Xu v Aussie Investment Group Pty Ltd
[2022] VCC 104
•11 February 2022
| IN THE COUNTY COURT OF VICTORIA AT MELBOURNE COMMERCIAL DIVISION | Revised Not Restricted Suitable for Publication |
GENERAL LIST
Case No. CI-21-00210
| YIQING XU | Plaintiff |
| v | |
| AUSSIE INVESTMENT GROUP PTY LTD (ACN 159 169 089) & ORS | Defendants |
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JUDGE: | Her Honour Judge Burchell | |
WHERE HELD: | Melbourne | |
DATES OF HEARING: | 10, 11, 12, 15, 16 November 2021 and written submissions on 30 November 2021 and 14 and 21 December 2021 | |
DATE OF JUDGMENT: | 11 February 2022 | |
CASE MAY BE CITED AS: | Xu v Aussie Investment Group Pty Ltd & Ors | |
MEDIUM NEUTRAL CITATION: | [2022] VCC 104 | |
REASONS FOR JUDGMENT
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Subject:CONTRACTS – MISLEADING AND DECEPTIVE CONDUCT – DAMAGES – EQUITABLE COMPENSATION – FIDUCIARY DUTY
Catchwords: Unit sale agreement – damages at common law – equitable compensation – damages under the Australian Consumer Law – agency agreement – whether suitable business – profitability – whether reasonable price – reasonable market value - whether breach of contract – fiduciary duty – business broker – business visa requirements - second limb of Barnes v Addy – implied guarantees under ACL – fit for purpose – reasonable skill and care – whether misleading and deceptive conduct – duty of care - negligence – knowing receipt – proportionate liability – causation – mitigation – laches – unclean hands
Legislation Cited: Competition and Consumer Act 2010 s 137B, Schedule 2, ss 1, 2, 3, 4, 18, 19, 37(2), 60, 61, 87CD and 236
Wrong Act 1958 (Vic) ss 24AI, 26, Part IV and IVAA
Cases Cited: Barnes v Addy (1874) LR 9 Ch App 244
BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266
Codelfa Construction Pty Ltd v State Railway Authority (NSW) (1982) 149 CLR 337
Astley & Ors v Austrust Limited (1999) HCA 6
Grocon Constructions (Victoria) Pty Ltd v APN DF2 Project 2 Pty Ltd [2015] VSCA 190
Byrne v Australian Airlines Ltd (1995) 185 CLR 410
Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41
Commonwealth Bank of Australia v Barker (2014) 312 ALR 356
Ansett Transport Industries (Operations) Pty Ltd v Commonwealth (1977) 139 CLR 54
Ron Cameron v Ozzy Tyres Pty Ltd [2015] NSWCATCD 68
Arturi v Zupps Motors Pty Ltd(1980) 49 FLR 283
Zuvela & Anor v Geiger [2007] WASCA 138
Gonsalves v Debreczeni [1998] NSWSC 588
McKenzie v McDonald [1927] VR 134
Daly v Sydney Stock Exchange [1968] 65 ALR 193
Chan v Zacharia (1984) 154 CLR 178
Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165
Beach Petroleum NL v Johnson (1993) 115 ALR 411
King v Lintrose Nominees (unreported decision Supreme Court of Victoria 17 May 1993)
Armstrong v Jackson [1917] 2 KB 822
Gray v New Augartia Porcupine Mines Ltd. [1952] 3 DLR 1
Chickabo Pty Ltd v Zphere Pty Ltd & Ors [2019] 57 VR 406
Spellson v George (1992) 26 NSWLR 25 666
Re Pauling's Settlement Trusts [1962] 1 WLR 86
Barescape Pty Ltd v Bacchus Holdings (No. 9) [2012] NSWSC 984
O’Sullivan v Management Agency & Music [1985] QB 428
Alati v Kruger (1955) 94 CLR 216
Armstrong v Jackson [1917] 2 KB 822
Lewis Securities Ltd (in Liq) v Carter [2018] NSWCA 118
Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89
The Bell Group (In liq) v Westpac banking Corporation (No 9) [2008] WASC 239
Briginshaw v Briginshaw (1938) 60 CLR 336
Harsted Pty Ltd v Tomanek [2018] VSCA 84
Lyell v Kennedy (1889) 14 App Cas 437
Dering v Earl of Winchelsea (1787) 1 Cox 318; 29 ER 1184.
CSR Ltd v Amaca Pty Ltd [2016] 62 VR 359
Orr v Ford (1989) 167 CLR 316
Barker v Duke Group (in Liq) (2005) 91 SASR 167
Streeter v Western Areas Exploration Pty Ltd (No 2) (2011) 278 ALR 291
Lamshed v Lamshed (1963) 109 CLR 440
Portbury Development Co Pty Ltd v Ottedin Investments Pty Ltd [2014] VSC 57
Perre v Apand Pty Ltd [1999] HCA 36
Mutual Life & Citizens Assurance Co Ltd v Evatt (1968) 122 CLR 556
Tepko Pty Ltd v Water Board (2001) 206 CLR 1
Global Sportsman Pty Ltd v Mirror Newspapers Ltd [1984] FCA 167
Awad v Twin Creeks Properties Pty Ltd [2012] NSWCA 200
Houghton v Arms (2006) 225 CLR 553
Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd (1978) 140 CLR 216
Yorke v Lucas (1985) 158 CLR 661
Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6
Spangaro v Corporate Investment Australia Funds Management Ltd [2003] FCA 1025
Lewis Securities Ltd (in liq) v Carter [2018] NSWCA 118
Settlement Group Pty Ltd v Purcell Partners (a firm) [2013] VSCA 370
Re Dawson (deceased); Union Fidelity Trustee Co Ltd v Perpetual Trustee Co Ltd [1966] 2 NSWR 211
Talacko v Talacko [2009] VSC 533
Nicholls & Ors v Michael Wilson & Partners Ltd [2012] NSWCA 383
Harris v Digital Pulse Pty Ltd [2003] NSWCA 10
Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484
Swindle v Harrison [1997] 4 All ER 705
Henville v Walker (2001) 206 CLR 459
Publications Cited: K Barnett, “Equitable compensation and remoteness: not so remote from the common law after all.” [2014] UWALawRw 15; (2014) 38(1) University of Western Australia Law Review 48
Barnett & Harder, “Remedies in Australian Private Law” (2021) 2nd edition Cambridge University Press
G. S. Clarke QC, “Breach of Fiduciary Duties in Commercial Cases: Recent Developments” March 2020
M Cope, “The Equitable Obligation of a Purchaser, Who is a Fiduciary, To Make Full Disclosure of Material Information” The University of Queensland Law Journal Vol. 12, No.2, 79
LexisNexis, Halsbury’s Laws of Australia, (online at 6 November 2012) 15 Agency, (5) Duties of Agent to Principal, Duty to exercise care, skill and diligence
LexisNexis, Halsbury’s Laws of Australia, 185-Equity, (1) The Nature of Equity (C) Maxims of Equity [185-65] One who comes to equity must do so with clean hands
Meagher, Gummow and Lehane's, “Equity: Doctrines and Remedies” (4th ed 2002)
R Miller, “Miller’s Australian Competition and Consumer Law Annotated” (2021) Thomson Reuters
J Paterson, “The Consumer Guarantee Remedial Regime: Some Uncertainties and the Role of Common Law Analogy” (2016) Journal of Contract Law, 33
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr H de Kock | United Associates Barristers and Solicitors |
| For the First, Second and fourth defendants | Ms J Zhou | GFS Legal |
Table of Contents
Summary and outcome
The relevant facts
Issues
Valuation
Analysis
Contractual Issues
Breach of Contract
Sections 60 and 61 of the ACL
Service agreement implied reasonable skill and diligence and fitness for purpose
Fiduciary Issues
Whether AIG owed fiduciary duties to Frank
Whether Linda knowingly assisted in the alleged breach of fiduciary duty under limb 2 of Barnes v Addy
Unclean Hands and Laches
Mitigation
Negligence Issues
Whether Linda assumed a duty of care and the content of that duty
Whether Linda breached her duty of care
AIG Issues
Whether AIG and Linda made the Suitable Business Representation to Frank
Whether AIG and Linda made the Profitability Representation to Frank
Whether the representation that $500,000 was a fair and reasonable price for 51 units in the Zhengpin Unit Trust contravened s 18 and/or 37(2) of the ACL
Claim against JLAA Investments
Causation and Remedy Issues
Causation
Equitable compensation
Damages under contract
Damages under ACL
Damages for breach of duty of care
Conclusion
HER HONOUR:
Summary and outcome
1 In this proceeding, the plaintiff (“Frank”) claims the sum of $951,291.09 against the first, second and fourth defendants for losses suffered as a result of Frank entering into a Unit Sale Agreement with the fourth defendant (“JLAA Investments”). The matter arises out of the purchase of 51 units in the restaurant business known as “Zhengpin Kitchen” located at 264-266 Toorak Road, South Yarra (“the business” or “the restaurant”).
2 Frank claims he is entitled to damages at common law, equitable compensation and damages under the Competition and Consumer Act 2010, Schedule 2, being the Australian Consumer Law (“ACL”) on the grounds of:
(a) breach of the agency agreement between Frank and the first defendant (“AIG”);
(b) breach of ss 60 and 61 of the ACL by AIG in relation to its guarantee that services will be rendered with due care and skill and be fit for purpose;
(c) breach of fiduciary duty by AIG;
(d) the second defendant (“Linda”) knowingly assisting in the breach of fiduciary duty by AIG;
(e) misleading and deceptive conduct pursuant to ss 4, 18 and 37(2) of the ACL by AIG and Linda as to the suitability and profitability of the business;
(f) contravention of ss 18 and 37(2) of the ACL by Linda as a person involved in the contravention by AIG;
(g) breach of duty of care by Linda; and
(h) JLAA Investments’ knowing receipt of the $500,000 purchase price for the units: alternatively, that it was the alter ego of Linda in breach of the agreement, fiduciary duties and duty of care.
3 AIG and Linda deny making two out of the three alleged representations and further claim:
(a) Frank was to be in charge of and manage the business as the restaurant manager (clause 7(b)) and assumed management and control over the business and was, therefore, responsible for its unprofitable trading;
(b) all documents requested by Frank regarding the business were to be provided to him prior to settlement. Frank and his professional advisors had full and free access to the records and accounts of Zhengpin & Co Pty Ltd (Zhengpin & Co) and the business enabling them to fully investigate the accuracy of the warranties provided and all information and documents provided by the vendor (clause 8(a)(ii));
(c) the vendor warranted that Zhengpin & Co’s books, records and registers were in the possession of Zhengpin & Co and accurately recorded the details of all of the company’s transactions, finances, assets and liabilities (clause 8(c));
(d) deny that the transaction was disadvantageous to Frank;
(e) in or about April 2019, Frank requested access to financial records which was provided by the defendants. Frank took handwritten notes of the financial data of the business;
(f) in or about April 2019, the defendants provided a written summary of the financial state of the business to the Frank;
(g) Frank attended the business premises for a trial period in May 2019 during which time he had full access to the books and records of the business;
(h) the defendants deny acting as agent for the purpose of buying a business involved in the provision of a “service” or that Frank acquired goods as a “consumer” within the meaning of s. 3 of the ACL;
(i) the authority did not give rise to a fiduciary duty and the authority expired on 30 March 2019;
(j) Linda acted on behalf of AIG and not in her own right;
(k) Linda honestly held the opinion that $500,000 was a fair and reasonable price for 51 units in the Unit Trust;
(l) Frank failed to operate the business for 2 years;
(m) Frank well knew that the business was unprofitable;
(n) Frank’s mismanagement of the business and decision to cease operating the business in December 2019 caused or contributed to the failure of the business to operate profitably;
(o) if Frank suffered loss (which is denied), then he caused or contributed to the loss by his failure to take reasonable care; alternatively, that he should be denied a remedy on the basis of laches or unclean hands;
(p) Frank received valuable consideration for the sum of $500,000, being a 51% interest in the business.
4 In my judgment, the grounds constituting breach of fiduciary duty, breach of duty of care, breach of contract, and misrepresentation of a fair and reasonable price are made out. My reasons are set out below.
5 Accordingly, there will be judgment for Frank. I will order that the first, second and third defendants pay Frank’s costs of and incidental to the proceeding on the standard basis, in default of agreement (unless either party has a basis for a different order as to costs). I invite the parties to prepare draft orders to give effect to these reasons. I will determine any issue concerning costs on the papers.
The relevant facts
6 On 26 August 2018, the trustee company, Zhengpin & Co, entered into a lease over the restaurant premises, being 264-266 Toorak Road, South Yarra for the purpose of conducting a Chinese restaurant. The lease commenced on 15 August 2018.
7 From in or around July 2018 to December 2018, James Chen, Linda’s husband (“James”), engaged in the demolition of the existing Japanese restaurant at the premises, and the design and renovation of a new Chinese restaurant. In or around November 2018, the restaurant underwent a trial opening with James as head chef.
8 Since October 2018, the trustee company operated a Chinese restaurant business from the premises called “Zhengpin Kitchen” as trustee of the Zhengpin Unit Trust.
9 Frank, a Chinese national, came to Melbourne with his wife (“Danny”) in September 2018 on an Australian Business Innovation and Investment (Provisional) visa (188A visa). Frank applied for a subclass 888A (Business Innovation and Investment) visa.
10 The requirements for a subclass 888A visa are:
a) the applicant must hold a 188A visa;
b) the applicant must own and manage a business in Australia for the 2 years immediately before the 888A visa application is made;
c) the applicant must own at least 51% of the total value of the business if a turnover of the business is less than $400,000 per year; and
d) the business must have had an annual turnover of at least $300,000 in the last 12 months immediately before the 888A visa application.
11 Linda is the sole director and shareholder of both AIG and JLAA Investments. AIG offered business brokering services to Chinese clients.
12 JLAA Investments is the corporate trustee of the C&S Family Trust, with Linda, her husband James, Alec Chen and Alex Chen as named beneficiaries. Prior to 13 May 2019, JLAA Investments held 100% of the units in the Zhengpin Unit Trust for the benefit of the Family Trust, with Zhengpin & Co as trustee.
13 On or around 3 December 2018, Frank contacted Linda regarding his desire to purchase a business in Australia in response to an advertisement.
14 On 11 December 2018, Frank and AIG entered into a General Purchase Authority for the period 11 December 2018 to 30 March 2019, whereby AIG would act as Frank’s business broker “to buy the business” on behalf of Frank (“the agency agreement”).
15 Between December 2018 and March 2019, AIG introduced Frank to a number of businesses for sale.
16 On 1 May 2019, Frank transferred a deposit of $40,000 to Zhengpin & Co for the purchase of the units. James agreed this was the deposit for the sale of the units of the business.
17 On 13 May 2019, Frank purchased 51% of shares in the trust company from James. In addition, Frank purchased 51% of the 100 units in the Zhengpin Unit trust from JLAA Investments. As a result of this transaction, Frank obtained a 51% share in the restaurant business known as “Zhengpin Kitchen”.
18 On 24 May 2019, Frank transferred a further $400,000 to Zhengpin & Co. James agreed that this was a payment made by Frank for the sale of the units.
19 On 13 June 2019, there was a debit on the business’ Westpac account in the sum of $400,000. Frank contended that this was a withdrawal by either James or Linda of the $400,000 payment. Linda gave evidence that she did not have the right to transact with the restaurant account. James later gave evidence that he withdrew the money and paid back most of the loans he had taken out with friends and family for the renovations.
20 On 8 July 2019, the balance of the purchase price in the sum of $60,000 was paid together with the working capital contribution in the sum of $100,000 by way of bank cheque to Zhengpin & Co.
21 The purchase price for the transfer of the 51 units from JLAA Investments to Frank was $500,000 pursuant to the agreement for sale of units.
22 Between April and December 2019, Frank was engaged in the operation and management of the business.
23 On 12 December 2019, James stopped working at the business.
24 On 30 December 2019, Frank closed the business.
Issues
25 There are four causes of action for consideration before the Court and three ancillary issues. Those being, first, whether liability in the present case ought to be extended to Linda and JLAA Investments by either piercing the corporate veil or pursuant to the second limb of Barnes v Addy[1]. Second, whether the defendants caused the loss. Third, whether any remedy ought to flow in light of mitigation issues.
[1] (1874) LR 9 Ch App 244.
26 The issues before the court are:
A. contractual issues:
a. whether Frank was a “consumer” within the meaning of the ACL.
b. whether there was an implied term that AIG guaranteed the services under the agency agreement would be rendered with due care and skill under s 60 of the ACL.
c. whether there was an implied term that AIG guaranteed the services would be reasonably fit for purpose pursuant to s 61 of the ACL.
d. whether there was an implied term that AIG would provide services with skill and diligence of a competent business broker.
e. whether the agency agreement ended on 30 March 2019 or was extended by reason of the conduct of the parties.
f. whether AIG breached any terms under the agency agreement.
B. fiduciary duties:
a. whether AIG owed fiduciary duties to Frank.
b. whether Linda knowingly assisted in the alleged breach of fiduciary duty.
c. whether Linda used AIG as her alter ego to obtain a benefit of the sale agreement for herself or for JLAA Investments in breach of AIG’s contract and fiduciary duties to Frank.
d. whether Frank gave informed consent to any breach of fiduciary duty by AIG.
e. whether Frank should be denied a remedy on the basis of laches or unclean hands.
C. negligence:
a. whether Linda assumed a duty of care towards Frank and the content of any such duty.
b. whether Linda breached her purported duty of care.
D. ACL Issues:
a. whether AIG and Linda made the Suitable Business Representation to Frank.
b. whether AIG and Linda made the Profitability Representation to Frank.
c. whether the Suitable Business Representation contravened ss 18, 37(2) and/or 4 of the ACL.
d. whether the Profitability Representation contravened ss 18, 37(2) and/or 4 of the ACL.
e. whether the representation that $500,000 was a fair and reasonable price for 51 units in the Zhengpin Unit Trust contravened s 18 and/or 37(2) of the ACL.
f. what was the fair and reasonable price for 51 units in the Zhengpin Unit Trust as at 13 May 2019.
E. causation and remedy:
a. whether Frank suffered loss and damage caused by:
i. the conduct of AIG;
ii. breach of fiduciary duty of AIG;
iii. breach of duty by Linda;
iv. misleading or deceptive conduct or representations by AIG and/or Linda;
and the quantum.
b. whether Frank is entitled to equitable compensation against AIG and/or Linda.
c. whether any award under s 236 of the ACL should be reduced pursuant to s 137B of the ACL to the extent that the court considers just having regard to the extent of Frank’s responsibility for the loss and damage suffered.
d. alternatively, whether pursuant to s 87CD of the ACL, whether the liability of AIG and/or Linda should be limited to an amount reflecting the proportion of the damage or loss that the court considers just; having regard to the extent of their responsibility for the loss and damage suffered.
e. whether any damages recoverable by Frank against AIG and/or Linda should be limited pursuant to proportionate liability principles under s 24AI of the Wrong Act 1958 (Vic).
f. whether JLAA Investments received $500,000 from Frank knowing that it was received as a result of a breach of fiduciary duty by AIG.
g. whether Linda used JLAA Investments as a vehicle to obtain a benefit of the sale agreement for herself in breach of AIG’s contractual and fiduciary duties to Frank and her own duty of care.
h. whether any orders for recission or damages or equitable compensation should be made against JLAA Investments.
27 Each of the issues are examined below.
Valuation
28 Frank relied on the expert reports of Gideon Rathner, partner of Lowe Lippman Chartered Accountants & Business Advisors. The defendants relied on the evidence of Stephen Le Couilliard of Best Accountants & Associates.
29 Mr Rathner relied on the financial and other information provided to him by Frank and used a cost based methodology to determine the business’ valuation.
30 He noted that Linda paid $120,000 to purchase a Japanese restaurant business also securing its lease and liquor licence in May 2018. The General Ledger for furniture and fittings for the period 1 July 2018 to 6 March 2020 records total costs incurred of $116,521.71. He said that this was consistent with renovations being completed in December 2018. Mr Rathner noted that the defendants confirmed that the business commenced full service operation in about January 2019. The cost to establish the business therefore totalled $236,522.
31 Mr Rathner found that the trading results for the business for the period January 2019 to May 2019 were as follows:
2019 Sales ($) Profit (Loss) ($) January 847 February (12,281) March 47,432 (9,534) April (20,235) May (31,879) June 69,852 (12,414)
32 He concluded that the business continued to incur losses each month until December 2019. The business ceased trading on 20 December 2019.
2019 Profit (Loss) ($) June (12,414) July (20,123) August (19,844) September (6,801) October (12,647) November (13,868) December (18,636)
33 On the basis of the information before Mr Rathner, he concluded that the value of the business in May 2019 was between $nil to $236,522.
34 In his supplementary report, Mr Rathner considered the components for time and labour incurred by a founder in a start-up business, such as design and research in setting up the particular business. He said that it did not change his conclusions.
35 Mr Rathner gave evidence that what would normally happen is the labour cost of a party would be included in the profit and loss statement and reflected in the profit or loss of the business. To the extent that the cost was not paid, it would be represented as an unpaid liability on the balance sheet. Therefore, when assessing the value of the business on a net asset basis, it would already have been included in the valuation.
36 Mr Rathner said that it is prudent to obtain a valuation prior to purchasing a business. Mr Le Couilliard also agreed that it is usual procedure for a purchaser to obtain an independent valuation as part of their due diligence prior to investing in a business.
37 Mr Rathner conceded that people could purchase shares in a business for more than their market value or costs of the business. He said that the purchase price for a start-up not turning a profit is correlated to the investor’s anticipated future profit. He gave further evidence that in a micro business, such as this one, where one would expect the person buying into the business would be doing so in the hope of earning a wage, one would generally expect that profit would need to be generated quickly. If it did not generate a profit within the first 12 months, it would often end up closing. Mr Le Couilliard agreed that a purchaser may be willing to pay more than the market price and may pay a premium for various reasons.
38 Mr Rathner said that if the purchase price for half of the business was $500,000 then the assumption must have been, that the business had an underlying asset base of $1 million. If the business was not capable of returning that investment in a short period of time, one would expect it to close to minimise the investors’ losses. Alternatively, if the investors were very confident about the business, they might be able to use that $1 million of underlying assets, to the extent that there were some real assets, as security to borrow further funds based upon a business plan of when those borrowings could be repaid. This is akin to going to a bank for a loan, where one has to submit a case for how the money will be repaid.
39 Mr Le Couilliard took into account the assets and liabilities of the trading entity and looked at the bank statements of the business as follows.
Assets of the trading entity ($) Cash at bank 3,528.69 Cash on hand 100.00 Drawings 232,765.74 Fixtures and fittings 96,210.39 Plant and equipment 33,706.74 Plant other 2,573.70 Goodwill 109,090.91 Total assets 477,976.17 Liability of the trading entity ($) Loan 549,899.25 GST (ATO) 1,624.16 Total liability 551,523.41
40 The total equity (deficiency) in the business as at 12 May 2019 was $73,547.24.
41 Mr Le Couilliard concluded that the reasonable market value of the business as at 15 May 2019 was $241,582; comprising the total of the value of (a) the purchased goodwill in the sum of $109,091 and (b) the value of the fixtures, fittings, plant and equipment in the sum of $132,491. Mr Le Couillard employed an asset valuation method to arrive at his valuation. This was due to the lack of forecasts for the business given it had ceased operating after a relatively short period, thereby not providing a great deal of trading time available to assess its value. The asset valuation focussed on the assets net of liabilities.
42 Frank’s expert, Gideon Rathner, opined that as at 13 May 2019, the reasonable market value of a 51% share in the business was between nil and $120,000 (rounded). The defendants’ expert, Mr Le Couilliard assessed the “total market value” of the business as at 15 May 2019 to be $241,582. Therefore, there is not much difference between the two experts regarding what was the reasonable market value of the business at the time of the Sale Agreement ($241,582 - $236,522 = $5,060).
43 The plaintiff submits that pursuant to the unit sale agreement, JLAA Investments received $500,000 for 51% of the units and a further cash contribution of $100,000. James and Linda were able to recoup all the money they put towards the business, save for $49,899.25 and kept an ownership stake of 49%. In evidence, James rejected the suggestion that he and Linda used Frank as a “cash cow”. He said he had established his business before Frank’s appearance and willingness to purchase the 51% share and that he really wanted a partner who had the ability to run the business with him.
44 In the circumstances, Frank says that the representation that $500,000 was a fair and reasonable price for a 51% interest in the business was a misleading representation and a gross misrepresentation of the true market value of the units in the Zhengpin Unit Trust.
45 The defendants concede that the valuation of the business at the relevant time was less than the sale price.
Analysis
Contractual Issues
46 Frank gave evidence that in November 2018, he saw an advertisement by the “The Australian Topbridge Group” in a local Box Hill newspaper. The advertisement, among other things, stated that:
“We are agents representing buyers and we stand in the shoes of buyers to safeguard your interest!” and “The Australian Topbridge Group is a comprehensive investment group company approved for registration and regulated by the Australian Government Business Investment Commission.”
47 In addition, Frank says that the advertisement stated that the Australian Topbridge Group provided services for 188A/E Australian Overseas Students Entrepreneur Immigration with “Professional guidance for overseas students to achieve success in business entrepreneur migration!”
48 Frank took down the contact details provided on the advertisement and sent a message by way of WeChat.
49 On 3 December 2018, Linda sent Frank a WeChat message: “Hello, what I can do for you”. Frank responded: “I want to consult about business purchase”. Frank says that over the phone Linda told him that “Topbridge” was her business and that the services of this business included assisting newly arrived migrants to invest into Australian businesses for immigration purposes. Linda said that “Topbridge” was short for AIG.
50 Frank and Linda met on 5 December 2018, at Laurent café in South Yarra. During the meeting, Frank said to Linda that he was on a subclass 188A visa and that he wished to buy a business for the purposes of obtaining a subclass 888A visa. Linda responded that she had a number of 188A clients and that she was a buyer’s agent.
51 On 11 December 2018, Frank and Linda met again, at the office of AIG in Melbourne CBD. Frank said that during this meeting Linda said to him words to the effect: “You have nothing to be worried about, Mr Xu. I have a lot of experience in this field. I promise that I will find a business which will satisfy all your requirements and will meet the requirements for 888A visa.” Linda does not dispute this conversation took place but says that the words to the following effect were used: “I am an experienced business broker and I have helped other clients similar to yourself. However, your visa requirements will be handled unlimitedly by you immigration lawyer.”
52 Linda told Frank that she had 15 years’ of experience without a single complaint. She agreed that she said this to Frank to put him at ease and so that he would trust her. Linda said that she would be able to find him a suitable business before the due date.
53 At the 11 December 2018 meeting, the parties entered into the agency agreement for the period 11 December 2018 to 30 March 2019, whereby AIG would act as Frank’s business broker “to buy the business” on behalf of Frank. Pursuant to the agency agreement, Frank agreed to pay to AIG an initial fee of $3,300 and upon successful purchase of a business, a 5% commission. AIG agreed to provide the services of a business broker to Frank.
54 Linda says that between December and March 2019, AIG introduced Frank to a number of businesses for sale among which was a Jimmy Grants coffee shop at Eastland shopping Centre. At a meeting on 31 January 2019, Frank requested that Linda look for more businesses. Linda told him that the rent for the coffee shop was $220,000 per year and it was increasing by 5%. Frank said that the franchisor would still need to be paid the franchise fee but agreed Jimmy Grants could be an option.
55 On 12 March 2019, Linda and Frank met again with Linda providing further business options including the Jimmy Grants Eastland coffee shop franchise, the Hometown Asian grocery shop in A’Beckett Street, a printing factory run by “a local” with a sale price of $1m for 30% of its shares and a sushi shop called Fish and Sushi Well at Burke Avenue, Hawthorn East for which, as Frank stated, Linda told him the annual rent was $78,000. There were no discussions about turnover.
56 Linda said that the coffee shop turnover was over $500,000 and it was a franchise. The franchisor charged 8% in management fees and it had 6-8 employees. The rent at the Eastland coffee shop was over $180,000, but she could not recall the exact figure.
57 In relation to the Hometown Asian grocery shop, Linda said that the shop had been operating for 3 years, with annual takings between $400,000 - $500,000. It was located close to RMIT University and the owner was wanting to open up another shop 10kms away and was therefore looking to sell the A’Beckett Street shop.
58 Linda said that she told Frank about the local printing factory which was a very big business with high value; he could consider purchasing a 30% share (or over) of the business for $1m which included the valuation of the facilities.
59 Linda went on to tell Frank about Fish and Sushi Well (“the sushi shop”) saying the shop had been running for about 10 years, rent was $80,000, with an annual turnover of $400,000. In 2015 - 2016 the sushi shop was quite profitable but lost money in 2017 - 2018 when the owner returned to China and the installed management was poor. Given the sushi shop had good past performance, in the event better management came onboard, then performance could improve.
60 Frank submitted that by reason of Linda providing extensive field research, data and financial evaluation and comprehensive business forecasting for the target business of the sushi store, set out above, that she provided Frank with a Medium Term Service pursuant to the agency agreement (see further below). Linda denied this and said she did not organise a “trial run” for Frank. She says she did not charge him the $5,000 for this service.
61 Frank said that after discussing these options his main target was the sushi shop. He reasoned that the amount of investment required in the printing factory was too high and he lacked any experience in running a printing business.
62 By the end of the meeting on 12 March 2019, Frank said that he was interested in the sushi shop. Linda agreed.
63 On 15 March 2019, Frank wrote to Linda via WeChat saying he had discussed the options with his wife and they had decided to operate the sushi shop. Linda arranged for them to meet in the city at her office. At that meeting, Frank explained why he was not interested in the other businesses and decided to proceed with the sushi shop instead.
64 Linda then obtained additional information about the sushi shop.
65 On 25 March 2019, Frank sent a message to Linda asking whether she had any news about the sushi shop’s price and in a following telephone conversation, Linda told Frank about the negotiations with the sushi shop.
66 On 26 March 2019, Linda wrote to Frank stating that she wanted to discuss the details of “the back-up plan”. Frank said that over the phone Linda told him that there were some problems with the sushi shop sale because the management company was being very difficult and there was an issue with the lease transfer. Linda said that Frank then wanted to talk about the “back-up plan”.
67 Frank’s evidence was that he wanted to have a more detailed discussion about the back-up plan with Linda. Linda said that she thought the A’Beckett Street Asian Grocery shop was a better option for Frank as it was close to RMIT and he said he would give it more thought. Linda claimed the Grocery shop was “the back-up plan” and that Frank said he would consider it.
68 Linda says that on 27 March 2019, Frank met her and James at Laurent café in South Yarra and made an oral request to buy the Zhengpin restaurant business. Frank said that Linda told him that the sushi shop management company was very difficult when it came to transferring the shopping centre lease and a past buyer had given up on purchasing the sushi shop due to the failure to transfer the lease. Conversely, Linda said that there were no particular issues and it was standard for a lease transfer that the vendor held a bond for 6 months. Where the buyer had no experience in running a business in Australia, then the bond might be higher.
69 Frank deposed that Linda told him that because he was not a permanent resident or a citizen, he would encounter difficulties in transferring leases and the shopping centre may require more than 6 months’ advance rent. Linda denied this, saying a shopping centre landlord requires more from its tenants than an independent landlord. Frank also stated he would have to do an assessment or interview with the shopping centre and that Linda told him this was standard procedure of any shopping centre.
70 All the while, Linda maintained she still retained “a back-up plan” in the form of the Asian Grocery shop and that if Frank agreed, she would prepare documents for the sale. This was in light of the diminishing visa time frame, the mounting urgency of his case and due to the fact that he was willing to run the business himself. Frank said that Linda told him that just across the road from the café where they were meeting, her husband had set up a restaurant called Zhengpin Kitchen, and she would like to recommend that business. Linda claimed that Frank asked for a back-up plan if the sushi shop fell through due to the lease issues.
71 In my view, in light of the messages sent on 25 and 26 March 2019, it was Linda who suggested a back-up plan to Frank and that back-up plan was the Zhengpin Kitchen business, and not the Asian Grocery store.
72 Frank’s wife Danny gave evidence that she first met Linda at the 27 March 2019 meeting at Laurent café in South Yarra. She said they discussed the sushi shop and was told that there had been a previous potential purchaser but there had been issues with the transfer of the lease and that they should be prepared for the same. It was around lunch time and Linda said that her husband’s restaurant was across the road and they should have lunch. The defendants say that Danny was not at the 27 March 2019 meeting at Laurent but that they met Danny on 3 April 2019. The defendants submitted that Danny did not have a good memory of the events and was relying on her husband’s recollection. On the contemporaneous documents, I accept that Danny’s first meeting with Linda and James was on 3 April 2019.
73 Linda said they concluded their business discussions at Laurent café and as it was lunchtime, crossed the road and had lunch at Zhengpin Kitchen and she made a round of introductions. Prior to the meeting, Linda claimed Frank did not know anything about the restaurant, where Frank’s evidence was that Linda had told him the restaurant was James’ business. Linda said that when it came to business she and James were clear about: “what is his and what is mine”. Frank understood from Linda’s statement that the restaurant business was completely run by James and it was run in his individual name. At lunch James came out of the kitchen and she introduced her husband to Frank. Linda said Frank said he was very surprised and said “Linda, you even own a restaurant”. She replied that is was not her restaurant, it was James’ restaurant and her and James’ businesses were separate. Frank agreed to have a look at the restaurant.
74 Frank agreed James told him that he had just opened the restaurant and that he should taste the dishes. Subsequently, Frank told James about his education in the UK and his background in accounting with James saying that Frank also stated he spoke English and had previously worked in Hong Kong. Frank denied this. He claimed he only told James he wanted to purchase a business in Australia because he wanted to apply for the subclass 888A visa.
75 James’ evidence was that that the first time he met Frank was on 27 March 2019 when Linda brought him to Zhengpin Kitchen and he was surprised when Linda introduced Frank during the lunch. Frank said “this is your shop, can I take a look around?” after which James gave Frank a tour of the premises and showed Frank a video of the restaurant’s opening. When he took him back to the table Frank asked James how business was going, to which he replied “not too bad”. Frank then asked whether James had a partner as it was a big restaurant to which James said “no”. He helped them order a few dishes and as it was a busy day, he went on with his own business.
76 James said his conversation with Frank was brief and only about 10 minutes given he was having lunch with Linda and that they were there for about an hour and half. He spoke to Frank about how Zhengpin Kitchen was a new restaurant and that it opened in December 2018. He mentioned it was an old Japanese restaurant and that he has changed it to Chinese. Frank agreed that James told him it was a newly opened restaurant but he did not mention the Japanese restaurant.
77 James said that after they finished their lunch he returned to the table and tried to see them off.
78 James’ evidence was that on seeing them off, Frank suggested the restaurant as a “back-up option”. Frank denied this. James told Frank he was not in a hurry to get an investor as the restaurant had only just opened and the turnover was not high. He had not previously considered the option of an investor and told Frank that a restaurant is very hard work. James said that Frank replied that he was not afraid of hard work. It was not until 3 April 2019 that James claimed he understood that Frank wished to invest in Zhengpin Kitchen.
79 Linda said that Frank told her that he worked in a restaurant in the UK for about 2 years and he had looked at opening a restaurant in Hong Kong. Frank said that he was very excited at the prospect of investing in the business and told James about the Accounting Degree he completed in the UK and the 2 years’ of waitering experience he also gained while in the UK. Further, he told James he had been doing business in Hong Kong for a few years. James said that Frank told him he had experience in managing a business and he was looking for a business.
80 Linda said that they did not discuss purchasing a share of the restaurant at Zhengpin Kitchen. They had concluded their discussion of back-up plans at Laurent café and were only there to have lunch. She said that Frank asked at the café if the restaurant was owned by James alone and could he use it as a back-up plan.
81 Linda told Frank that the restaurant was owned by James. In her view, the purpose of the family trust was the tax structure set up by her family and business accountant and it provided the funds for the restaurant. However, she said that James made all the decisions about the restaurant and she was not involved in any of the day to day management. However, Linda agreed that the family trust represented her commercial interest and if the restaurant made money, those funds would be paid to the family trust. So too, when money was paid for the sale of units, it would benefit the family trust. Linda said that James had borrowed money from the family trust and a third party financier. James could then determine how much money he would return to the family trust. Linda said that not all of the purchase price came back to the family trust as there were debts that had to be paid.
82 On 1 April 2019, Linda sent Frank a copy of the restaurant’s menu via WeChat due to Frank mentioning the restaurant to his wife and their willingness to invest in the business. Linda acknowledged that this was not something she could decide, given James ran the restaurant, but that if Frank was interested, she could set up a meeting with James. Linda claimed she told Frank that the authority had expired on 30 March 2019 and if the restaurant was not successful she would need to sign up a new agreement. Frank requested a meeting on 3 April 2019 and via WeChat Linda recommended he bring his wife along to the meeting.
83 Linda says that on 1 April 2019, Frank formally advised the defendants by WeChat that he wished to purchase a share of the Zhengpin Kitchen restaurant instead of a business introduced to him by AIG. Frank said during the phone conversation they did not talk only about the restaurant but they came to that conclusion at the end of the conversation. Linda said that before the phone conversation, Frank left her a phone message in which Frank explained that he had mentioned Zhengpin Kitchen restaurant to his wife and they were very interested and wanted to invest in it. For her part, Linda told Frank that she could not make a decision about the restaurant and when it came to selling or any other decision, James was responsible for making them all. Linda denied that she suggested the restaurant as an option, but that she mentioned the authority had expired with Frank yet to make a decision about a business. Linda informed Frank that if the Zhengpin Kitchen restaurant deal did not go through, she would need to sign another authority with him. This conversation was not put to Frank in cross examination.
84 James gave evidence that on 1 April 2019 Linda told him of Frank’s interest in investing in the business and to give it some thought. James said he was considering it given Frank’s background and previous experience.
85 On 3 April 2019, Frank, Danny and Linda met at Laurent café in South Yarra to discuss the collaboration and 10 minutes into the meeting Linda called James to come over the road to meet at the café. Frank said that the purpose of the meeting was to decide if he should continue putting any effort in the sushi shop and to get more information about Zhengpin Kitchen. Linda told Frank that the restaurant had started business in December 2018 and showed him the opening menu. She detailed that the restaurant was James’ business with a monthly rent of $11,000 and that they had obtained a favourable lease with a 4 months’ rent free period during which they had undertaken extensive renovations. She told Frank about James’ working experience as a successful chef in China and that he had been an executive chef of a star rated restaurant. Danny’s evidence was consistent with Frank’s account. Conversely Linda’s evidence was that she did not discuss James’ experience as an executive chef in a star rated restaurant.
86 Danny said that the purpose of the 3 April 2019 meeting was to introduce James’ restaurant to Frank. Danny agreed that Linda told them that she managed to secure a 4 month lease period with monthly rent of $11,000 and that the restaurant opened at the end of December 2018. Danny’s evidence was that James told Frank that about $15,000 per month was being invested into the restaurant, the wages were about $4,000-$5,000 per week (and did not include James’ wage) and the rent was $11,000 per month.
87 Linda said the group then had a meeting at Zhengpin Kitchen restaurant which lasted about 3 hours. During this time, Frank and Danny looked around the restaurant and questioned James further about the operational situation of the business. Linda said that they again asked when the restaurant opened with James telling them they started their trial run on 18 November 2018 with an official opening date in January 2019.
88 Linda claimed James brought a copy of the lease with him to the meeting and had printed out the February to March cash register takings and explained the records to Frank and Danny. James said that Frank could take the lease and takings records with them for their reference. Linda suggested that they could take the information to their own accountant. Linda’s evidence was that at that time, the weekly takings were about $5,000.
89 Linda went on to say that Frank asked about the purchase price if he became a unitholder. She told him James was not willing to sell the whole business, but if he wanted to sell, it would be a half stake with an asking price of $500,000. Linda said that James told Frank that his total investment to date was around $700,000-$800,000 and the provided asking price was what James’ thought fair. She told Frank that $500,000 for 50% of the business was not too much given James’ investment to date. Linda did not get or provide an independent valuation of the business and it was based on James’ own valuation. Frank did not request an independent valuation. Linda admits she made the representation that $500,000 was a fair and reasonable price.
90 Frank said that he told Linda that he did not have any experience managing or operating a restaurant. He told Linda that the business he needed to buy required an annual turnover of $300,000 plus to increase the chance of success for his visa application and it was required to reach a $400,000 turnover in the 12 months prior to the application. Linda took out her mobile phone, did some calculations and came up with $1,000 to $1,500 a day figure for turnover. Linda asked James if he could reach this turnover to which James said “that is for sure”. He said there were apartments nearby, commercial shops and offices and the customer base was very stable. Frank and Danny both said James told them there would be “no problem” to reach the figure. Linda also agreed the restaurant was located in a very busy area with new apartments being built at the end of 2019; James was confident that, as a result, there would be more customers.
91 James said that he thought the business was stable in the beginning. They had a turnover of $3,000 to $5,000 a day for 2 – 3 months, 7 days per week because they were actively marketing and attracting new customers; this produced a turnover of $84,000 per month. James did not recognise the BAS for the period January – March 2019, as the business’ accountant produced the document. The BAS records show total sales for the first 3 months as $47,432 accounting for monthly takings of $15,810 and not $84,000. On 21 January 2019, a cheque from the business was dishonoured because the bank account did not have sufficient funds. The plaintiff submitted that the business, as at 12 January 2019, had serious cash flow difficulties. James said that the business was still new in January 2019.
92 The profit and loss statement for the year ending 30 June 2019 prepared by Mr de Couilliard shows total sales as $137,623.71. James said that he had not seen the report before. Frank submitted that James made up his evidence about the turnover of $3,000 to $5,000 per day. None of the financial records supported the assertion that the business was making $3,000 to $5,000 a day for the first 2 – 3 months. James said they received a lot of cash payments from their Chinese clients, however, there is no record of these cash sales.
93 Linda’s evidence was that they anticipated that by the end of the second year of trading the business would enter a rapid increase period where annual takings could reach $1m. James said that if the restaurant was successful they could open up branches and had lodged a trade mark for the restaurant’s logo on 30 July 2018 in anticipation of the projected growth and expansion.
94 The defendants claim that they said profits would depend on “if things go well”. Further, Linda claims not to have made the representation of the ability of the business to make $1,000 to $1,500 a day in turnover. James concedes that he did make that representation, but the defendants note that James is not a defendant to these proceedings. The defendants claim that no one made representations as to profitability at the meeting as claimed. Frank denied this and said that James, in relying on the construction of the new apartments, said turnover could then reach $2,000-$3,000 per day. Linda agreed that James said this. The defendants claim that they told Frank that the profits depended on things going well and, additionally, the front and back of house working well together. Frank denied this. He said James was an experienced restauranteur and made promises about the restaurant’s profitability. Linda, as his agent, did not express any disagreement in relation to the truthfulness of James’ statements. Frank said that James made these promises to entice him to invest his money, despite his inexperience in front of house management of a restaurant.
95 Frank and Danny said that Linda told them the restaurant was not profitable at that stage as June to August was the quiet period. From September/October onwards the number of customers and profits would increase. James said that by the end of 2019, the business would break even and in 2020, would become profitable. Linda agreed with what James said. Frank submitted that the reason why they told him that, in 2020, the business would turnover $400,000 was to encourage him to invest as he required this to satisfy his business visa criteria. Linda then gave evidence that James said the business would achieve a turnover of $300,000 by the end of 2019. The plaintiff submitted that this was James’ ambition. In fact, the business did not break even at the end of 2019.
96 There was a discussion about the price for purchasing units. Linda mentioned the price of $500,000 for 51% of the business. She told Frank that James was only willing to sell half of the restaurant. Frank told Linda that $500,000 was a little bit expensive and Danny said that she was surprised by the purchase price as well. Danny gave further evidence that Linda told them about James’ leaving their previous Preston restaurant to look after their children after the birth of their second child. Now, that the children were older, James wanted to go back to work.
97 Frank gave evidence that Linda told him that James used to run a very successful restaurant in Preston, which had a turnover of $15,000-$17,000 per day. Linda said that they misheard her as the turnover for Preston was around $10,000 per day. Linda denied that she mentioned James’ experience to encourage Frank to invest in the business. Linda said James had talked about his past successful experience, but that before 3 April 2019, he had not turned his mind to sell the restaurant or a stake therein.
98 On 3 April 2019, James said that he, Linda, Danny and Frank met to talk about working together. This was the first time that James met Danny. He introduced the turnover figure of around $5,000 per week and showed Frank and Danny the takings records from February to March 2019. James told them the monthly rent was $11,000, gave them a copy of the lease and spoke a little about the investment structure as he saw it. He detailed the wages were $4,500 per week for the staff, excluding James’ wage, and said they discussed the price for the units at the meeting. James put the figure of $500,000 for 50% of the units in the business to Frank and Danny and did so based on his investments into the business. He detailed that he had spent $600,000 on renovations, over half a year researching the business and his costs, including labour and legal costs, were around $20,000. His wage, calculated from January to December 2019 was around $150,000. He valued the liquor licence and goodwill at $120,000 which included future potential of the restaurant. This was the reasoning applied in coming to a fair figure of $500,000 for the 50% share. James said he would not have sold a 50% interest for less than $500,000.
99 It is common ground that the restaurant was not making a profit as at April 2019 because it was a new business. In the first 12 months’ of operation, James was still investing money in the business, building up its reputation and managing its suppliers. James said they discussed that they needed $15,000 in cash flow per month as the restaurant was not making money and the new partner would need to contribute $100,000 as cash flow. James said he did the maths towards the end of 2019 and arrived at this figure based on the takings and the existing operational situation. He anticipated that if they worked harder they would be able to improve the business and anticipated breaking even by the end of 2019 with the venture becoming profitable by 2020.
100 Frank submitted that, by March 2019, without his cash contribution the business could not sustain itself through its own trading activities. James said that he could make contributions himself to cover the monthly rent if the bank account was short but agreed that without cash contributions, the restaurant was not able to cover its expenses.
101 James recalled Frank mentioning a turnover figure of $300,000 to $400,0000. James said there was no problem that they could reach $400,000 by the end of the second year. Normally for a new restaurant, to be safe, the usually predicted turnover is around $300,000. James’ evidence was that the business would then enter into a speedy increasing period with his estimating the turnover in the second year reaching $500,000 to $1 million. In the third year, the business was anticipated to reach its peak, with it usually being the case for a restaurant as big as this one, with over 100 seats, that they could estimate takings of over $1 million per annum.
102 It became common ground that, in order to break even, the business needed to turn over $1,500 a day and in order for James to be paid a wage, the restaurant would need to increase this to over $2,000 per day. James said that his long term plans after 3 years and achieving the turnover of $1 million, was to consider opening further branches.
103 James said that his previous experience as a chef was in the city and at the Preston restaurant working in fast food. He went on to say that in Preston, at the start the turnover was not very good but in the first year it was $6,000 per day increasing in the second year to $10,000 per day. The Preston restaurant had capacity for less than 70 seats.
104 James said that, as he was the chef and director of Zhengpin Kitchen, he had started the restaurant following 6 months of research and had completed the fit out and refurbishment and was effectively starting from scratch. His research identified that there were two famous Chinese restaurants on Toorak Road near the train station with a turnover of over $10,000 per day. Across the road from the premises was Laurent Café, Chez Olivier (a famous French cuisine restaurant) and The Meat and Wine Co with apartments being constructed nearby. James thought it was a very good location to establish his Chinese restaurant. He undertook the start-up research beginning in March 2018 and on 15 August 2018, James took over the premises.
105 James said that he took over from a Japanese restaurant on the premises and converted it into a Cantonese Style restaurant after negotiating with the vendor and reducing the asking price to $120,000. Frank claimed that he owned the restaurant personally. James is the sole director and secretary of Zhengpin & Co and the family trust only provided him with funds through a loan. However, the owner of the shares in the restaurant were owned by the trustee of the family trust.
106 James said that the demolition of the Japanese restaurant was a “huge” job. The tatami mats were fixed to the walls, the liquor bar was entirely different to the Chinese style, the kitchen facilities were outdated and the layout was different. James changed the restaurant layout completely. The renovations took about 4 months to complete. James was the owner-builder for the works with a team of 4 to 5 workers. He said when the restaurant opened it was very good and had 8 employees.
107 James said that after 3 April 2019, Frank came to the restaurant a couple of times for lunch with some friends. When he met Frank, he introduced the operations of the business and the takings of the restaurant. Between April and May 2019, James said that Frank also visited the restaurant alone but he could not recall how many times this occurred. Frank told James that he was looking around. James said that Frank stayed around 2 hours each time and usually came in the evenings.
108 Linda says that between April and May 2019, Frank was provided with the financial data for the business and attended the premises to familiarise himself with it.
109 In evidence Linda denied making the Profitability Representations as alleged that:
"The restaurant is not making money at this moment. June to August is the off-peak season for a restaurant. But James is very experienced. From September, the restaurant’s incomes will cover the expenses. Then from October, the restaurant will definitely make money. It is certain for James to make a profitable restaurant."
110 Instead, she claims that James said words to the effect:
“This is a new business. We need to put in the work to make it successful. If the front-end manager and the back-end staff coordinate well, we can break even within a year. After a year, I do not see any difficulty in making a profit.”
111 Frank said that had Linda made the representation as above at the time, then he would have needed to calculate working capital into the restaurant and would not have invested in the restaurant at all. James said that a business is successful due to the work of the people involved. Danny denied that Linda said that the turnover depended on both parties putting in the work.
112 Linda told Frank and Danny that there had been other investors interested in the restaurant and there had been previous discussions, but conceded they never got to the stage of discussing a purchase price. Linda told Frank and Danny that the investors’ ideas were outdated and they needed to partner with investors from a younger generation to keep up with the times and implement initiatives such as online ordering. James said that he was not considering a sale but a friend showed their interest in investing in the restaurant. He did not agree because that person was not young and his concept was different to James’ and as such, did not consider him as a potential partner.
113 When Frank asked for the restaurant’s financials Linda advised him that the financial year had not ended yet and because the business had only operated for a few months, they did not have any official financial reports. She said they would have to prepare a special financial report and said that doing so would be wasteful or “not money well spent”. She told Frank that at the end of financial year he would be provided with the official financial statement. Frank gave evidence that he did not receive any financial reports of the business prior to his investment.
114 Frank said that he believed Linda when she told him that $500,000 was a reasonable amount to invest in the business. Frank’s position was that Linda was his agent. She was responsible for reviewing all documents, evaluating the prices of prospective businesses and, as such, it was her obligation to provide him with full disclosure in relation to the business. Instead, he believed her when she told him that James’ and her businesses were “all separate”. Frank said that he believed James when he said he could turn over $1,000 - $1,500 per day. He also believed Linda when she said that from October onwards the number of customers would increase because they had undertaken detailed market research of many restaurants. James and Linda both told Frank that there was a market research report but he did not see it nor did he request a copy of the report. Frank said that both James and Linda told him that if the restaurant was run properly it would be able to open up many branches like David’s Hot Pot and Secret Kitchen. Linda agreed with this in her evidence.
115 Frank said that Linda made enquiries with James whether the business turnover could reach $400,000 per year. In her role as a business agent, Linda failed to dispute this figure. Therefore, Frank said that he trusted what was predicted and it was her job to ask for the financials for the business to inform him pursuant to the terms of the agency agreement. Linda submitted that as a broker it was not her role to dispute a business owner’s prediction. She would not be in a position to know if James’ prediction was false. Danny did not recall discussions about future profitability just whether the business would be able to meet the 888A visa requirements. Linda said that whether the business was suitable for his migration purposes was a matter for Frank’s migration agent.
116 Danny said Frank was the main decision maker about the purchase. He asked her for some input. She said that Linda gave her a lot of confidence in the restaurant and at the time Danny thought it was a good restaurant. Danny did not raise any objections to the purchase.
117 In the negotiation Frank said that they agreed to $500,000 for the purchase of the shares. He denied that he knew Linda was the one selling the restaurant. Linda said that when they signed the unit sale agreement it was explained to Frank that the family trust owned the restaurant but did not have the right to manage and run it.
118 In a transcript of a discussion between Danny and Linda for the meeting between the parties on 3 December 2019, Danny said that the price of the shares were too high but they bought in above the market rate to become joint shareholders and they were buying Linda and James’ skills. Frank agreed with his wife’s comment and said they were willing to pay a premium price because of the promises Linda and James made to them. They say the promises were false.
119 Frank said that he only had dishwashing experience and yet Linda and James took him on as their business partner. Frank said that after he became a director and shareholder he did his best to help James run the restaurant. Frank claimed that the success of the restaurant depended on the most experienced partner in the business and James would need to bear more responsibility. Linda said that Frank told her he was a waiter in the UK for two years.
120 After the 3 April 2019 meeting, Frank created a “management group (Zhengpin Kitchen)” WeChat message stream. He said that he invited Linda into the WeChat management group because she was James’ wife and his agent. The defendants say that this shows that Frank knew that Linda was part of the management of the restaurant. Frank said that he accepted that there would be communication as between husband and wife. He said that Linda had already sent the restaurant menu to Frank via WeChat.
121 Danny said that Linda was included in the “management group (Zhengpin Kitchen)” WeChat message because she wanted to share the videos of the opening of the restaurant with them. Linda said Frank set up the WeChat group as he wanted to know more about the restaurant. Frank said that after the transaction had completed, Linda could leave the management group chat. However, Frank and Danny both accepted that Linda did not leave the management group chat after 13 May 2019 following the purchase of the units. Danny said that Linda stayed in the management chat to assist James. The defendants say this is inconsistent with the plaintiff’s position that they thought James and Linda’s businesses were separate.
Breach of Contract
122 Frank contends that on a proper construction of the terms of the agency agreement, AIG agreed to provide the following services to Frank:
a)act as his agent for the purpose of buying a business in Australia;
b)identify suitable target businesses that are available for purchase;
c)conduct due diligence on the target businesses including field research, data evaluation, financial evaluation and business forecasting;
d)help to negotiate with the seller in order to obtain the best possible price and most advantageous terms of sale; and
e)advise on transfer procedures and other legal requirements.
123 Clause (i) of the agency agreement provides that “The Purchaser agrees to pay [AIG] the Preliminary Service Fees of $3,300 incl. GST, Medium Term Service Fee of $5,500 incl. GST and 5% or above commission that need to be paid in the final stage (including Medium Term Service Fee) (Please refer to the Service Guide for more information).” The Service Guide provided that “[o]nce the business succeeds, a $5,000 previously paid [fee] will be deducted from the commission”.
124 Although the agency agreement stated that it remained in full force and effect from 11 December 2018 to 30 March 2019, it went on the further provide that it “shall be in full force and effect until settlement date”.
125 The Medium Term Service included the terms that AIG would conduct due diligence on the target business including field research, data evaluation, financial evaluation and business forecasting and help negotiate with the seller in order to obtain the best possible price and most advantageous terms of sale.
126 The defendants say that Frank only paid $3,000 (excl GST) for the preliminary service fee. The defendants claim that he did not select the $5,000 (excl GST) service. Frank said that he thought he would get the full service in accordance with the schedule and that Linda did not ask to pay strictly in accordance with the agreement. He further said that he paid the 5% commission which would deduct from the commission the sum of the $5,000 for the intermediate services if previously paid in accordance with clause (i) read together with the Service Guide. All of the remaining payments for the agent’s service was included in the final amount. Frank believed that the $5,000 was included in the final sum and Linda did not require him to pay the $5,000 previously, so this did not need to be deducted from the 5% commission. I agree with Frank that the agency agreement incorporated the Preliminary Service and Medium Term Service and that the 5% commissions was included in the final stage in accordance with clause (i) and the Service Guide. As such, the Medium Term Service was binding between the parties.
127 Linda says that, for the services provided under the agency agreement, the customer would choose which service they needed and then AIG would charge accordingly. Usually AIG would charge $3,000 on signing the agreement. This would cover the Preliminary Service with the initial consultation, 1-3 options according to the client’s needs and then basic analysis for the client to choose a suitable business. The next step was to help the client and vendor to discuss the business details and Linda would then help the client have a trial run of the business and assist with the changeover once that is concluded. AIG would then charge $5,000 for the Medium Term Service Fee.
128 Linda said that if Frank had paid the $5,000 for the Medium Term Service Fee it would be included in the final purchase commission invoice. She conceded that the $27,500 final invoice was more than 5% of the $500,000 purchase price. Linda said she charged her fees in accordance with each service and the commission had a specific explanation of what was included. The Medium Term Service of $5,000 was not needed by every customer and she only charged her clients if she provided that kind of service. If she did not complete a sale, then she could not charge the commission, and so she would then need to charge the client the $5,000 fee.
129 In the process of completing the purchase, a law firm was involved to draft the agreement. The legal fee of $2,000 was not charged by AIG but was an indication to the client of the fees that could be rendered by the law firm engaged.
130 Linda said AIG charged Frank the $3,000 and a commission after Frank invested in Zhengpin restaurant. Linda said she charged the commission because Frank showed an interest to buy Zhengpin as a “back-up plan” before the agency agreement expired. This position is inconsistent with that taken by counsel for the defendants’ in the opening submissions; that the issuing of the invoice for the 5% commission was rendered in error and should be reimbursed.
131 On 12 March 2019, Frank and Linda had a meeting in which Linda introduced Frank to several businesses what were potential investment opportunities. One of these was the sushi bar.
132 On 15 March 2019, Frank sent a WeChat message to Linda stating that he has decided to buy the sushi bar. The message stated: "Linda, I have discussed with my wife and we have decided to operate Fish and Sushi". Linda responded with a message: “Okay, how about meeting at 1:30pm next Monday”.
133 Frank says that on 18 March 2018, he met with Linda and again said to her that he wanted to buy the sushi bar.
134 On 25 March 2019, Frank sent a WeChat message asking: “Linda, any news?”. The next day Linda responded with a message stating: “…I want to discuss with you about the details of the backup plan, a more comprehensive preparation to ensure our subsequent smoothness”.
135 Frank said that on 27 March 2019 and 3 April 2019 Linda discouraged him from buying the sushi bar and encouraged him to buy a share in Zhengpin Kitchen. It is common ground that during the meeting on 3 April 2019 Linda represented to Frank that $500,000 was a fair and reasonable price for a 51% interest in the Zhengpin Kitchen restaurant. Linda said that James suggested $500,000 as the purchase price and Frank could have refused.
136 Frank argues that he relied on what Linda said to him during the meetings on 27 March and 3 April 2019 and signed the Sale of Units Agreement on 13 May 2019.
137 Franks says that under general law, an agent for reward is required to exercise the degree of care, skill and diligence which is reasonably necessary for the due performance of the undertaking.[2]
[2] LexisNexis, Halsbury’s Laws of Australia (online at 6 November 2012) 15 Agency, (5) Duties of Agent to Principal, Duty to exercise care, skill and diligence [15-170].
138 Frank also relies on the consumer guarantees implied by ss 60 and 61 of the ACL. Frank was a consumer under the ACL because the amount paid for AIG's services were less than $40,000 (s 3 ACL).
139 Frank says that AIG breached the agency agreement in circumstances where:
a)Zhengpin Kitchen was an unprofitable business that was making significant trading losses in the months before Frank signed the Sale of Units Agreement.
b)Zhengpin Kitchen was not a suitable business for subclass 888A visa purposes as it was not registered for GST and did not have a turnover of $300,000 or more.
c)The price of $500,000 for 51 of the 100 units in Zhengpin Unit Trust was exorbitantly high and there was no reasonable correlation between the price paid and the profitability of Zhengpin Kitchen.
d)AIG failed to inform Frank about the true state of Zhengpin Kitchen's financial affairs.
e)AIG failed to obtain a reasonable or market price for the 51 units in the Zhengpin Unit Trust.
f)AIG failed to warn Frank about the financial risks involved in investing the amount of $678,580 in acquiring a 51% stake in Zhengpin Kitchen.
g)The market value of the Zhengpin Kitchen business was between nil and $236,522.
140 The defendants contend that the services provided by AIG to Frank did not extend to the purchase of the restaurant. They say that in the performance of AIG’s obligations under the contract, Linda sourced a number of small businesses for the plaintiff, one of which – Jing Bo Pty Ltd (trading as Fish and Sushi Well) – Frank had initially shown interest in purchasing. She says that on 27 March 2019, it was Frank who initiated the request to purchase the restaurant, first as a back-up option, and later in April 2019 as his primary business investment in Australia.
141 The defendants contend that Frank’s investment in the business did not arise out of the performance of services by AIG pursuant to the Contract where:
a)the purchase only arose after expiration of the Contract.
b)Frank’s purchase of shares in the restaurant did not arise in the course of the performance of services by AIG. Instead, it was initiated by Frank in circumstances where there could be no common intention between the parties that Linda – as the wife of the founder and chef of the restaurant – would still be performing services for Frank in her capacity as his business broker, particularly given the expiry of the Contract.
142 The defendants alleged that “the plaintiff and AIG entered into a general purchase authority agreement for a term expiring on 30 March 2019”. The defendants assert that as no contract existed at the time of the Sale of Units Agreement, the pleaded breaches cannot succeed. Linda said that it is usual practice in her industry to have an authority for 3 months. After 3 months if she was unsuccessful in finding a business then the parties would need to sign a new authority.
143 Frank submits that based on the conduct of the parties, the agency agreement must be taken to have continued to operate. After 30 March 2019, Linda did not stop to act as Frank's business broker and their meetings and discussions about what business he should invest in continued. Moreover, after Frank bought a 51% stake in Zhengpin Kitchen on 13 May 2019, AIG issued an invoice to Frank (dated 11 June 2019) for their 5% commission in the amount of $27,500 with respect to that transaction. This invoice was duly paid by Frank on 11 June 2019.
144 As AIG rendered an invoice and accepted payment of commission under the agency agreement for a transaction that took place on 13 May 2019, Frank contends that the defendants can hardly now argue that the operation of their reciprocal duties under the same agreement somehow came to an end on 30 March 2019. Linda’s evidence was consistent with her continued view that she was entitled to the commission, despite her counsel’s opening submission to the contrary.
145 Further, as noted above, the terms of the agency agreement state that the agreement “shall remain in force and effect until settlement date”. In the present case, Frank was introduced to the business prior to 30 March 2019 and settlement date took place on 13 May 2019. This was contemplated by the agreement and I find that the agency agreement was in force at the time of settlement.
146 Frank said that he asked why he still needed to pay commission to AIG. He said Linda told him that she introduced the business to him and he had to pay the commission. Linda denied having this conversation. She said that she sent Frank the invoice on 11 June 2019 and by the end of June she went to the restaurant and had a conversation with him. Frank said to Linda that the agency agreement had expired and in fact Linda was the seller of the restaurant units. He asked if she was still charging the commission. Linda said that normally if the offer was made before 30 March 2019 then the commission was charged. She said that Frank had shown interest in the restaurant prior the expiry date. Linda claimed that he did not need to pay, he could make the decision on his own. This proposition was not put to Frank in cross examination and again, was not consistent with the defendants’ counsel’s opening.
147 Linda said that there had been an offer to pay the commission sum of $27,500 back to Frank and this was the subject of an offer. An offer of $35,000 was made in writing by the defendants to the Frank at 6:36pm on 12 October 2021, having regard to the amount paid by [Frank] in respect of the business broker services he received in full and final settlement of the entire proceeding. The defendants waived privilege in the letter of 12 October 2021.
148 Frank submitted that the letter of 12 October 2021 could not reasonably be characterised as an offer to repay the agent’s commission but that it was an offer to settle the entire proceeding. Linda said that the offer was based on the commission of $27,500 plus interest. I agree with Frank that on a fair reading of the letter of 12 October 2021, the defendants’ offer was to compromise the proceeding and not an offer to repay the commission.
149 The defendants concede that the first defendant invoiced the plaintiff $27,500 in respect of a ‘commission’ amount, which was paid on 8 July 2019. They now say that such invoice should not have been issued in circumstances where the first defendant was no longer providing services to Frank. At the time of trial, AIG had not repaid the commission to Frank.
150 Frank said that when Linda was leaving the restaurant she said to him that he needed to pay the agent’s fee. Frank said he was surprised because Linda was part of the restaurant business transaction as the lease to the premises was in the name of JLAA Investments. Linda said the agreement had been signed between them under the agent’s agreement and this was the amount that Frank had to pay her. Linda said that because her business was separate from James’ business he needed to pay her the money at 5% and, additionally, that he needed to pay half of the rent. Frank said Linda told him there was no conflict of interest and the businesses were completely separate.
151 Frank says that he calculated the trading profit and losses from January 2019 to May 2019 using the bank statements. Frank conceded he knew the business was making a loss but he did not ask how much the losses were as Linda and James had not provided the financial statements and were unwilling to pay for the business accountant to prepare official financial records.
401 The defendants submit that given Frank had a timeframe in which he would be required to purchase a business for his visa application, and James was unwilling to sell at a price less than $500,000, the Court ought to be satisfied that, firstly, Frank would have purchased the business, and, secondly, that he would have purchased the business at the asking price, even if he knew he was paying a premium.
402 As such, the defendants claim that either Frank has failed to take reasonable care in his own investment decision, or, he did in fact take reasonable care, conduct and due diligence. They say that, having made a fully informed decision to invest in the business, Frank now asks the Court to order that the defendants effectively become guarantors against a poor investment outcome. In the former case, the defendants submit, Frank’s lack of reasonable care breaks the chain of causation such that the defendants should not be liable for the loss. In the latter case, it is unclear on what basis the plaintiff asks the Court, in respect of a claim in contract, ACL, equity and/or negligence, to order that the defendants indemnify him against the realisation of the inherent risks of starting a new business.
403 The defendants did not intend to cause loss or damage to Frank, particularly in circumstances where the parties were engaged in a joint venture to operate the business.
404 The defendants conclude that Frank would have purchased the restaurant at the asking price, and has failed to prove that any breach by the defendants caused him to sustain loss or damage arising out of his investment in the business.
405 Frank contends that, but for the breaches committed by AIG and Linda he would not have entered into a transaction that was to his detriment. His case is therefore a “no transaction case”. Frank gave evidence that if he were told of the fact that Zhengpin & Co bought the Japanese restaurant for $120,000 in May 2018, he would have obtained an independent valuation. He also gave evidence that if he knew that Linda was a beneficiary of the C&S Family Trust before he bought the units from JLAA Investments, he would have terminated the purchase of those units.
406 Frank concedes that he said that he was willing to pay a premium price because “of the promises that Linda and James made” and this evidence is consistent with Danny’s evidence, who testified, in reference to the transcript of the meeting of 3 December 2019, that they were willing to invest in the business because of what Linda told them about James’ experience. However, Frank gave evidence that he would not have purchased the business at the asking price if he was apprised of the true facts.
407 Frank submits that looking at the evidence as a whole, including Linda’s evidence, Linda played an active role in promoting the Zhengpin Kitchen restaurant to Frank and Danny and encouraged them to make the investment. All that needs to be established for a finding of causation under the Wrongs Act, is that Linda’s conduct caused or contributed to the harm. It is not necessary to show that Linda’s conduct was the sole necessary condition of the harm.
408 Frank submits that under the Wrongs Act, factual causation requires proof that the defendants’ negligence was a necessary condition of the occurrence of the particular harm. A necessary condition is one which must be present for the occurrence of the harm. The defendants will be liable if their conduct may be described as contributing to the occurrence of the harm. It is not necessary that the defendants’ negligence be the sole necessary condition of the occurrence of the harm.
409 The principles for causation in cases of a claim for damages resulting from negligence, regardless of whether the claim is brought in tort or in contract, was set out by Dixon AJA, in Settlement Group Pty Ltd v Purcell Partners (a firm).[84]
Under the statute, factual causation requires proof that the defendant's negligence was a necessary condition of the occurrence of the particular harm. A necessary condition is a condition that must be present for the occurrence of the harm.
There may be more than one set of conditions necessary for the occurrence of particular harm and it follows that a defendant's negligent act or omission which is necessary to complete a set of conditions that are jointly sufficient to account for the occurrence of the harm will meet the test of factual causation within s 51(1)(a). In such a case, the defendant's conduct may be described as contributing to the occurrence of the harm. It is not necessary that the defendant's negligence be the sole necessary condition of the occurrence of the harm.
[84] [2013] VSCA 370 at [97]-[100].
410 In Re Dawson (deceased); Union Fidelity Trustee Co Ltd v Perpetual Trustee Co Ltd[85] Justice Street considered causation for breach of fiduciary duty and observed as follows:
The obligation of a defaulting trustee is essentially one of effecting restitution to the estate. The obligation is of a personal character and its extent is not to be limited by common law principles governing remoteness of damage. …
[I]f a breach has been committed then the trustee is liable to place the trust estate in the same position as it would have been in if no breach had been committed. Considerations of causation, foreseeability and remoteness do not readily enter into the matter. …
[T]he inquiry in each instance would appear to be whether the loss would have happened if there had been no breach.
[85] [1966] 2 NSWR 211 at 214-216.
411 Justice Kyrou in Talacko v Talacko[86] observed that the objective of equitable compensation for breach of fiduciary duty “is to place the innocent party, as nearly as possible, in the position in which he or she would have been had there been no breach of duty” whereas common law damages for breach of contract are generally assessed as at the date of the breach, equitable compensation is assessed at the time of the trial with the full benefit of hindsight[87].
[86] [2009] VSC 533.
[87] Talacko at [119] – [120].
412 In my view, the defendants seek to agitate two competing and inconsistent positions. One, that Frank was a willing and fully informed investor and, alternatively, that he failed to take reasonable care and conduct due diligence. Given my anterior findings above, AIG and Linda did not supply full and frank information before the execution of the Unit Sale Agreement, Frank, therefore, could not be a willing and fully informed investor in the business. Further, part of AIG’s service under the agency agreement was to conduct due diligence on Frank’s behalf. Frank’s evidence was that he would not have purchased the share of the restaurant business if he had been told the true facts. Any failure to take reasonable care is the subject of the quantum of damages and is explored further below.
413 The defendants’ submission that Frank would have negotiated to pay $100,000 for the 51% share, had he known the market value of the business, does not change the representations made by the defendants; that a fair and reasonable price for 51 units in the Zhengpin Unit Trust was $500,000 and does not mean that there was no reliance placed on the representation by Frank.
414 Applying the principles set out in Talacko and Settlement Group, I find that AIG and Linda’s conduct caused or contributed to the harm suffered by Frank and with respect to the test for causation based on breach of fiduciary duty, the loss would not have happened if the breach had not occurred. In my view, both of these tests have been established on the evidence that AIG and Linda’s conduct caused the loss and damage suffered by Frank.
Equitable compensation
415 Where equitable compensation is sought, the plaintiff must establish some causal connection between the breach of fiduciary duty and the loss for which compensation is recoverable, by the fact that the loss would not have occurred but for the breach.[88]
[88] Re Dawson (dec’d) [1966] 2 NSWR 211 at 215 per Street J.
416 In Alati v Kruger,[89] it was observed that a claimant who has entered into a vitiated transaction has a number of choices when seeking remedy, including suing for damages for breach of contract, suing for misrepresentation and rescinding the contract. However, a plaintiff cannot both affirm a contract and rescind it.
[89] (1955) 94 CLR 216 at 223.
417 Nevertheless, it is noted that plaintiffs may claim cumulative remedies of rescission and compensation for consequential losses in tort as long as the alternative remedies are separately pleaded and there is no double recovery.[90]
[90] Barnett and Harder p 494.
418 Justice Sackville in Nicholls & Ors v Michael Wilson & Partners Ltd[91] set out the principles to be applied for the assessment of equitable compensation as follows.
[91] [2012] NSWCA 383 at [170] - [181].
419 Equitable compensation has three principal features[92]. First, the primary purpose of the remedy is compensation for what has been lost. Thus, compensation is ordinarily computed by reference to the detriment suffered by the plaintiff.
[92] Meagher, Gummow and Lehane's, Equity: Doctrines and Remedies (4th ed 2002), at [23-020].
420 Second, the assessment of equitable compensation is not fettered by common law principles, such as remoteness of damage or foreseeability, which can diminish the quantum of damages at common law. The justification for the difference in approach is that the obligation to make restitution, which courts of equity have imposed on defaulting trustees and fiduciaries, is of a more absolute nature than the common law obligation to pay damages for tort or breach of contract.[93]
[93] Re Dawson (dec'd) at 216.
421 Third, although the equitable duties imposed on a fiduciary have an element of deterrence,[94] as a general proposition there is no element of penalty in the assessment of compensation.[95]
[94] W M Gummow, above n 92. at p79.
[95] cf Harris v Digital Pulse Pty Ltd [2003] NSWCA 10 at [44], [404], [407], [470].
422 A claim for equitable compensation requires a causal link between the breach and the loss.[96] Thus to claim equitable compensation for the defendant’s breaches of fiduciary duty, the plaintiff must establish that it has sustained losses and that there is a causal link between the losses claimed and the breaches.
[96] Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484; [2003] HCA 15 at [44].
423 Professor Barnett has observed that the rules governing equitable compensation for losses arising from breach of fiduciary duty are arguably too broad in that the remoteness limitations on equitable compensation are entirely different from those found in the common law, she argues that courts should, and sometimes do, draw on known models of compensation derived from common law and statutory causes. She opines that:
It may be appropriate to make a fiduciary or trustee liable for all losses flowing from a breach. However, in other circumstances this may produce an unjust result, particularly if the loss arises long after the trustee’s or fiduciary’s relationship with the beneficiary has ceased, and/or the losses are only connected to the breach in the loosest sense. It is argued that insufficient attention to causal and remoteness principles in these situations could render equitable compensation unduly harsh and potentially punitive, and that drawing upon common law models of compensation could be helpful in resolving the issue.[97]
[97] K Barnett, Equitable compensation and remoteness: not so remote from the common law after all UWA Law Review (2014) p48.
424 Professor Barnett states that courts are not always comfortable with holding the defendant liable for all losses in the area of misleading or deceptive conduct or a failure to disclose a conflict.[98] She suggests that some account could be taken of proportion between the breach and the harm caused to ensure that damages do not constitute an unfair burden.
[98] Ibid at p63; Swindle v Harrison [1997] 4 All ER 705, 717 (Evans LJ)
425 Frank contends that as a result of AIG and Linda’s breach of fiduciary duty, he would not have signed the sale agreement, become the guarantor under the lease and made the payments for the purchase price of the units, the contribution to working capital, the several payments for rent, the agent’s commission paid to AIG, Oakfair Lawyers’ invoice, half of the lease deposit and the guarantee under the lease.
426 The defendants conceded repayment of the final commission in the sum of $27,500 paid to AIG on 8 July 2019 under the agent agreement.
427 The defendants claim that there is no causation for the payment of the $3,300 for the preliminary fee paid under the agency agreement. This was paid more than 3 months prior to Frank becoming aware of the restaurant business and could not be avoided. In my view, any amount paid by Frank under the agency agreement should be returned to him as it was money paid by him under a contract that was breached by AIG. He paid the preliminary fee in anticipation of performance of the terms of the contract, which did not occur. As such, the preliminary fee was an expense that was wasted because of AIG’s failure to perform. The preliminary fee is properly characterised as reliance loss suffered by Frank as a result of breach by AIG and Linda and it ought to be compensated.[99]
[99] Barnett and Harder, p152.
428 Frank ought to have an award of compensation for the sum of $600,000 against AIG and Linda paid pursuant to the sale of unit agreement.
429 The transfer of the lease was part of the terms of the sale of unit agreement and therefore, the payment of half of the security deposit under the restaurant’s lease in the sum of $16,500, the payment for ongoing rent in the sum of $29,000 and the liabilities to the landlord under the lease in the amount of $201,161.22 plus interest, form part of the loss that would not have occurred but for the breach.
430 As this is a no transaction case, the award for equitable compensation for breach of fiduciary duty amounts to the sum of $877,461.22 plus interest. This sum does not take into account Frank’s concession that $200,000 must be deducted from any damages awarded.
431 Further, I find that JLAA Investments was used by Linda as her own corporate creature, vehicle or alter ego to obtain the benefit of the sale agreement in breach of fiduciary duty and it is liable for the $500,000 purchase price.
Damages under contract
432 Frank seeks damages for breach of AIG’s agency agreement by failing to conduct due diligence on the business and failing to negotiate the best possible price and the most advantageous terms of the sale for Frank and by reason of its breach of the statutory implied term pursuant to s 60 of the ACL.
433 Frank says that, but for AIG’s breach of the agency contract, he would not have signed the sale agreement, become the guarantor under the lease and made the payments for the purchase price of the units, the contribution to working capital, the several payments for rent, the agent’s commission paid to AIG, Oakfair Lawyers’ invoice, half of the lease deposit and the guarantee under the lease.
434 The apportionment legislation allows the court to reduce the damages recovered where a person suffers damage partly as a result of their own fault and partly of the fault of another, to such extent as the court thinks just and equitable having regard to the plaintiff’s share in the responsibility for the damage.[100]
[100] Wrongs Act 1958 (Vic), s. 26(1).
435 Where the damage is caused by more than one defendant, rather than each defendant being liable for the whole loss, the amount of defendant’s contribution is that which is found by the court to be just and equitable having regard to the extent of that person’s responsibility for the damage.[101]
[101] Part IV Wrongs Act.
436 Concurrent wrongdoers are only liable proportionally for the plaintiff’s loss with a particular defendant’s liability being limited to the amount which reflects the proportion of the damage or loss which the court considers is just having regard to the respective responsibility of the defendants.[102]
[102] Part IVAA Wrongs Act.
437 Frank paid $500,000 for a 51% share in a business that was only worth $236,522. For a 51% share as at 13 May 2019, the purchase prices should have been $120,000. He overpaid for his share of the units by the sum of $380,000. He admitted that he did not seek to engage an independent valuation for the business. Frank’s independent expert said that in a sale of units, it is prudent practice to obtain a valuation before proceeding with the transaction.
438 The evidence set out above indicates that Oakfair Lawyers had a conflict of interest in acting for Frank and the vendor of the business. They failed to advise Frank about the conflict so that he could take steps to mitigate the risks, and failed to advise Frank to seek financial advice or obtain an independent valuation. The loss claimed by Frank was caused by Oakfair Lawyers’ acts and omissions as a concurrent wrongdoer. As such, the damages recoverable by Frank are to be limited to the amount reflecting the proportion of the loss or damage claimed having regard to their respective responsibilities.
439 I agree with the defendants’ submission that Frank failed to take reasonable care in determining for himself whether the purchase price was fair and reasonable, whether he should pay the amounts he paid by way of investment and by way of working capital in the business, and whether he should guarantee the lease of the restaurant. Frank did not engage his own accountant or business valuer to review the business transaction on his behalf.
440 In my view, an appropriate assessment of damages is $877,461.22 apportioning the loss and damage having regard to the parties’ respective responsibilities arising from the matters set out in these reasons above in the following amounts:
a)Oakfair Lawyers 20%
b)Frank 30%
c)AIG 50%
441 AIG is liable for damages at common law in the sum of $438,730.61 plus interest.
Damages under ACL
442 I have previously found that AIG and Linda contravened ss 18 and 37(2) of the ACL in making the Reasonable Price Representation. Frank submits that by reason of AIG and Linda’s contraventions, he suffered loss and damage in the form of the payments for the purchase price of the units, the contribution to working capital, the several payments for rent, the agent’s commission paid to AIG, Oakfair Lawyers’ invoice, half of the lease deposit and the guarantee under the lease.
443 For misleading or deceptive conduct claims there may be apportionment of damages having regard to the extent to which the claimant is responsible for loss and damage.
444 The defendants contend that pursuant to s 137B of the ACL, the amount of the loss or damage that Frank may recover should be reduced to the extent to which a court thinks just and equitable, having regard to Frank’s share in the responsibility for the loss, which they claim is the entirety or the majority of the loss claim. The proportionate liability for concurrent wrongdoers is also applicable under this head of damage. The majority of the High Court in Henville v Walker[103] affirmed that the whole of reliance loss that a plaintiff suffered in consequence of altering their position by reason of the defendant’s breach can be awarded.
[103] (2001) 206 CLR 459.
445 I accept that there was a failure by Frank to engage an accountant and independent business valuers to assist him in his transaction which contributed to his loss. As such the amount awarded under this head of damage should be reduced by reason of s 137B of the ACL. I agree that an accountant and independent valuer ought to have been engaged by Frank in this case and that a prudent purchaser acting reasonably would have done so, particularly given the quantum involved. It is just and equitable that there be a reduction of the amount of loss or damage to reflect Frank’s failure to take reasonable care.
446 In my view, an appropriate assessment of damages is $877,461.22 apportioning the loss and damage having regard to the parties’ respective responsibilities in the following amounts:
a)Oakfair Lawyers 20%
b)Frank 30%
c)AIG 50%
447 AIG is liable for damages at common law in the sum of $438,730.61 plus interest.
Damages for breach of duty of care
448 I have found that Linda has breached her duty of care to Frank by failing to inform him of the true state of the financial affairs of the restaurant, in particular the cost of the renovations, the purchase of the Japanese restaurant and her interest in the vendor. Additionally, she failed to obtain a reasonable price for the purchase of the restaurant.
449 Frank says that but for Linda’s breach, he would not have signed the sale agreement, become the guarantor under the lease and made the payments for the purchase price of the units, the contribution to working capital, the several payments for rent, the agent’s commission paid to AIG, Oakfair Lawyers’ invoice, half of the lease deposit and the guarantee under the lease.
450 In my view, for the reasons already stated, an appropriate assessment of damages is $877,461.22 apportioning the loss and damage having regard to the parties’ respective responsibilities in the following amounts:
a) Oakfair Lawyers 20%
b) Frank 30%
c) Linda 50%
451 AIG is liable for damages at common law in the sum of $438,730.61 plus interest.
Conclusion
452 Accordingly, there is judgment for the plaintiff together with interest and costs.
453 For the foregoing reasons, I find that:
a) AIG and Linda must pay Frank equitable compensation in the sum of $877,461.22.
b) JLAA Investments must pay Frank the amount of $500,000 and there be rescission of the Sale Agreement.
c) AIG and Linda must pay Frank damages in the sum of $438,730.61.
454 I will hear from counsel about the precise form that that judgment should take.
- - -
Certificate
I certify that these 107 pages are a true copy of the judgment of Her Honour Judge Burchell delivered on 11 February 2022.
Dated: 11 February 2022
Simon Bobko
Associate to Her Honour Judge Burchell
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