,000; 5% thereafter, including stock (with a minimum of $6,000) plus GST upon settlement of this matter.
2. The Purchaser/s acknowledges that:
●other than those set out in this Contract no warranties or representations have been given or made by or on behalf of the Vendor/s;
●the Purchaser/s has relied solely on the Purchaser’s own judgement in entering into his Contract; and
●the terms and conditions contained in this Contract comprise the whole of the agreement between the parties.
3.The Vendor/s and the Purchaser/s acknowledge that Greenfields Business & Commercial Brokers or any employee or servant therein HAS NOT offered an opinion whether written or oral in respect to the Goods and Services Tax (GST) legislation.
4.GST ...
4.2The Vendor/s agrees that it will carry on the enterprise until the day of the supply.
5.The Purchaser/s has been made aware that Greenfields Business & Commercial Brokers and/or its Director has a direct and beneficial business relationship with Garfield Financial Services prior to executing this agreement.
6.This Contract is not subject to finance.
7.This Contract is subject to the Purchaser/s perusing the trading figures of the Business and being satisfied with such trading figures. The Purchaser/s will notify the Agent in writing of their approval or otherwise within seven (7) days from execution of this Contract by all parties. If the Agent is not notified within the said period then this Clause shall be deemed waived and satisfied.
8.This Contract is subject to and conditional upon the Purchaser/s being wholly satisfied as to the terms and conditions and other provisions of the Agreement with Power Labs International, USA, on or before the Tenth (10th) January 2003. If the Agreement is not on terms and conditions satisfactory to the Purchaser/s then the Purchaser/s by notice in writing to the Agent terminate this Contract in which event all deposit monies paid hereunder shall be refunded in full.
9.This Contract is subject to and conditional upon the Vendor/s attending to the following at the Vendor’s expense and prior to or at completion:-
●registering a change of company name with the Australian Securities Commission in respect of “Rare Import Export Co Pty Ltd”.
●registering “Rare Import Export Co” as a Business name with the Office of Consumer Affairs; and
●providing a duly completed transfer of the Business name “Rare Import Export Co”.
In the event that the above is not attended prior to or at completion, the Purchaser/s may terminate the Contract by notice in writing to the Vendor/s and all deposit monies paid will be refunded to the Purchaser/s without deduction.
10.The Purchaser/s warrants to pay the amount of Ten Thousand dollars ($10,000.00), being part deposit on the Business Sale, to the Agent’s Trust Account upon execution of this Contract. The remainder of the deposit, namely Eleven Thousand Eight Hundred dollars ($11,800.00) shall be paid to the Agent’s Trust Account upon satisfaction of Special Conditions Seven (7) and Eight (8).”
Greenfields were astute to protect their own position.
The standard conditions of contract included:
“8.1 Vendor’s Statements
The Vendor states and assures the Purchaser that except as otherwise disclosed in this Contract:
(a) the Vendor is the owner of the Business and it will not be subject to any charges, encumbrances, liens or any other form of consensual or non-consensual security interest at the date of Completion except as may be disclosed in this Contract;
(b) to the best of the Vendor’s knowledge and belief the Vendor has applied for or obtained all licences, permits, patents, certificates, consents or other approvals from any competent authority necessary for the proper carrying on of the Business and that there is not, and at the date of Completion there will not be, any subsisting contravention of any licence, permit, patent, certificate, consent or other approval obtained by the Vendor in relation to the premises for the carrying on of the Business.”
Whatever effect they may have in claims based on the general law, provisions such as Special Condition 2 are not worth the paper they are written on in proceedings based on s 52. As it happens, there is no real contest about the making of the “representations alleged to be false” for which the defendants can be held responsible. Speaking generally, the Wrights placed reliance on them, as one would expect any putative purchaser of the business to do. Mr Mylne, the defendant’s counsel, prepared the following helpful schedule (Exhibit “A”):
“REPRESENTATIONS ALLEGED TO BE FALSE
1.That the business was a well established distribution network with an Australia wide client base;
2.That the business had contacts worldwide;
3.That the business was showing genuine net profits in excess of $130,000.00 per annum;
4.That there was no new opposition to the business;
5.That the supplier relationship between the business and its main customer, Golden Glow, was going well;
6.That the business had no dead stock;
7.That the business had no slow payers;
8.That there was no change in the buying habits of large customers;
9.That major products sold by the business were:-
(i)Noni juice;
(ii)Shark cartilage;
(iii)Colloidal minerals;
(iv)Bio-Chito products;
(v)Oral Mat products.
10.That Therapeutic Goods Administration listing certificates and certificates of analysis and microbiology were available.”
As to item 9, Mr O’Sullivan, for the plaintiffs, clarified that (iii) was not alleged to be false. It is clear there was never any suggestion that the products identified in (iv) and (v) had anything like the importance of the preceding ones.
The “due diligence” process permitted by Special Condition 7 was carried out at Mr Cary’s home on 13 December 2002, which coincides with the day the contract was dated. The Wrights were able to inspect stock and the like, but the main interest was in accessing additional financial information stored in the computer. To the Wrights’ surprise, in light of information that the business had no employees, a lady called Lenore Franks of Kurvinks (now deceased), who attended to book-keeping functions, was there. The Wrights found underlying materials for the 2001-2002 accounts could not be accessed, but they could see corresponding material for the later period. Around 6.00 pm (according to the printing times on its pages) they made account inquiries for sales, freight import, stock, registration and subscriptions, bank fees and sales for the financial year to date as found in Exhibit 10; they obtained the MYOB profit and loss statement for the four months to 31 October 2002 generated by the MYOB program, which presents a gloomier picture of the business than did Exhibit 6:
“Rare Import Export Co Pty Ltd
43 Marawa Drive
BUDDINA Q 4575
Profit & Loss Statement
01/07/02 through 31/10/02
13/12/02
5:43:54 PM
_______________________________________________________________________________________________________________
Income Sales $124,105.00 Freight Collected $1,201.64 Total Income $125,306,64 Cost Of Sales Stock $78,136.96 Freight Import $15,632.76 Freight (Aust) $1,267.00 Packaging $175.32 Total Cost Of Sales $95,212.04 Gross Profit $30,094.60 Expenses Advertising $1,161.40 Accounting/Audit fees $854.00 Bank fees $704.55 Donations $279.09 Freight Paid $709.39 Insurances $682.42 Legal Fees $694.95 Postage $283.26 Registration & Subscriptions $2,194.36 Rent $365.48 Stationery & Office supplies $60.81 Telephone/Internet Account $3,416.42 Vehicle Maintenance $112.28 Vehicle Expenses $487.56 Total Expenses $12,005.97 Operating Profit $18,088.63 Other Expenses Suspense A/c $1,784.99 Bank Interest Charged $205.30 Total Other Expenses $1,990.29 Net Profit/(Loss) $16,098.34”
There is a two thirds increase in freight and something like an 80 per cent increase in expenditure taken out of gross profit from trading. The Wrights expected to be able to control such expenditure; they were surprised that some items had been taken out by Kurvinks. They did not particularly advert to the discrepancies between the MYOB generated accounts and the ones prepared by professional accountants. I would think it reasonable for more reliance to be placed on the latter; they would be taken as the product of expert professional judgment being exercised as to the way in which particular items should be treated. Exhibit 9 set no alarm bells ringing for the plaintiffs; and no-one on the defence side alerted them to any decline in the business having been experienced. Both lay and professional opinions expressed in evidence were to the effect that no reliable or useful extrapolation from a period as short as four months can be used to arrive at annual figures, or some notion of how a business is progressing in which confidence could be reposed; it would have been different if figures had been available for the twelve month period to 31 October 2002.
There was a MYOB profit and loss account for the financial year to 30 January 2002 printed out at 5:43:54 pm on 13 December 2002 (Exhibit 11):
“Rare Import Export Co Pty Ltd
43 Marawa Drive
BUDDINA Q 4575Profit & Loss Statement
01/07/01 through 30/06/0213/12/02
5:43:54 PM
_______________________________________________________________________________________________________________
Income Sales $387,960.32 Freight Collected $1,220.40 Misc. Income $1,737.00 Total Income $390,917.72 Cost Of Sales Stock $218,239.29 Freight Export $302.30 Freight Import $20,392.76 Freight (Aust) $4,470.19 Consultant Fees $155.45 Total Cost Of Sales $243,559.99 Gross Profit $147,357.73 Expenses Advertising $3,373.56 Accounting/Audit Fees $2,549.20 Bank fees $2,143.09 Business Advisory Service $454.55 Electricity A/c $193.95 Govt Debit Tax/fees $326.00 Insurances $444.38 Legal Fees $3,015.37 Postage $1,360.23 Printing $4,067.18 Repairs & Maintenance $1,363.22 Registration & Subscriptions $2,184.91 Rent $820.92 Stationery & Office supplies $582.90 Staff Amenities $48.82 Telephone/Internet Account $8,555.99 Travel & Accommodation $929.73 Vehicle Maintenance $754.72 Vehicle Expenses $2,067.11 Vehicle Hire $193.62 Superannuation $35,000 Sundry Expenses $927.28 Total Expenses $71,356.73 Operating Profit $76,001.00 Other Expenses Suspense A/c $8,402.35 Bank Interest Charged $411.28 Total Other Expenses $8,813.63 Net Profit/(Loss) $67,187.37”
Mr Wright was struck by the difference in the bottom line from Exhibit 2, which was doubtless the basis of the enticing profit figure used in the advertisement. He did not (nor, presumably, did Mrs Wright) expect that expenses would be confined to the modest list adopted by Kurvinks, and was mindful of the benchmark of $100,000 per annum. He endorsed on Exhibit 11 a record of “expenses” he would not be facing, including superannuation of $35,000 (which Mr Cary said in his evidence that the accountants had advised him to pay) and legal fees of $3,015. He could thus adjust $67,187.37 to something comfortably in excess of $100,000. He also noted “STOCK DIFF $3,500.00” which would appear to be a figure derived from Exhibit 2. It would have become patent that the fluctuations in the exchange rate between the US and the Australian dollar might affect profitability of the business significantly.
The contract became free of Special Condition 7. Completion occurred and the Wrights took over the running of the business on 3 February 2003, after other conditions had been satisfied, chiefly that Power Labs International, by Mr Partridge, indicated the acceptability of the Wrights to take over as distributors of its products outside the USA. The Wrights paid the gross instalments required against the purchase price, then the balance owing on completion and a sum of $18,664.00, agreed as the price for stock. $7,500 of that sum was paid in cash by Mr Wright to Mr Cary; each charges the other with responsibility for that notion. An attack was mounted on Mr Wright’s credit on the basis of his taking advantage of the lower figure appearing in the stocktake signed by the Wrights and “Mark Cary (vendor)” on 3 February 2005 (Exhibit 13), rather than the similarly dated purchase order signed as “paid in full” by Mr Cary, which acknowledges the full amount, when stamp duty was paid on the contract on 27 June 2003, together with a penalty of $115. Whether or not there was any basis on which he could have done so, Mr Wright did not seek to distance himself from that exercise, which may have avoided or evaded up to $150.00 or so in duty.
Mr Cary was required to stay on to provide “assistance” to the Wrights for two weeks after completion pursuant to General Condition 22.1. In the course of that exercise he revealed the deception being practised upon an important West Australian customer in relation to one of the business’s main products, shark cartilage powder. The product provided was Australian sourced, rather than a Power Labs product which would have been much more costly to get in. It appears this deception was advanced by a spurious Certificate of Analysis signed by Mr Cary but appearing to emanate from Power Labs Int. 18274 Alexandra Way, Grass Valley CA 95949 USA (Exhibit 25 is a copy made available to the plaintiffs from Western Australia). That document, said to be issued in March 2002 in respect of Lot No: BH24134 use-by-date: Dec 2003, is indistinguishable in its analysis from a similar document found by the Wrights among the effects of the business signed by Mr Partridge; this one has a date of issue of 9 July 1998 and relates to “Lot No: 247382, use-by-date Dec/00”.
It has emerged that the activity of the business in relation to shark cartilage products (powder, capsules and liquid) was largely unlawful, for non-compliance with the Commonwealth Therapeutic Goods Act 1989 by s 19D of which offences and penalties are established in relation to registered goods or listed goods unless they are dealt with on the basis of strict compliance with the Act. It is convenient to acknowledge the legislation here, prior to discussing its ultimate application to the circumstances under the heading “TGA issues” below:
“THERAPEUTIC GOODS ACT 1989 – SECT 19D
Civil penalties relating to registration or listing etc. of imported, exported, manufactured and supplied therapeutic goods
(1) A person contravenes this subsection if:
(a) the person does any of the following:
(i) imports into Australia therapeutic goods for use in humans
(ii)exports from Australia therapeutic goods for use in humans;
(iii)manufactures in Australia therapeutic goods for use in humans;
(iv)supplies to Australia therapeutic goods for use in humans; and
(b)none of the following subparagraphs applies in relation to the goods:
(i)the goods are registered goods or listed goods in relation to the person;
(ii)the goods are exempt goods;
(iii)the goods are exempt under section 18A;
(iv)the goods are the subject of an approval or authority under section 19;
(v)the goods are the subject of an approval under section 19A.
Maximum civil penalty:
(a) for an individual – 5,000 penalty units; and
(b) for a body corporate – 50,000 penalty units.
Exception if person was not the sponsor of the goods
(2)(Subsection (1) does not apply if the person proves that he or she was not the sponsor of the goods at the time of the importation, exportation, manufacture or supply, as the case may be.
Civil penalty relating to the importing of registered or listed goods
(3) A person contravenes this subsection if:
(a)therapeutic goods are registered or listed in relation to the person (other than listed goods that are therapeutic devices); and
(b)the person imports the goods into Australia; and
(c)the registration number or listing number of the goods is not set out on the label of the goods in the prescribed manner before the goods are supplied in Australia.
Maximum civil penalty:
(a) for an individual – 200 penalty units; and
(b) for a body corporate – 2,000 penalty units
Civil penalty relating to the supply of registered or listed goods
(4) A person contravenes this subsection if:
(a)therapeutic goods are registered or listed in relation to the person (other than listed goods that are therapeutic devices); and
(b)the person supplies the goods in Australia; and
(c)the registration number or listing number of the goods is not set out on the label of the goods in the prescribed manner.
Maximum civil penalty:
(a)for an individual – 200 penalty units; and
(b)for a body corporate – 2,000 penalty units
Application of Customs Act 1901
(5) Where:
(a)the importation or exportation of goods contravenes subsection (1); and
(b)the Secretary notifies the Chief Executive Officer of Customs in writing that the Secretary wishes the Customs Act 1901 to apply to that importation or exportation;
the Customs Act 1901 has effect as if the goods included in that importation or exportation were goods described as forfeited to the Crown under section 229 of that Act because they were:
(c) prohibited imports within the meaning of that Act; or
(d) prohibited exports within the meaning of that Act;
as the case requires.
Section 3 supplies the following definitions:
“‘sponsor’, in relation to therapeutic goods, means:
(a)a person who exports, or arranges the exportation of, the goods from Australia; or
(b)a person who imports, or arranges the importation of, the goods into Australia; or
(c)a person who, in Australia, manufactures the goods, or arranges for another person to manufacture the goods, for supply (whether in Australia or elsewhere);
but does not include a person who:
(d) exports, imports or manufactures the goods; or
(e)arranges the exportation, importation or manufacture of the goods;
on behalf of another person who, at the time of the exportation, importation, manufacture or arrangements, is a resident of, or is carrying on business in, Australia(155-156).
...
therapeutic goods means goods:
(a)that are represented in any way to be, or that are, whether because of the way in which the goods are presented or for any other reason, likely to be taken to be:
(i)for therapeutic use; or
(ii)for use as an ingredient or component in the manufacture of therapeutic goods; or
(iii)for use as a container or part of a container for goods of the kind referred to in subparagraph (i) or (ii); or
(b)included in a class of goods the sole or principal use of which is, or ordinarily is, a therapeutic use or a use of a kind referred to in subparagraph (a)(ii) or (iii);
and includes medical devices and goods declared to be therapeutic goods under an order in force under section 7, but does not include:
(c)goods declared not to be therapeutic goods under an order in force under section 7; or
(d)goods in respect of which such an order is in force, being an order that declares the goods not to be therapeutic goods when used, advertised, or presented for supply in the way specified in the order where the goods are used, advertised or presented for supply in that way; or
(e)goods (other than goods declared to be therapeutic goods under an order in force under section 7) for which there is a prescribed standard in the Australia New Zealand Food Standards Code as defined in subsection 3(1) of the Australia New Zealand Food Authority Act 1991; or
(f)goods which, in Australia or New Zealand, have a tradition of use as foods for humans in the form in which they are presented.”
Any listing or registration incorporates strict requirements as to the source of product and the packaging of it for purposes of sale, which is restricted to identified persons or entities. The packaging and labelling which Mr Cary was doing at home was not authorised in any way, and productive of illegality as the business was carried on. It is clear from material in Exhibit 23 which relates to a product described as liquid Chitosan (which may be taken to come under the umbrella Bio-Chito) that, by no later than August 2002, Mr Cary would have had a good idea of the role of the Therapeutic Drugs Administration and the importance of complying with the regime supervised by it. He was heedless of his (or the first defendant’s) obligation under General Condition 8.1(b) in allowing a TGA listing for shark cartilage capsules to expire in January 2003, that is, before completion. The listing had been arranged by and was apparently in the name of one Mickan, who sold the business to the Cary interests in May or June 2001. Mr Cary said at page 320:
“I never received a bill to pay it. I had made payments on shark cartilage capsules, but I had moved address. I kept the payments up on shark cartilage powder.”
He was cross-examined about this at 327 ff. He declined to accept Mr O’Sullivan’s suggestions (both of which I think are legally correct) that since he was not the sponsor of that product or in any formal relationship with the TGA in relation to it, he was never lawfully entitled to sell the shark cartilage products. He did accept in cross-examination that, given the manufacturing and packing processes actually engaged in, he was not entitled to sell shark cartilage powder. The Wrights, who were not prepared to deceive customers as to the origin of products (the justified and proper stance, of course), took steps to regularise that aspect of the business with the TGA which in the end could not be availed of, because the approved manufacturers, etc. insisted on minimum production runs which exceeded the volumes the Wrights were likely to achieve (at least at times relevant to this claim).
Circumstances might alter cases, but it appeared to be accepted here by the accounting experts on both sides, and I think by Mr Mylne that “maintainable earnings” of a business would not extend to earnings dependent on unlawful activity. One wonders how the impact of unlawful sales to minors of alcohol or tobacco products would be treated.
Noni juice
It was not the shark cartilage products problems, but others in relation to “Noni juice”, a plant extract thought to offer health benefits emanating from Pacific Islands, that alerted the Wrights within weeks to their purchase of the business being calamitous. The problem was that the biggest customer for that product had introduced its own competing product sourced much more cheaply from the Cook Islands (the Power Labs product was Hawaiian). What proved to be its last order came in August 2002.
Solicitors sent Mr Cary the following email on 11 March 2003:
“We advise that we act on behalf of David and Sharon Wright who previously entered into a contract and subsequently settled that contract with you in respect of the sale of the business known as Power Labs International and Rare Import Export Co.
We are instructed by our client that prior to them entering into this contract there was a meeting held in the offices of Greenfields Business Brokers on the 10 December, 2002. It is our client’s intention (sic) at this meeting you withheld information and material that would effect (sic) any decision which a prospective purchaser would make so far as purchasing the business is concerned. It is our client’s intention that you also gave false and misleading information that did effect their decision and did effect the price paid for the business. The questions that our client asked of you at this meeting were prepared by our client prior to that meeting and your answers to those questions became the basis of their decision to purchase or not and if they did purchase the price that they were going to purchase at.
Your answers in relation to the sale of Noni Juice were misleading and you failed to provide the information to our client in relation to same, which information you would have been well aware of. Our client’s subsequent enquiries and investigations into the situation particularly with Golden Glow clearly indicate to them that you were aware but failed to advise our client of the Golden Glow situation so far as them becoming a competitor rather than a buyer of Noni Juice from the subject business. The issue of Noni Juice also involves a situation of “dead stock” valued in excess of $8,000.00. At the interview you clearly stated there would be no “dead stock”. We also are instructed that after our client’s had taken over the business you were asked for a list of distributors and what they purchased. Golden Glow was included in this list as a customer and a customer who purchase large quantities of Noni Juice.
We are also instructed that when you were asked if there were any changes in the buying pattern of any of your major customers you replied “no all are going well”. This was certainly not the case even at that time as the records show to our client now that the buying pattern of the customers in relation to Noni Juice had changed and was continuing to change dramatically for the worst.
Your pattern of purchasing Noni Juice would have changed also but again you did not reveal any of that information but rather claiming that there was no new competition as well as what we have previously stated that there were no changes in the buying patterns of any major outlets. You were well aware that Golden Glow had entered the market place with a Noni Juice product of their own but failed to advise our client of this. You asserted at the meeting in December that if the business continued to be run in the manner that it was being run at as at that time is for approximately 20 hours per week with no change in operating style that the profits for 2001/2002 would continue in the future. This simply has not occurred even though our clients have continued to run the business as you had if not even spending more time in it.
After the contract became unconditional we are instructed you indicated that there may be some problems with the market for Noni Juice but not being specific about that and it was only after our client gained access to the records and to the customers that they became aware of the significance of the situation.
We are also instructed that the customer and supplier data base which was to be supplied as part of the contract was incomplete and remains incomplete despite you promising to provide them with a complete data base.
The CD burner in the computer supplied is also inoperable as it is password protected. Again requests have been made of you to provide this password and again it has not been provided.
The software require to support the necessary accounting program (MYOB 10.5) has not been supplied. Arrangements to transfer the rights regarding all software have not been made.
In these circumstances our client, unless you are prepared to take the business back over and repay to our client all monies that would return our client’s to the same financial position that they were in on the 3 February, 2003, as if they had not purchased the business, will be taking further action in relation to this matter.
We advise that our client will be taking further action unless this is attended to within 7 days of the date hereof.”
The evidence bears out the factual assertions in that letter, subject to the qualification that Mr Cary’s misleading statements may not have been appreciated by him as wrong. The “problems” referred to in the sixth paragraph of the letter, Mr Cary had suggested, would prove temporary, because the Golden Glow product was inferior. It seems that Mr Wright’s conclusion, having taken advantage of an introductory visit with Mr Cary to Golden Glow’s premises to purchase a bottle for sampling, was that it was hard to pick any difference. Mr Grasso, representing a distributor of health food products which was a substantial purchaser of Power Labs Noni juice, gave evidence by telephone link to the effect of his complaining to Mr Cary “mid 2002” about a cheaper (but “identical”) Golden Glow product with which the Power Labs product could not compete: transcript p 274. In September and November 2002, according to Mr Partridge’s affidavit, Mr Cary complained to him about the new competition in the Australian market; he says he expressed the view that his product, a “freeze dried concentrated Noni juice” would be superior; he suggested the imported price might be reduced if 55 gallon drums rather than bottles were used.
There were other communications which the court was not permitted to see, specifically one said to include a without prejudice offer. The plaintiffs’ stand was put beyond doubt in a later communication from their (then) solicitors:
“25 June, 2003
The Director
Keenfilly Pty Ltd ACN 056 014 352
C/- 43 Marawa Drive
BUDDINA QLD 4575Dear Sir or Madam
RE: WRIGHT & RARE IMPORT EXPORT CO PTY LTD
We refer to the above matter and to our previous correspondence of the 11 March, 2003, and advise as follows:
1.That the contract dated the 13 December, 2002, has been rescinded.
2.Our client’s require the repayment of the purchase price of $218,000.00 together with the reimbursement of stamp duty of $6,667.50 and legal expenses of $847.00 associated with the sale;
3.Our client’s also reserve their rights in respect of claiming further damages arising out of this matter.
Yours faithfully
M A KENT & Associates”
The legal costs are part of the claim for damages, as is “the stamp duty paid on the contract in the sum of $6,640”. That last claim seems inconsistent with the $6,664 imprinted on Exhibit 8. It is difficult to see why the defendants should have to pay the $115 penalty. The plaintiffs cannot be charged with delay in rescinding. Matters have so developed that they have been left operating the business – at a very modest level, at least in the early period, on figures supplied by their accounting expert, Mr Gunn, which are all we have.
Another document which the court should note in fairness to Mr Cary is the following, apparently faxed to him on 14 May 2002:
“Hello Mark,
Regarding the phone conversation in which you were inquiring, as to approximate quantities, of stock we may be ordering between now (May 14 2002) and November 01 2002.
Keeping in mind, that these figures are not a Purchase Order, and are only an estimate of what we may sell. It is likely that we might sell more than our forecast, or the products could move a lot slower than we expect.
Power Labs Noni Juice
Our forecast is to sell approximately 47 a week.
Power Labs Colloidal Minerals
Our forecast is to sell approximately 35 a week.
Remembering that this is not a Purchase Order and, we may sell more or less than expected I hope these figures will help you out.
Kind Regards
Cindy Russoniello
Purchasing Officer
Golden Glow”
The evidence showed that Golden Glow published autumn/winter catalogues valid for six months from 1 May and spring/summer catalogues valid from 1 November in each year. At that time, there were separate catalogues for Golden Glow’s own products (published as Golden Glow Natural Health Products) and for products sourced from elsewhere (published as Healthy Home catalogue). The Wrights were shown the May 2002 Healthy Home catalogue before they offered to purchase the business. Page 60 is a near full page promotion of Power Labs Noni juice at $45 for a 946 ml bottle. In the November 2002 catalogue corresponding, the same product at the same price was given a sixth of a page. The corresponding Golden Glow Natural Health products home shopping catalogue offered a litre bottle of Golden Glow’s own Noni juice for $35, with a discount for quantity. There is nothing significant in Mr Cary’s having made the inquiry he did at the time of that conversation. It would be useful for him to have information about the likely volume of Golden Glow’s requirements. One should not speculate that he feared, at that time, that the requirements might fall. Nor may one speculate that he was privy at any time relevant to this claim to the contents of Golden Glow’s catalogue relating to its in-house products. The one valid from 1 November 2002 (Exhibit 14) not only lists Noni juice with unusual prominence (featuring a picture) in its alphabetical order at page 102, but contains another full page promotion (one of only a handful) at the end of the alphabetical list, immediately before the Glossary of Terms and Catalogue Index. The text is:
“Introducing Golden Glow Organic Noni Juice.
Due to the popularity of this product, Golden GlowÒ brings you our own organic Noni Juice. Sourced from the Polynesian islands where Noni grows wild, Golden Glow Noni juice is 100% juice with no additives, preservatives, colours, sugars or flavours added.
Traditionally, Noni was used by Polynesian people for a wide variety of ailments, including conditions that affected the respiratory, digestive, nervous and immune systems. It was also used to treat joint, skin and skeletal problems and valued for its nutritional properties.
Golden GlowÒ brings to you Noni Juice of excellent quality at a competitive price. Try our Noni Juice today!
See page 102 for more information.”
While the court should presume Mr Carey ignorant of the contents of that catalogue, they are part of the evidence establishing that for s 52 purposes, what was said about the Noni juice market was misleading, objectively wrong. The prospects for the Power Labs product, uncompetitive in respect of price, were bleak. In the interim, and before the Wrights became bound to the contract, Mr Cary had inklings from other sources of harder times ahead. Apart from what is revealed by the evidence of Mr Partridge and Mr Grasso, there’s the evidence of Ms Russoniello. I accept her evidence (pp 203-04) that before Exhibit 14 came out, she let Mr Cary know:
“...that when we introduced products into the Healthy Home catalogue based on the sales of those products, the marketing team then made a decision on whether to introduce a Golden Glow branded product of that particular one. So I then let him know that we would be discontinuing the noni juice because the sales had been going really well for it and they made that decision to introduce the Golden Glow noni juice.”
The meaning of the above is that the Power Labs Noni juice was such a successful product for Golden Glow that they determined to produce their own version in the expectation that it would be accepted by customers (as indeed happened – sales of the Power Labs product dwindled to almost nothing by February 2003) and that the externally produced product would be discontinued. Ms Moxon had told the court:
“As we would expect when we bring our own product in under our brand name, our customers often change so that the sales of the alternative would drop off, and so we would just keep it there until we converted our customers over to Golden Glow’s brand or until we run the stock out of the alternative product we had.”
(Page 197).
In the circumstances, it is unlikely that Mr Cary is correct in his evidence at 319-20 that Ms Russoniello rang him around March 2002 to advise that Golden Glow would be obtaining another Noni juice and that he:
“asked her, ‘Do you think that will affect my sales’ and she said, ‘We don’t expect it to.’”
This was not put to Mr Cary. I do accept his evidence at 345 that in a later conversation he was asked:
“...to hold the price for the November catalogue when she told me it was going in the November catalogue, which I had to guarantee Golden Glow with colloidal minerals and noni juice, because when they put product in their catalogue you have to guarantee your price for the length of the catalogue.”
Exhibit 34 summarised sales of Power Labs Noni juice to Golden Glow:
“October 2001 $14,896
December 2001 $ 7,728
February 2002 $ 9,072
March 2002 $ 5,600
April 2002 $ 4,368
June 2002 $10,752
$53,416
September 2002 $11,424”
- the above being dates of sales, which might (and did in the case of the last) refer to orders placed in the preceding month. It is now known that Golden Glow disappeared as a buyer of that particular product. It is possible to massage such figures to indicate different conclusions. It is not possible with confidence to ascribe to Mr Cary at the time of his making the representations complained of in December 2002 that he knew, or should have known, that there would be no more business with Golden Glow in respect of Noni juice.
It is not possible in this respect, or in any other (excepting the deceit practised on Mr Chatterton in Western Australia in relation to shark cartilage products) to make a finding that Mr Cary was dishonest. It is not necessary, in the final analysis, to consider whether there was any negligent misrepresentation. In respect of Noni juice, for purposes of s 52, highly misleading statements were made for purposes of representations 4 and 5, and also 8. I am satisfied that the plaintiffs relied on those representations, and to their detriment, in that the Noni juice aspect of the business for which they paid good money was non-existent, for practical purposes.
The defendants can hardly complain if the court approaches the representations in the way contended for by Mr Mylne (p 404):
“The only decisions required are whether the representation was or was not misleading and whether the plaintiffs suffered a loss by the conduct in breach of section 52.”
Consideration of the “representations alleged to be false”
Mr Mylne’s approach was to deal with the problematic representations separately. Thus, in respect of representation 3 (see [10] above), based on the newspaper advertisement, he contends:
(a)that on the basis of what was said in Yorke v Lucas (1985) 158 CLR 661 (especially at 671) accessory liability cannot be sheeted home to Mr Cary in light of his evidence that he had no knowledge and relied upon accounting advice (“he didn't have any knowledge of the essential matters that made up the contravention”) – p 405.
(b)so far as concerns the first defendant (Mr Cary, too, if (a) does not save him) in relation to the newspaper ad (and, indeed, Exhibit 2), the first defendant, to quote the High Court in Yorke v Lucas at 666, purported “to do no more than pass on information supplied by another [Kurvinks ... and therefore would not necessarily] be engaging in misleading or deceptive conduct if the information turns out to be false.”
(c)in any event, any representation contained in those documents was overtaken by events, in particular the provision of updated material from Kurvinks and the MYOB print-outs (the plaintiffs rely on this later material to establish the falsity of Exhibits 1 and 2, whereas the defendants rely on it to cut back their effect).
(d)in respect of causation of any loss, for purposes of s 82, the plaintiffs fail on causation, Mr Mylne submitting at 406-07:
“The representation doesn’t have to be the sole cause of the loss or damage, it has to be a cause applying the general principles contained in March v. Stramare [1991] 65 ALJR 334 and 337. Relevantly though, in Ricochet Pty Ltd v Equity Trustees Executor and Agency Company Ltd, 1993, 113 Australian Law Reports, 30, at page 36, the Full Federal Court referred to the fact that:
‘…it may be that on the balance of probabilities a party was induced to make a decision by a combination of factors including the misrepresentation. Assuming a non-trivial contribution to the causative process by the misrepresentation, then it may be actionable. Ultimately, the ‘causative threshold’ beyond which liability attaches to a misrepresentation which is one of number of factors inducing a decision that produces loss will be a question of judgment.’
There’s a reference then to March, but the mere possibility that a misrepresentation might have induced a cause of action by the representee can never in itself attach liability under section 82.
Kabwand v National Australia Bank [1989], Australian Trade Practices Reports 40-950 is further authority for the fact that the conduct need not be the sole inducement, however, it states there that for present purposes it was sufficient to say that a person claiming damages must show either that he has been induced to do something or refrained from doing something which gives rise to damages or has been influenced to do or refrained from doing something giving rise to damages the conduct contravened in section 52.
Now, the next authority is an important one, in my submission and that is Elders Trustee and Executor Co Ltd v Reeves (1987) 78 ALR 193. There Gummow J when he was on the Federal Court said this in respect of a section 52 case:
‘…the conduct relied upon by the applicant need not be the only cause of the loss or damage of which complaint is made. That does not necessarily mean that a party is to be fixed with liability under section 82 for loss or damage suffered by his conduct where the chain of causation has been broken or dislocated, or whether the real, essential, substantial, direct or appreciable or effective cause lies elsewhere, particularly in a cause or causes arising from the acts or omissions of the applicant himself (243)’”
The difficulties attending the exercise of working out what representees might have done in other circumstances, particularly when the focus is limited to one only of a series of representations, appears in the following couple of pages extracted from the cross-examination of Mr Wright:
“MR MYLNE: I thought you agreed it was around $100,000?-- I made sure it was at least $100,000, is what I said.
At least $100,000?-- At least.
A little bit over and you would have been happy with that?-- No, I was just making sure it was that figure, plus more. It was late in the day-----
How much more would have been – would you have been satisfied with?-- I expected that the representations would have been correct that we – the ad in the paper, what Mr Cary had been telling us-----
I just want to know what you state that you relied upon. So is it correct to say that you would have not entered into the contract had the net profits been less than $130,000?-- What I said was-----
It’s a straightforward question?-- It’s not a straightforward question at all, so far as I’m concerned. I’m a very trustworthy person. I trusted the recommendations. I trusted the people that spoke to me. I had complete trust in everyone, like a bloody fool.
Alright?-- My whole background and my whole life has dealt with honest people, right through the service and as a boy from the bush.
And you go and understate what you pay for stock in trade on a contract to the Duties office, and you’re an honest fellow?-- That’s a statement that is very defamatory.
You’re an honest man, are you?-- Yes.
I’ll ask you the question again. If there’s anything about it you don’t understand, just tell me. I don’t want to waste too much more time. Is it correct to say that had you known the net profits of the business were less than $130,000 at the time you entered the contract, you would not have executed the contract?-- No, because I trusted that the special purpose accounts did what they said.
So?-- But look-----
I assume from that – you’ve answered the question. I assume from that, then, if the true net profit of the business was not $130,000, but $120,000 and had you known that prior to signing the contract, you would not have signed it?-- I would not have signed the contract.
Is that correct?-- I would not have signed the contract, no.
Okay. Thanks. Because you had by that stage – by the evening of the 13th, you had a plethora of information which indicated to you that the business was unlikely to be earning $130,000 in the 2003 year, didn’t you?-- No. I had sales figures that were on track to what it did the year before or even better.
Let’s just go to Exhibit 11, would you, please?-- Yes.
Now, that’s a profit and loss statement from 1 July 1 to 30 June ’02, correct?-- Yes.
And that demonstrates a net profit of $67,000, correct?-- Yes.
Now, you say in defence of your position that superannuation ought to be added on to that?-- Yes.
So that gets it to about what, $102,000?-- Yes.
What else do you say ought to be accounted for there to get it anywhere near the ballpark of $130,000?-- He has got his expense account, his bank interests that were charged. Sorry, accounting fees, I knew mine wouldn't be nearly that much. I didn't think I would need a business advisory service. We wouldn't have been taking electricity off. Insurances, I don’t know. But his legal fees certainly would have been added back on.
Gets you to about $110,000 at the most, wouldn't it?-- You are making these – yeah.
Would that be right?-- Yeah. Travel and accommodation he has another grand or more there.
All that would get you to about $110,000 net profit ringing wet, wouldn't it?-- Yeah. But as I say, it was – righteo. Fine. You’ve made your point.
Do you agree with that proposition with-----?-- Without having a calculator in front of me, I guess I have to.
You don’t have to do anything. Do you agree with the proposition that I’ve just put to you, that all of the matters I’ve just put to you would bring the net profit figure to about $110,000 ringing wet?-- I guess you’re right.
Alright. Now can you go to Exhibit 9, and that was also given to you on the 13th?-- Yes.
By Mrs Franks. And that shows pretty marked deterioration in any event, doesn't it, from the document Exhibit 11?-- Well, I think we would have to compare that more to the special purposes accounts, but once again the sales – the total income was well on track.”
Mr Wright’s point was well made. The most up-to-date summary of sales was provided by the defendants as part of exhibit 6:
“SALES TURNOVER FOR THIS YEAR
JULY $21,419
AUGUST $26,894
SEPT $65,124
OCTOBER $11,867
NOV $25,914
ABN NUMBER & BUSINESS 056 014 352
AVERAGE SPEND PER MONTH FROM DISTRIBUTORS APPROX $12,000 TO $15,000.
RARE IMPORT EXPORT IS THE COMPANY NAME & IS REGISTERED POWER LABS INTERNATIONAL IS NOT REGISTERED”
A note in Mrs Wright’s handwriting records the names of the five distributors identified by Mr Cary on 10 December 2002 and the results of some calculation based on averaging the average, $2704.80 per month.
I do not accept Mr Mylne’s contentions (a) and (b) above. The first defendant, meaning Mr Cary, for all practical purposes, provided the figures which Kurvinks refined. They were plainly happy to use Kurvinks’ work to promote the sale and, in my opinion, cannot distance themselves by shifting responsibility to the accountants, Mr Russell, or anyone else. Contention (c) is sound, and the evidence quoted extensively above indicates that, in relation to representation 3, (d) is, too.
That said, representation 3 remains part of the context in which other representations were made. Although further information was supplied, notably during the due diligence exercise, it was left to the plaintiffs to work out its implications, no suggestion being made to them that $130,000.00 may have exceeded what was achievable in later circumstances. The defence case is that this should have been obvious to the plaintiffs. It would seem to follow that it was obvious to the defendants.
The clear conclusion to which the court is driven is that false or misleading representations were made which considered in combination induced the plaintiffs to purchase the business (which they would not have done otherwise) to their detriment. Dealing with them, as summarised in Exhibit “A” in turn:
1.That the business was a well established distribution network with an Australia wide client base. That representation was true.
2.That the business had contacts worldwide. The contacts appear to have been limited to Power Labs International and to a Singapore based customer, Best World International PTE Ltd which purchased Noni capsules. There was a huge order for 300,000 dated September 2002 for just under $30,000. I note (but place no reliance on it, given the state of the pleadings) that Mr Cary made much of this order as one generating a huge profit for minimal work. He omitted to advise that the apparent easy profit had to be shared with Mr Partridge, whose company was the supplier. When the Wrights chased up Best World, it or its principal had become a Power Labs International distributor and had no further interest in acquiring anything through Rare Import Export Co. It is not possible to find this representation was false or misleading.
3.That the business was showing genuine net profits in excess of $130,000.00 per annum. The court places no reliance on this representation individually. However, even if it was correct (which seems doubtful, given the expenses taken out) as a description of trading to 30 June 2002, it could not have been made consistently with s 52 when it was made in December 2002. I do not take the plaintiffs to be saying that they relied greatly upon this representation. Their case has always been that they did not rely on the “bottom line”, but on the top line representing gross sales. Although Mr Gunn identified a slight overstatement in that regard in exhibit 2, because some sales were allocated to the wrong year, nothing of substance about gross sales indicated was misleading.
4.That there was no new opposition to the business; and
5.That the supplier relationship between the business and its main customer, Golden Glow, was going well. Those were false or misleading in respect of Noni juice, which accounted for something like a third of the business, and particularly so in respect of 4. I find that Mr Cary did nothing to disabuse the plaintiffs of their justified impression on the basis of what he told them until after the contract had become free of Special Condition 7. It was not possible for him to rationalise away his clear statements by attributing some special meaning to them.
6.That the business had no dead stock; and
7.That the business had no slow payers. I think these are matters for analysis about which judgments may vary. Mr Wright had his own definition of dead stock, in terms of how long it took to move stock. The slow-moving stock said to falsify the representation on one view did not achieve that status until Golden Glow’s abandonment of Noni juice was made clear, or until TGA related problems in respect to shark cartilage products emerged. One of the distributors might fairly have been categorised a slow payer, although it seems that, eventually, the money would come in. I find it hard to believe that fuller information about these matters would have dissuaded the plaintiffs, whose enthusiasm for the business was enormous, from going ahead. It is more likely that they would have overlooked them, or sought to exclude “dead stock” from what they purchased, unless some discount or other benefit was provided.
8.That there was no change in the buying habits of large customers. This is a significant matter, closely associated with 4 and 5, rather than being important on its own. The pattern of large orders coming from customers months apart made it difficult to reach conclusions at any particular point in time as to whether there was some change. To an extent, the plaintiffs could have performed their own analysis for the period from 1 July 2002 during the due diligence process. Perhaps Mr Cary should have been more circumspect about making the representation. It is difficult to excuse his circumspection about Noni juice.
9.That major products sold by the business were:-
(i) Noni juice;
(ii) Shark cartilage;
(iii) Colloidal minerals;
(iv) Bio-Chito products;
(v) Oral Mat products.
Bio-Chito and Oral-Mat products were mentioned as either significant nor promising products for the business over and above the other three, which were clearly “major” ones, as the plaintiffs gathered from the outset. They make no complaint about (iii). As to the others, the charge made is that the market for them was disappearing or not lawful, as the case may be. As a description of the past experience of the business, the representations were true. The problems the defendants face really arise in relation to other representations bearing on those products.
10That Therapeutic Goods Administration listing certificates and certificates of analysis and microbiology were available.
TGA Issues
There may be some problem about the plaintiffs’ chronology, given that Mr Wright (according to Mrs Wright, who presumably spoke for herself as well) knew nothing about the Therapeutic Goods Administration. I am satisfied that they turned up at Mr Russell’s office on 10 December 2002 with a list of subjects for inquiry, as per Exhibit 5, including “TGA”. It is perhaps not so clear that what follows (“certificates of analysis, microbiology etc.”) was written out in advance, although the writing corresponds with that of the topic, rather than the annotation at the end “GMP all OK”. GMP stands for Good Manufacturing Practice, a concept with which Mr Wright asserted familiarity. Exhibit 7 is a reproduction of a Yellow Pages entry, self-evidently not placed by Mr Cary when one looks at the e-mail address given:
“WHOLESALERS – IMPORTERS
- EXPORTERS &
CONTRACT MANUFACTURERS· Shark
SHARK Cartilage
T E C H (Listed with T.G.A.)
· Lip Ceuticals
· Noni Juice
· Colloidal Minerals
· Sporting Supplements
suppliers to industry
of raw materials
- Bulk orders welcome –
RARE IMPORT EXPORT CO. PTY. LTD.
PACIFIC RIM NUTRITION
Ph: 5493 5927
638 Nicklin Way, Wurtulla
Fax: 5493 8784Email: [email protected]”
Mr Wright said he had been given this by Mr Russell on 10 December 2002. Unless he had seen the entry already, it is difficult to understand why he would have been asking about the TGA, as Mr Cary admits happened (T 312-13). His cross-examination included the following at 328-29:
“MR O’SULLIVAN: I accept that you bought the business from him – but had you no formal relationship with him so far as the TGA is concerned, I suggest to you that you were in fact not lawfully entitled to sell shark cartilage capsules at any stage?-- I don’t agree with that.
Okay. Now, I suggest, and do you accept, that you were not, in fact, entitled to sell the shark cartilage powder in the manner in which it had been manufactured and produced as you were during the course of the business; do you accept that?-- Yes, I do.
Would you then accept, I suggest to you, that whether intentionally or otherwise it was misleading for you to tell the Wrights, which you admit you did, that all of the TGA listing certificates and Certificates of Analysis and microbiology for the business were available?-- Yes.
You accept that was in fact misleading?-- Do I accept it was misleading?
Yes, in fact misleading, whether intentionally or otherwise, for you to say that to them?-- Could you repeat that again, please?
Do you accept that it was in fact misleading in December of 2002 for you to tell the Wrights, as you admit you did, that all of the TGA listing certificates and Certificates of Analysis, microbiology, et cetera, were available?-- The microbiology was available, which I gave to them. I also gave them the TGA listing numbers to the best of my knowledge, they had that in a brochure, and I also advised them to contact the TGA.
Well, that wasn’t the question I asked you, Mr Cary. What I asked you was whether or not you accept that it was in fact misleading to tell the Wrights that all of the TGA listing certificates and Certificates of Analysis were available?-- They were available.
I see. So you don’t accept that that was misleading to tell them that?-- It wasn’t because I gave them to them.
It wasn’t misleading to fail to tell them that they couldn't use them?-- At that stage I didn't know they couldn't use them.
All right. But do you accept that it was in fact misleading not to tell them that, whether it was intentionally or otherwise?-- In hindsight now, yes.
You accept that?—In hindsight. What I know now, yes, so it was unintentionally.
All right. And you would expect it to be important, wouldn't you, for a purchaser to know whether or not they were legally entitled to sell products of the business, particularly major products of the business?-- Yes.
Okay. And it would be fair to stay that it wouldn't be reasonable to expect a purchaser to pay for part of the business that was not being conducted in accordance with the law?-- Yes, I would have to accept that.”
For Trade Practices Act purposes, what was intended is immaterial. The inference is readily drawn that Mr Cary allowed himself to make statements about important subjects as to which he lacked sufficient, or any familiarity. It rather appears that he relied on the Mickans to have set things up properly, that he took no trouble to get himself or the first defendant recognised by the TGA. The January account, which he failed to pay, was presumably addressed to the Mickans at the address shown in the Yellow Pages, which Mr Cary abandoned at some stage, relocating the business to his residence solely. Shark cartilage products (when presented in the form of capsules, pills, tablets or powder, other than as a wholesale product in powdered form for use as an ingredient in food) are ... “therapeutic goods” for purposes of the Therapeutic Goods Act by reason of an order of 30 March 1999, to be found in the Commonwealth Of Australia Gazette, No. GN 15, 14 April 1999, a copy of which is Exhibit 31. It seems unnecessary to rehearse in detail the evidence given on affidavit and by telephone link by Michael Wiseman, an officer of the TGA. It has no record of either of the defendants as a sponsor, or related to a sponsor of any shark cartilage product (or Noni capsules), except that the first defendant in the Mickan era (in light of Exhibit 7 and the evidence about it) got listed in relation to shark cartilage powder on 24 May 2001 on the basis of a company called ConsulChem being the manufacturer licensed to undertake chemistry and microbiology testing, and Cottee Pharmaceuticals (Aust) Pty Ltd and/or Andresen Fisheries Pty Ltd and the manufacturers being licensed to manufacture in dosage form, package and release the product for supply. Shark cartilage products account for about a third of the business. The court readily reaches the conclusion that the plaintiffs relied on that part of the business being conducted lawfully; they would not have made the contract they did had the true situation, as outlined by Mr Wiseman, been made known to them.
What are the plaintiffs’ damages?
The claim succeeds. It is too late for rescission, which, in any event, the plaintiffs do not seem to want any more, although I accept that is what they wanted in the first half of 2003. In cross-examining Mr Gunn, Mr Mylne sought to extract concessions that damages ought to be assessed on the basis of the difference between the value of a business if a representation had been factual and its value on the basis of the truth of the matter to which the representation was relevant. Presumably, there might be a series of reductions of the agreed price (which may never have been a sensible one). In the end, he did not submit that damages under s 82 should be assessed on that basis.
The established practice is to compare the position of successful plaintiffs with the position they would have enjoyed had s 52 not been infringed, meaning, here, had they not agreed to purchase the business for $218,000 and to purchase its stock. In many cases (as here) such a plaintiff remains proprietor of the disappointing business, which may have some value. He or she would ordinarily have to bring that value into account, rather than having the entire purchase price treated as lost: the case is approached as one of X dollars paid for something worth X minus Y dollars. This is the standard approach, although the basis of it is that, but for the conduct infringing s 52, the business would not have been purchased at all. In principle, the successful plaintiff establishes what he or she would have done with the resources applied in the purchase had those resources not been applied to it. Sometimes much may depend on the date as of which damages are calculated. A business worth much less than its purchase price on settlement (by reference to which damages might be calculated) may prosper thereafter, bringing the disappointed purchaser a windfall, no doubt on the basis of the purchaser’s own efforts or fortuitous later developments. Mr Gunn’s evidence shows that in the first year or so the Wrights were able to earn next to nothing from the business. It is unknown how the energies they expended upon it compared with the efforts Mr Cary made. It is unknown whether more recently the business has prospered or not. It was common ground in this case that damages ought to be calculated when the contract was completed (3 February 2003) or when it became unconditional, which would be 20 December 2002 for purpose of Special Condition 7, later for purposes of Special Condition 8. It was not suggested that any change of significance happened between the contract date and the completion date.
The plaintiffs’ accounting expert, Mr Gunn, and the defendants’, Mr Thynne, found a good deal of common ground, including that a notional management salary of $35,000 per annum ought to be recognised as an expense to be met from maintainable earnings. This was an aspect which never entered the plaintiffs’ calculations. Mr Gunn’s report (Exhibit 17) is dated 13 November 2003. It may well have been produced in a sensible exercise of the plaintiffs’ seeking to establish for themselves whether their claim was worth pursuing. They filed it on 16 December 2003. There is much useful material in the attachments to the report which, generally speaking, are the result of the plaintiffs’ engaging appropriate assistance to access material on the business computer’s hard drive.
Mr Gunn explained his valuation of the business as follows:
“8.0 BUSINESS VALUATION
8.1The appropriate method of valuation of a business is the capitalisation of future maintainable earnings.
8.2We have completed our valuation and have detailed this on Attachment ‘H’ which is appended to our report.
8.3In order to determine future maintainable earnings we have analysed the income and expenditure as noted above.
8.4We have made adjustments to take account of the illegal sales of Noni Capsules and Shark Cartilage. We have also taken account of the savings on freight and the cost of purchasing these products. We determined that on average freight amounted to 6.4% of sales and that the value of cost of goods sold was approximately 50% of sales price.
8.5We took account of maintainable sales for Noni Juice and Colloidal Minerals. We are of the opinion that maintainable Noni Juice sales should be reduced to, on average, $1,000 per month and maintainable Colloidal Minerals sales should be increased to, on average, $8,634 pear month. We have also taken account of the freight and Cost of Goods Sold adjustments.
8.6We took account of maintainable sales for ‘Other’ products. As noted in paragraph 6.3.28 we are of the opinion that maintainable ‘Other’ product sales should be reduced to, on average, $1,000 per month. We have taken account of freight and cost of goods sold adjustments.
8.7It is appropriate when valuing a business to make allowances for the cost of commercial salaries to manage a business. We noted that the business should require around 30 hours per week of work. We allowed a rate of $22.50 per hour and determined that the cost of a commercial salary would be approximately $35,100 gross per annum. We have adopted a very conservative amount of $35,000 for the purposes of this assessment. Any increase in this salary would reduce the Net profit before Tax.
8.8After taking account of the above adjustments we have determined that the Future Maintainable Profits for the business is in fact a loss. We have therefore adopted future maintainable profits of zero dollars per year.
8.9We determined that an appropriate capitalisation rate for this business would be 50% to 100% or a multiplier of between two and one times earnings. We determined this rate by acknowledging that the cost of finance is approximately 9% and that there is very considerable risk associated with the alternative health remedy industry. This has been evidenced by recent events involving Pan Pharmaceuticals, lack of barriers to entry such as capital, specialist expertise and the like.
8.10We have therefore determined that the value of the business at the time of purchase is zero.
9.0 ECONOMIC LOSS
We have calculated the economic loss following the purchase of the business. We have summarised our assessment below:
SUMMARY OF ECONOMIC LOSS
Total Capital Loss $218,000
Total Incidental Costs $7,485
Total Income Losses (Holding Costs) $0
Total Future Disposal Costs $0
Total Economic Loss $225,485
TABLE 1
9.1METHODOLOGY
9.1.1 We have calculated the losses sustained by your client in accordance with the methodology described below:
CAPITAL LOSS
9.1.2 The methodology used is to calculate the capital loss as the difference between the purchase price of the business and the market value of the property at the date of purchase.”
The reference in 8.2 should have been to attachment “J”:
“VALUATION OF RARE IMPORT EXPORT
_______________________________________________________________________________________________________________
OPERATING BEFORE INCOME TAX 131,986 (Per Published Financial Accounts) Adjustments to Operating Profit Before Income Tax LESS Expenses Not Included Bank Fees 2,143 Government Taxes – Debits 326 Motor Vehicle Expenses 2,822 Registrations & Subscriptions 2,185 Sales For the period May 01 to June 01 3,689 Actual Sales - Illegal Noni Capsules 67,116 Shark Cartilage 84,921 Actual Sales – Non-Maintainable Actual Noni Juice Sales 84,350 Colloidal Minerals 92,359 Colloidal Silver 6,572 ‘Other’ Products 19,904 Additional Cost of Goods Sold – Maintainable Sales Noni Juice Sales 6,000 Colloidal Minerals 51,804 Colloidal Silver 2,600 ‘Other’ Products 6,000 Additional Freight – Maintainable Sales Noni Juice Sales 768 Colloidal Minerals 6,631 Colloidal Silver 333 ‘Other’ Products 768 Commercial Salary 35,000 TOTALS 476,291 ADD: Cost of Goods Sold For the period May 01 to Jun 01 1,845 Freight For the period May 01 to June 01 236 Savings on Cost of Goods Sold – Illegal Goods Noni Capsules 33,558 Shark Cartilage 42,460 Savings on Freight – Illegal Goods Noni Capsules 4,295 Shark Cartilage 5,435 Savings on Freight – Non-Maintainable Actual Noni Juice Sales 5,398 Colloidal Minerals 5,911 Colloidal Silver 421 ‘Other’ Products 1,274 Additional Cost of Goods Sold – Actual Sales – Non-Maintainable Noni Juice 42,175 Colloidal Minerals 46,179 Colloidal Silver 3,286 ‘Other’ Products 9,952 Additional Sales - Maintainable Noni Juice Sales 12,000 Colloidal Minerals 103,608 Colloidal Silver 5,200 ‘Other’ Products 12,000 TOTALS 335,234 Adjusted Net Profit before Tax (9,071) (MAINTAINABLE EARNINGS) AS NEGATIVE MAINTAINABLE EARNINGS ZERO Capitalisation Rate 50%-100% VALUE ZERO”
I am inclined to prefer the view of Mr Thynne in respect of the rate discussed in 8.9. He gives a range of 35 per cent to 40 per cent. His initial failure to appreciate that the Exhibit 6 figures were for four months rather than three being pointed out to him by Mr Gunn, he came up to 40 per cent. In an effective cross-examination, Mr O’Sullivan got him to make proper reductions to maintainable earnings by reference to matters summarised in Exhibit 39. The business was worth nothing like what the Wrights paid. I have difficulty concluding that it was worth nothing. Taking a practical approach, it seems to me that the business in Colloidal Minerals was sustainable, that there were prospects of sales outside Australia of products that the Therapeutic Goods regime might have caused a problem for within the country (for example, Noni Capsules); there were prospects of achieving something (lawfully) with shark cartilage products; there was an extensive client base, which the Wrights tried to make use of. It seems to me excessively theoretical to bring in the notional management salary, although both accountants would have done so, on the basis of 30 hours being expended per week, rather than the 20 Mr Cary referred to as required.
As indicated, I find it difficult to accept that the business had no value, unattractive as it seems on careful analysis. Challenged to locate an authority in which a court had taken that approach, Mr O’Sullivan after the trial supplied a reference to Bell v Australasian Recyclers (WA) Pty Ltd (1986) ATPR 40-644, which has some similarities with the present situation. Toohey J said at 47, 223:
“The applicants paid $15,000 under the franchise agreement. By reason of the company’s inability to provide a supply of rag, there was no goodwill attaching to the agreement. I accept that the cutting machine which was part of the agreement and the two additional machines for which the applicants paid $636 have no commercial value. The applicants received 1,000 kilos of rag but they were forced to buy an additional 870 kilos at a cost of $573.55. The applicants’ partnership return for the year ended 30 June 1984 shows a gross income of $10,548 and expenses of $9,609, giving a net profit of $939. Broadly speaking this profit equates the cost of additional machines and rag so that it is fair to regard the applicants as having received nothing for their $15,000. That is the starting point for an assessment.”
Dire as was the plaintiffs’ situation in light of the loss of Golden Glow as a purchaser of Noni juice and the realisation that regulatory problems that became clear after the well-known difficulties of Pan Pharmaceuticals became public in late April 2003 (on Mr Wright’s recollection at p 105 of the transcript), there was nothing so totally destructive of the business as the inability to obtain raw material in Bell.
Establishing the real value of the business at the time the plaintiffs took it over strikes me as extraordinarily difficult. The TGA-related difficulties that were there all along as risks (arguably more so when Mr Cary failed to renew in January 2003) might not have been appreciated by some in the relevant market. Some may have been willing to carry on the deceit practised against Mr Chatterton. Notwithstanding Mr Gunn’s view that no properly advised person would pay anything for the business, I think it had a value, even in hindsight. It had access to (or occupied a favourable position from the point of view of getting access to) products not generally available which, as Mr Thynne said, is seen as a barrier to entry. It had a large, established client base. It had the Yellow Pages listing. The plaintiffs’ and the defendants’ estimates of value in December 2002, of $200,000 and $250,000 respectively are of no use to the court in resolving identification of the real value; both may have depended very much on dreams or wishful thinking. The $218,000 agreed on is not useful either, as a starting point from which one could work out the true value. Mr Thynne asserted it showed the plaintiffs (unbeknownst to them) adopting the same multiplier for relating maintainable profits to value as he did (40 per cent).
The court did not hear what price was paid by Mr Cary or his company for the business. It is known that in January 2002, in an affidavit used in an application for consent orders in the Family Court of Australia, he valued his interest in the business at $70,000, which one would think included stock (Exhibit 35). He said he ignored professional advice to value the interest at nothing, or low. In the context of consent orders being sought, he would have no motive to give anything other than a genuine estimate. The evidence before the court does not permit any judgment to be made as to whether his performance was better than that of the former proprietors. Some apparent improvement over the early months from July 2002 may have been cyclical. There was no challenge to his evidence of wanting to sell for family reasons, after his marriage broke up.
Useful as Mr Gunn’s work was, I prefer Mr Thynne’s view of appropriate capitalisation rates to apply to maintainable profits. His assessment of those at $87,467 was reduced to $65,887 by taking out $21,580 for shark cartilage products. Under cross-examination he entertained further possible reductions to maintainable earnings which were set out in Exhibit 39:
“POSSIBLE REDUCTIONS TO MAINTAINABLE EARNINGS
1/7/02-31/10/02
Effect of Exhibit 9 (Freight) $20,000
Shark cartilage powder $15,000
Noni Juice – Sales to Golden Glow $22,000
Noni capsule sales $1,400
Legal Expenses $700
Motor vehicle expenses $1,500
Bank Fees $700
Registrations and subscriptions $2,000
$63,300”
Mr Thynne did not necessarily accept that all or any of those reductions were proper, being asked to deal with them on a hypothetical basis. The first item concerns an enormous escalation in “freight” which was never satisfactorily established to have occurred in practice or (if it did occur) explained. The second item ought not to be taken into account more than once. Mr Thynne and Mr Gunn produced a joint statement by expert accountants (Exhibit 38) which, in my opinion, identifies the approach the court ought to take in determining the true value of the business when it changed hands. I take the following to be Mr Thynne’s view:
“An alternative approach would be to determine what a purchaser in the market may pay. Given the size of the business, it would not be uncommon for a purchaser to value the goodwill of the business using a rule of thumb. Although the rules of thumb tend to overvalue businesses, in this end of the market they are very common as purchasers tend to be “buying themselves a job”.
A rule of thumb my be a multiple of one (1) to two (2) times the net profit before owners salary, depreciation, benefits and financing. Using the 2002 adjusted results, this would result in a goodwill value of between $130,000 and $260,000 plus the value of net tangible assets.”
This approach disregards the notional $35,000 per annum salary which both accountants thought appropriate in a conventional valuation exercise in respect of a business. Applying that notional expense, one would come up with a zero value – which, in my opinion, lacks practical utility for present purposes. There are elements of estimation involved here, no one having attempted to present the court with what may have been a useful exercise of preparing figures based on a 12 month period ending 30 October 2002 or, preferably, 30 November 2002 or later. I would assess the value of the business, including the plant and equipment referred to in Exhibit 38 and listed in the contract at $35,000. This may be thought to coincide roughly with Mr Cary’s own estimate in January 2002. I am in no sense accepting him as an expert valuer, but take comfort in the coincidence of my best assessment of the value with his (as at a year earlier).
It follows that the plaintiffs’ damages representing the excessive amount they were induced by misrepresentations to pay for goodwill were $183,000. I would have assessed the corresponding damages in respect of stock (which I am not satisfied was entirely “dead stock”) as half of what was paid for stock, namely $9,332. The damages award ought also include stamp duty of $6,549 and legal expenses of $847. The amount sought in the amended statement of claim filed 10 November 2005 for dead stock is $9,003, which is the appropriate sum to adopt. I will hear the parties in relation to interest, but it would appear that it ought to be allowed on all of the above components from 3 February 2003 (adopting a single date for the sake of simplicity) except for the stamp duty, which was not paid until 27 June 2003. For the moment, it will be taken that there will be no further submissions.
There was nothing before the court to show the appropriate interest rate. The prescribed rate for default judgments of 9 per cent seems too high. I very much doubt that the plaintiffs would have earned anything approaching that on the funds committed to the purchase, but consider 6 per cent a suitable rate, if not a generous one for most of the period. The judgment should attract interest from pronouncement of it at 9 per cent pa.
Interest on the stamp duty amount of $6,549 from the date of stamping to 22.9.06 is allowed at $1,265, interest on the other damages components (which total $192,850) from the date of settlement at $41,525. Subject to the correctness of calculations, there will therefore be judgment for the plaintiffs against the defendants for $242,189 of which $42,790 represents interest, and costs.
0
2
0