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Federal Court of Australia |
COURT
IN THE FEDERAL COURT OF AUSTRALIACATCHWORDS
Trade Practices - damages - variation of contract - applicants purchase a water drilling business from the first respondent - applicants seek damages and a declaration that the contract has been rescinded by the applicants pursuant to ss. 82 and 87 of the Act based on the respondents' misleading and deceptive representations contrary to s.52 of the Act - principles to apply in assessing damages.Trade Practices Act 1974 (Cwlth) ss 52, 82, 87
Trade Practices - Damages - Applicants purchased business from first respondent - Applicants seeking damages pursuant to ss. 82 and 87 of Act based on respondents' misleading and deceptive representations contrary to s. 52 of Act - Principles to apply in assessing damages. The applicants claimed damages for breach of s. 52 of the Trade Practices Act 1974 (Cth). The claim was founded on certain conduct and statements of the respondents (by themselves or their agents), which were said to have been relied upon by the applicants in agreeing to purchase, from the first respondent, a business which it carried on under the name "Reliance Drilling Co.".
The respondents disputed the claim, and the first respondent cross-claimed for the balance of the purchase price. The applicants sought to set off their damages against what was found to be owing to the first respondent. In the course of his judgment his Honour dealt with the legal principles applying to the assessment of damages under the Act.
Held: (1) Whilst common law rules as to the measure of damages in tort may, in appropriate circumstances, provide a useful guide, no justification exists for confining the damages which are recoverable under ss. 82 and 87 of the Trade Practices Act 1974 by reference to common law tests. The only limitations which exist in proceedings under the Act are those expressed or inherent in the statutory provisions themselves. The statutory right to damages under s. 52 of the Act serves a wider purpose and is intended to have a broader ambit than the common law actions of tort or negligent misstatement.
Taco Company of Australia Inc. v. Taco Bell Pty. Ltd. [1982] FCA 136; (1982) 42 ALR 177, followed.
Yorke v. Ross Lucas Pty. Ltd. (1982) 45 ALJR 299; Simpson Ltd. v. Hubbards Pty. Ltd. (1982) 44 ALR 695; Gates v. City Mutual Life Assurance Society Ltd. (1983) ATPR 40-335; South Australia v. Johnson (1982) 42 ALR 161; McAllister v. Richmond Brewing Co. (N.S.W.) Pty. Ltd. (1942) 42 SR (NSW) 187; Potts v. Miller [1940] HCA 43; (1940) 64 CLR 282; Doyle v. Olby (Ironmongers) Ltd. (1969) 2 QB 158, considered.
Toteff v. Antonas [1952] HCA 16; (1952) 87 CLR 647; Alati v. Kruger [1955] HCA 64; (1955) 94 CLR 216, distinguished.
Esso Petroleum Co. Ltd. v. Mardon (1976) 1 QB 801; Selman v Minogue (1937)
37 SR (NSW) 280; Clark v. Urquhart (1930) AC 28, referred to.
(2) Applicants who establish a cause of action under the Act are entitled to
those losses which are the immediate result of the
offending conduct and also
to consequential losses if sufficiently direct.
Doyle v. Olby (Ironmongers) Ltd. (1969) 2 QB 158, adopted.
(3) The statutory entitlement to compensation is not restricted to losses
involved in the single element constituted by the transaction
of purchase;
applicants for relief under the Act are entitled to have each act or omission
shown to have been taken in reliance upon
offending conduct considered for the
purpose of a determination of whether they thereby suffered loss.
HEARING
Brisbane, 1983, February 21-24, 28. 28:2:1983This was the hearing of an application for damages under s. 52 of the Trade Practices Act 1974 (Cth).
The facts appear sufficiently in the judgment.
R.I. Hanger, for the applicants.
K.V. Hanson, for the respondents.
Cur. adv. vult.Solicitor for the applicants: J.W.L. Armstrong.
Solicitors for the respondents: W.J. Wilson & Copley.
P.H. MORRISON
ORDER
1. The contract between the applicants and the first respondent dated 4 February 1982, the subject of these proceedings, be varied so as to reduce the purchase price payable by the applicants to the sum thus far received by the first respondent, such variation to have and to have had effect on and from the date of the said contract.2. Any provision in the said contract or in the supplementary agreement between the applicants and the first respondent dated 26 March 1982 obliging or purporting to oblige the applicants to pay any further sum to the first respondent in addition to moneys thus far received by the first respondent be declared void ab initio.
3. The money standing to the credit of an account in the name of the solicitors for the parties with the A.N.Z. Bank be released from the bank by the solicitors for both parties and paid to the solicitors for the applicants on behalf of the applicants.
4. The respondents pay to the applicants $30,000.00 damages.
5. The applicants recover from the respondents their taxed costs of and incidental to these proceedings including reserved costs if any.
DECISION
The applicants in these proceedings claim against the respondents for damages for breach of s.52 of the Trade Practices Act 1974 ("the Act"). The applicants claim is founded upon the statements and conduct of the third respondent, a director and shareholder of the first respondent, and of one Johnson, an employee of the second respondent, which was the real estate agent involved in the sale on behalf of the first respondent. The breaches are alleged to have occurred during the period from 2 February 1982 to 4 February 1982. The applicants assert that, in consequence of what was then said and done, they entered into a contract dated 4 February 1982 under which they agreed to purchase from the first respondent for $123,000.00 a business which it carried on under the name "Reliance Drilling Co".The particulars of alleged misrepresentations ultimately relied on, as set out in paragraph 6 of the applicants' Amended Statement of Claim, were in the following terms:
"6. Prior to the signing of the said contract by the applicants and to induce
the applicants to enter into the said contract the first,
second and third
respondents warranted and represented to the applicants that:
(a) the turnover of the said business was between $20,000 and $25,000 per
month in the dry season and between $10,000 and $15,000
per month in the wet
season;
(b) the wet season lasted for four months of the year and the dry season for
eight months;
(c) the overheads of the said business before income tax were approximately
35% of turnover;
(d) . . .
(e) the first respondent had firm orders for in excess of 40 bores and that
the applicants would have the benefit of such orders as
owners of the said
business;
(f) the said business was a going concern and capable of yielding immediate
profits of the nature referred to in sub-paragraphs (a),
(b) and (c) hereof to
the applicants;
The applicants' claim for damages was finally particularised as follows:1. Loss incurred in carrying on business to 30th June, 1982
---------Less Income from operation 500.00
$27,344.73
---------Net loss to 30.6.82 $26,844.73
Paid to A.G.C. 500.00
Telephone - paid $128 allow 60.00
Insurance of rig 254.00
Advertising 46.00
Repairs & Maintenance 62.95
Maps (hydrological) 29.60
Fuel (unpaid @ 30.6.82) 293.95
Fuel 10.15
Incurred AGC ($1744.80 x 8) - less $500.00 paid July through February
13,458.00
Depreciation - July through September (attached calculations) 7,805.00
Bank fees & interest say 400.00
---------Less income from business 580.00
$22,919.65
---------Business loss 21,339.65
3. Other losses incurred to 21.2.83
Increased cost of
accommodation 1,991.00
Loss of salary (Net) 21,192
Less Social Security payments 717 20,475.00
------J.R. Frith - Superannuation 2,337.00
------ 13,234.004. Interest on monies paid to
Interest at 17% per annum on
instalment of $10,700 paid on
4th April, 1982 to 21st February,
1983 and thereafter at $4.98
per day $1,929 $1,929.00
--------Total other losses incurred
TOTAL ABOVE LOSSES AND EXPENSES $108,170.38
ADD Estimated loss on forced sale of equipment 35,000.00
DEPRECIATION SCHEDULE
Based on values accepted by F.I.T. Dept. which were based on purchase price
of equipment and depreciation calculated on a reducing
balance:
Item WDV Rate Annual
July-Sept
30.6.82 % Dep $ 3
months
Sigma Scorpion $12,948 22.5 $2913 $728
Drilling Rig 41,895 35.4 14831 3708
Rock & Drag bits 1,323 35.4 468 117
4 x 4 Inter Truck 6,107 26.55 1621 405
Broomwade Air Compressor 23,814 35.4 8430 2108
Dodge Truck 6,380 26.55 1694 424
Dresser Downhole hammer 3,704 35.4 1311 328
Coronet Caravan 3,528 35.4 1249 312
Generator set 441 156 39
-------- ------ -----Less private use of Scorpion say 50% 364
$100,140 $32673 $8169
----------
$7805
The respondents dispute the applicants' claims. Further, the first
respondent has cross-claimed for the sum of $55,000, being an
unpaid balance
of the purchase price, plus interest alleged to be payable under a
supplementary agreement dated 26 March 1982 by
which the contract was varied.
The applicants seek to set-off the damages which they claim against any amount
which they are found
to owe to the first respondent.
Background:
In January 1982 the applicants lived in Melbourne. The female applicant, Mrs Frith, was employed as a nurse. The male applicant, Mr Frith, was a qualified accountant aged about 50 years who was employed in a senior administrative capacity by a leading firm of solicitors in Melbourne. He heard from a friend that a water drilling business was for sale on the Gold Coast and telephoned the agent, Mr Johnson, at his home over the Australia Day holiday weekend. Mr Johnson did not have details concerning the business available, and it was arranged that Mr Frith would call back, as he did, on Tuesday 2 February 1982, after the long weekend.
A series of discussions ensued, both by telephone and on the Gold Coast. Mrs
Frith remained in Melbourne, but Mr Frith actually
flew to the Gold Coast on 2
February 1982, the same day as he first discussed the business with Mr Johnson
in any detail. Mrs Frith's
involvement was confined to telephone discussions.
Evidence was given as to what was said and done by Mr Frith, Mrs Frith, Mr
McDermott
and Mr Johnson. There were very considerable discrepancies. Mr
Johnson's recollection was admittedly poor. Each of Mr and Mrs Frith
and Mr
McDermott tended to exaggerate and to alter the emphasis so as to present the
picture which was most favourable to his or
her cause. I do not propose to
discuss the various meetings and telephone conversations in detail. There are
elements of the transaction
which, on any view, are puzzling. I have formed a
firm opinion in respect of the critical issues which are necessary for the
decision
of these proceedings. I have not accepted the totality of the
evidence of Mr and Mrs Frith. It is by no means unlikely that, by now,
they
are not able to separate recollection entirely from reconstruction. However,
in general, I formed a clear preference for their
descriptions of what
occurred to Mr McDermott's version of events. His evidence seemed to me
basically unreliable.
The subject matter of the transaction
The business of "Reliance Drilling Co" was formed by the first respondent in March 1981. The first respondent also had other property and business activities, including land, an aircraft which it leased to interested parties and a vitamin distribution agency. All of the first respondent's business activities were conducted from Mr McDermott's home. Only rudimentary business records were kept, and there was no real attempt to separate out the items related to the various activities. Apart from log books in which a history of the work which had been performed was recorded, and a very rough "order book" in which the names of customers or potential customers were entered, the books used in relation to the business of "Reliance Drilling Co" were cheque books, a cash book, invoice books, and a bank deposit book. The cheque books, cash book, and bank deposit book also contained entries relating to the other business activities of the first respondent. The deposit book also contained entries relating to cash receipts from the drilling business totalling in excess of $10,000 which were not mentioned in any of the other records. A further two cash receipts could not be traced by Mr McDermott even into the bank deposit book, and an amount of between $800 and $900 which had been received by him in cash was admittedly not banked or recorded in any of the books. The first respondent's records were neither accurate nor readily comprehensible.
The business was carried on by Mr McDermott with the occasional aid of a casual employee. Its main physical asset was a drilling rig mounted on a truck. Other plant and equipment included another truck, a caravan, an air-compressor, a generator, a down-hole hammer, and assorted drills, bits, pipes, tools, attachments, fittings, spares etc. Little emerged as to the date of acquisition of the various items. However, whether or not some or all had been owned by the first respondent or Mr McDermott prior to the commencement of the business of "Reliance Drilling Co", there is no doubt that most, if not all, were by no means new. The initial drilling rig used in the business was held by the first respondent on lease from a finance company.
Little income was earned by the business in its first months of operation and it traded at a loss up to and including July 1981. Its gross income exceeded operating expenditures during August, September and November 1981. It is not possible to be dogmatic but it is probably sufficient to take the gross income earned as $10,000 in August, $15,000 in September, $10,000 in October and $20,000 in November, in round figures.
At about that time, the first respondent traded in its drilling rig for a larger more expensive model which it acquired on hire purchase for a significantly increased outlay.
The approximate gross income earned by the business in December 1981, was $12,000 and in January 1982 was $10,000. During December the gross income again exceeded operating expenditure. For most of the period from July 1981, the business had, therefore, in a sense at least, operated at a profit. However, the operating expenditures referred to took no account of depreciation or a labour charge to cover Mr McDermott's work in the business.
The highest gross income earned by the business in any month was in November 1981. However, that was also the month when its operating expenses were highest. Thirteen bores were drilled in that month. Only 6 were drilled in December and only 3 were drilled in January 1982 when the operating expenses exceeded the gross income. December and January are, perhaps, to be viewed as holiday months and/or wet months.
At the time when the business was placed on the market, very shortly after
the acquisition of the new rig, it had no orders for
work. Apart from a Mr
Finn, to whom more particular reference will be necessary, estimates for
possible future work had been given
to fewer than a dozen people, none of whom
had taken the matter beyond an expression of interest, in some cases quite
some time previously.
A few others, residents of Russell Island, had indicated
some interest in having a bore dug or an existing bore deepened when Mr
McDermott next took his equipment to the island. Mr McDermott had previously
made at least two forays onto Russell Island and had
also visited a number of
other Moreton Bay islands with his drilling rig during the brief spell of the
first respondent's prosperity
in the latter half of 1981. The Mr Finn referred
to was described as an articled clerk who was also a land developer, with a
large
tract of land near Nanango which he proposed to develop with the need
for quite a lot of bores. According to Mr McDermott, he provided
Mr Finn, some
time prior to Christmas 1981, with some details of likely drilling costs on a
bulk basis, and Mr Finn had said that
he did not want to do anything further
about the matter until the new year. The entry in the order book against Mr
Finn's name was
"several bores (up to 40)". Mr McDermott said in evidence that
he could not remember whether he spoke to Mr Finn in 1982 prior to
the sale to
Mr and Mrs Frith.
The breaches of s.52
Mr Johnson agreed with Mr and Mrs Frith that between 2 and 4 February 1982 he informed each of them of the details of the turnover and profit shown on the second respondent's listing of the business for sale and, indeed, agreed that he furnished Mr Frith with a copy of that document. There is no doubt as to those matters. The listing sheet stated that the turnover was $20,000 to $25,000 in the dry season and $10,000 to $15,000 in the wet season, and that the profit margin was approximately 65%. Mr Johnson said that the information in question was provided to him by Mr McDermott. I find that that was the case. The information was provided for the purpose for which it was used. I reject Mr McDermott's evidence that he made accurate statements only as to the turnover and/or profit which had been achieved and that his remarks on the subject otherwise were confined to forecasts or expressions of opinion, disclosed as such, as to what might occur in the future in certain circumstances. I note, in passing, paragraph 3 of the defence of each of the respondents by which each admitted:
"(i) That it was represented to the Applicants by the Second Respondent that
the turnover of the business was up to TWENTY THOUSAND
DOLLARS ($20,000.00)
and TWENTY FIVE THOUSAND DOLLARS ($25,000.00) per month in the dry season and
between TEN THOUSAND DOLLARS ($10,000.00)
and FIFTEEN THOUSAND DOLLARS
$15,000.00) per month in the wet season;
(ii) That it was represented to the Applicants by the Third Respondent that the wet season lasted for four months of the year and the dry season for eight months of the year."
No attempt was made by the respondents to justify the figures for turnover and profit which I have found were represented. Those figures were, beyond argument, false. However, it was submitted for the respondents that the effect of any such misrepresentations was "cured" or "neutralised" by the access which Mr Frith had to the first respondent's books and the use which he made of them.
In discussions with Mr Johnson on 2 February, Mr Frith had the business described to him in glowing terms and was, as I have said, provided with information from the second respondent's listing sheet. On 3 February he went with Mr Johnson to Mr McDermott's home. After an inspection of the equipment, all went into Mr McDermott's office.
A variety of matters concerning the business were discussed at Mr McDermott's home. It was inevitable that there would be discussions with respect to financial matters. Amongst other things, reference was then made, if it had not been made earlier, to the number of dry months (8) and the number of wet months (November - February) for the purposes of the first respondent's turnover formula.
Some, and perhaps all, of the first respondent's financial records were produced and made available for Mr Frith's inspection then and there. He was told that the invoice book was not a complete record because of cash transactions. He was also told that there were some comparatively minor entries in the bank deposit book which related to the first respondent's vitamin distribution business. The obvious impression to be gained from what was said to him was that the income of the business was in excess of what was revealed by the invoice book and that the bulk of the banking in the relevant part of the bank deposit book related to the business of Reliance Drilling Co. Some cross-checking between the invoice book and bank deposit book confirmed that there were bankings corresponding with the invoices. Mr Frith did not undertake a detailed examination and analysis of the books. The steps which he did take did not reveal to him that the invoice books and bank deposit book were inconsistent with what he had been told about turnover, or that these and the other books, including the cheque butts, were inconsistent with what he had been told about the profit margin which he knew took into account only operating expenditures.
Mr Frith's evidence upon this aspect of the matter was severely criticised, not without some justification. Particularly in cross-examination, his evidence exhibited some confusion and inconsistency. Nonetheless, I am satisfied that the general tenor of what occurred was as I have indicated.
The position might well have been different had the applicants sought to rely upon the financial records which were shown to Mr Frith as the basis of the misrepresentations of which they complained. However, that is not the case. They rely on the figures they were given for the turnover and profit margin and which are shown in the listing sheet, a copy of which was given to Mr Frith. The present question is not whether the financial records established or supported those figures, so as to justify his reliance upon those records, but, at its most favourable for the respondents, whether, because Mr Frith had the financial records, he knew or ought to have known that the other information given to him which was incorrect. He may have been extremely naive in his approach. His trusting and cavalier attitude belies the image commonly held of accountants. Nonetheless, I reject the respondents' robust answer to their own misrepresentations that the partially completed and informal books which they provided to Mr Frith should either have revealed to him the falsity of the statements which had been made to him or at least put him on guard. I am comfortably satisfied that the appliants continued to believe the representations as to turnover and profit which had been made to them until after the contract was completed.
The purpose of the inspection of the books was, of course, because Mr and Mrs Frith were not interested in purchasing merely plant and equipment, however suitably adapted to some particular business venture, but in purchasing a business as a going concern. The very nature of the contract ventured into was proof enough of that, quite apart from the type of information which was discussed in pre-contractual negotiations and the statements which were made to the applicants.
Not suprisingly, therefore, there was discussion of the jobs which had been performed by the business, the work on hand, and the first respondent's charges. Irrespective of the actual language used, I have no doubt that the position as portrayed to Mr Frith was that there were orders for bores, including an order from the then as unnamed articled clerk-developer, and that the number of bores mentioned was 40 or thereabouts. This matter was discussed, and that impression was conveyed by what Mr McDermott said, both at his home on 3 February 1982 and in the telephone conversation which took place that night to Mr McDermott from the home of Mr Frith's friend, Mr Chaston, at which Mr Frith, Mr Johnson and Mr Chaston were all gathered. It is not important to decide exactly what was said, or by whom, to whom, or when, or whether Mrs Frith heard of this topic from Mr Johnson or from her husband's report to her of what he had been told. Nor does it matter if, at the time, Mr McDermott genuinely believed that the work would eventuate or was dishonest in what he professed as to the work available to the first respondent. Mr McDermott swore answers to interrogatories on behalf of himself and the first defendant. His description of the position at the time of the negotiations in respect of the various jobs or possible jobs mentioned in the order book varies between different answers. In one answer, he described them as "requests for bores". In another, he acknowledged that he expected the majority of "prospects" would eventuate into jobs. The tenor of Mr Johnson's evidence was that there was mention of 40 bores, or a similar number, although not all might eventuate. It may be mentioned that the first respondent had only drilled a total of 41 bores in its peak period from August to November 1981.
Reference has already been made to the fact that, at the time, the business
had no orders for work, quite contrary to what the applicants
were told. It
will be necessary to deal, a little later, with what subsequently transpired
between Mr Frith and Mr Finn. I record
at this point, however, my finding that
the statements which were made by the respondents to the applicants with
respect to work
on hand prior to the contract were false and misleading.
The decision to purchase
In forming a decision as to whether or not to enter into the transaction, Mr Frith mentally discounted what he had been told concerning the profit margin by 50%, at least in respect of what the applicants might expect to earn in the initial period of their operation of the business. Further, he thought that the figures in the second respondent's listing sheet which showed the plant at $103,000 and the stock at $3,600 were excessive. In his opinion, the plant and equipment were worth somewhere between $70,000 and $90,000 and thus were overvalued in the price being asked. However, he considered that that did not really matter because the business was a going concern with the work on hand which had been described to him.
I have no difficulty in accepting that the representations which I have
found were made to the applicants were relied upon by them
when, on 4 February
1982, they entered the contract to purchase the business from the first
respondent.
Performance of the contract and the aftermath
The purchase price for which the contract provided was apportioned as to $20,000 to goodwill and as to $103,000 to plant and stock, with particular amounts appropriated to specific items by an annexure to the contract. A deposit of $12,300, borrowed by the applicants from their bank, was paid upon the signing of the contract, which provided for the balance of $110,700 to be paid in exchange for delivery of possession on 4 March 1982. Neither party sought to place any reliance upon any of the contractual terms.
The applicants resigned from their jobs in Melbourne and came to the Gold Coast and commenced to live in rented accommodation. However, at first they were unable to obtain finance and they defaulted under the contract. The first respondent granted the applicants an extension of time and a supplementary agreement in writing dated 26 March 1982 was entered into. By the supplementary agreement, the applicants were required to pay to the first respondent a further deposit of $10,700 on or before 3 April 1982, a further sum of $45,000 on or before 26 April 1982 and the balance of $55,000 on 15 July 1982 or upon the sooner receipt by the applicants of the proceeds of the sale of their relevant home. Provision was made for the applicants to give security to the first respondent in respect of the balance purchase price. Under the supplementary agreement, the applicants became entitled to possession of the property sold on payment of the further deposit of $10,700 on 3 April 1982.
The further deposit of $10,700 was paid by the applicants out of superannuation payments which had been received by them on termination of their respective employments in Melbourne. On that day, the applicants received some of the plant and equipment but not the drilling rig. They also received the order book. Although Mr Frith's relevant evidence is again unsatisfactory, it seems that the entry in the order book against Finn's name, i.e. "several bores (up to 40)", did not alert him to the fact that there was not, or might not be, work in hand in accordance with what he had been told. He did not contact Finn at that point. His explanation was that he did not consider it prudent to do so until he had received all the equipment and could carry out the work immediately if so required.
In the period between 3 and 26 April, the applicants commenced advertising, canvassing for business, and distributing promotional material.
The first respondent remained in control of the drilling rig until 26 April. On that day, the further payment of $45,000 required in accordance with the supplementary agreement was paid on behalf of the applicants by Australian Guarantee Corporation to which they onsold the plant and equipment for the purpose of acquiring it back on lease or on hire purchase. Security for the balance remaining was also given to the first respondent.
The business remained under the first respondent's control from the execution of the original contract on 4 February until 26 April 1982, although it is true that for most of April he did not have all the plant and equipment. Nothing, or virtually nothing, was earned in any of those months. Nor, apart from exceptions so minor as to be irrelevant, were the names of any additional customers or prospective customers obtained. Mr McDermott swore in answer to an interrogatory that he attempted to obtain orders and enquiries from several persons during that period, many of whom were those with whom he had contact prior to the contract, and that he continued to attempt to obtain further orders and enquiries by advertising and by distributing advertising cards in letterboxes. Inexplicably, particularly since he was entitled to the benefit of any income earned during the period in question, he did not claim to have had any contact with Mr Finn, although the new year spoken of by Mr Finn had long since arrived. Mr Finn was not called to give evidence.
After the applicants received the drilling rig, they embarked upon an attempt to operate the business. One of the first things Mr Frith did was to contact Mr Finn. He telephoned Mr Finn towards the end of April. Mr Finn asked Mr Frith to contact him again as soon as he had been taught what was necessary by Mr McDermott and a start would be made on the wells. A few days later Mr Frith called on Mr Finn only to be told that, due to the economic climate, his project was not to proceed.
It is unnecessary to speculate as to the role of Mr Finn. It was no part of the respondents' case that there was a firm order from Mr Finn for some number of bores, although not 40, and Mr McDermott's evidence made it clear that there was not. The respondents' case was that the representations alleged by the applicants were not made. I have found that they were. I reject entirely the respondents' contention that, at the meeting at Mr McDermott's house on 3 February 1982, there was an item by item discussion of the entries in the order book in the course of which the then current position in respect of each of the entries was explained to Mr Frith. Had that occurred, it would plainly have revealed to Mr Frith, as it was revealed to the Court in the course of Mr McDermott's cross-examination, that in fact there was no work on hand and that the prospects were quite speculative.
The business proved a disastrous failure for the applicants. They obtained virtually no work. I accept that the steps they took and the attempts they made were in accordance with the advice and information given them by Mr McDermott. I reject any attempt by the respondents to suggest that there were any significant enquiries which were inadequately followed up by the applicants or that any lack of work or loss in the operation of the business can be attributed in any degree to incompetence on the part of the applicants in either the financial or physical conduct of the business. However, I think it is likely that the business was severely affected in the relevant period by the prevailing economic conditions which were markedly worse, perhaps particularly in the locality in question, than they had been in the period prior to the contract, especially during that part of the period in which the first respondent had operated most successfully.
Mr Frith gave a garbled and unacceptable version of when and how the applicants discovered that they had been misled. Further, there is no satisfactory evidence that they complained to any of the respondents prior to the initiation of these proceedings. I mention these matters only to record that I have not been unaware of them in attempting to resolve issues of credibility and in seeking to discover what really happened in the critical period of the negotiations leading up to the contract.
The applicants made payments under their lease or hire purchase agreement to Australian Guarantee Corporation in May and June 1982. Each payment was for $1744.80. The damages claimed by the applicants include the amount of these payments. The only payment which the applicants have made to Australian Guarantee Corporation since 1 July 1982 was in the sum of $500.00.
The applicants ceased to operate the business at the end of September 1982 when Mr Frith commenced employment with a leading firm of Brisbane solicitors. Mrs Frith is unemployed.
In December 1982, the plant and equipment were repossessed by Australian Guarantee Corporation. Some suggestion was made that it may not yet have been sold and that there may have been an unsuccessful auction. No attempt was made to establish these facts.
These proceedings were commenced in August 1982. Pursuant to a compromise of
an interlocutory dispute which arose in the course
of the proceedings, the net
proceeds from the sale of the applicants Melbourne home, being the sum of
$59,087.15, stands deposited
at call at the ANZ Bank in the name of the
solicitors for the parties to be dealt with in accordance with the Court's
order.
DAMAGES
In a number of instances, this Court has made use of or made reference to the measure of damages in actions for tort in connection with the assessment of damages in proceedings founded on breach of Part V of the Act. For the most part, at least, the Court has confined itself to the adoption, by analogy, of the tort measure of damages in the context of expressing a preference, in the particular circumstances for the tort measure over the contract measure. The single judge decisions are collected in Yorke v. Treasureway Stores Pty Ltd (1982) A.T.P.R. 40-313. Since judgment in that case was delivered by Fisher J. on 16 September 1982, there has been passing reference to the topic in two decisions of the Full Court: see Simpson Ltd v. Hubbards Pty Ltd (judgment delivered 20 October 1982); and Gates v. The City Mutual Life Assurance Society Ltd (judgment delivered 18 February 1983). In the latter case, the Court mentioned that there has not been a universally applicable definitive statement of the appropriate measure of damages recoverable in connection with the breach of a provision of Part IV of the Act and said that it is probably better that some flexibility is maintained. In the circumstances of Gates v. The City Mutual Life Assurance Society Ltd, a sufficient question was how much worse off the applicant was by reason of having taken the steps which he did in reliance on the statements by the respondent which had been found to be made.
For the most part, the decisions of this Court under the Act speak of the appropriate measure of damages as that applicable at common law in actions for deceit, but mention is also made of the test in an action for negligent misstatement, and more particularly in that connection, reference appears to the decision of the English Court of Appeal in Esso Petroleum Co Ltd v. Mardon (1976) 1 QB 801. In South Australia v. Johnson (1982) 42 A.L.R. 161, the High Court at pp. 169-170 pointed to the fundamental difference which exists between the different measures applicable in actions for deceit and actions for negligent misstatement.
Until comparatively recently, there was some doubt in England as to the proper measure of damages in deceit, especially where consequential losses were concerned: see McGregor on Damages, 14th Ed., Chapter 39.
A number of the decisions in this Court, in which reference has been made to the damages recoverable in respect of breaches of Part V of the Act, have made reference to the decisions of the High Court in Toteff v. Antonas [1952] HCA 16; (1952) 87 C.L.R. 647 and Alati v. Kruger (1955) 84 C.L.R. 216. No question concerning consequential losses arose in either of those decisions. The plaintiff in the former had resold the business purchased whereas the plaintiff in the latter had rescinded. The different consequences which flowed were directly attributable to that distinction. Neither decision included any discussion of the recoverability of consequential losses.
In Potts v. Miller [1940] HCA 43; (1940) 64 C.L.R. 282, the property purchased consisted of shares, not a business. Again, there were no consequential losses sought and the case concerned only the plaintiff's claim to the difference between the price paid and the value of the shares at the time of the contract. The company in which the plaintiff subscribed for the shares had lost heavily after it commenced business and the plaintiff sought to use that fact to aid in establishing the absence of any value in the shares at the time when they were acquired. Neither Starke nor Williams JJ. made any express reference to claims in deceit for consequential losses. Each accepted, as did Dixon J., that "the measure of damages in an action for deceit is the difference between the amount which the plaintiff paid or became liable to pay for his shares and their real value on the date of allotment" (per Williams J. at p.307). However, Dixon J. discussed the recoverability of consequential losses in his judgment at pp. 296 and following, in the context of a discussion as to the relevance of the company's subsequent losses to the proof of the plaintiff's claim. At pp. 297-299, his Honour said:
"The measure of damages in an action of deceit consists in the loss or
expenditure incurred by the plaintiff in consequence of the
inducement upon
which he relied, diminished by any corresponding advantage in money or moneys
worth obtained by him on the other
side. . . .
It might be thought that the application of this rule must depend upon the
facts of the particular case; that the plaintiff is entitled
to the full loss
caused by his reliance upon the mis-representation, and that, if, for
instance, his reliance continued and he retained
the shares and paid calls
under the influence of the inducement, the value of the shares at the time of
their acquisition should
be of little or no importance. But it appears to be
treated as an inflexible rule that wherever the purchase or allotment of
shares
is the consequence of the deceit, the defendant shall receive credit
for the fair or real value of the shares estimated as at the
time of allotment
or purchase. In Clarke v. Urquhart; Stracey v. Urquhart (1930) A.C. 28 at
p.67, however, Lord Atkin showed some dissatisfaction with the rigid
application that the rule has received;
. . .
The reason given for the rule is that, if, after the date of purchase, the
thing which the plaintiff was induced to buy loses in value
owing to
accidental or extrinsic causes, that loss is not the reasonable consequence of
the inducement. "It is not enough to say
that but for the misrepresentation or
fraud the purchaser would never have bought, and therefore would not have lost
the thing bought.
To recover back the whole price, if the thing had any value
when bought, he must be in a condition to rescind the bargain and replace
it,
which here the plaintiff is not, as it is not in his power to make the company
take back the shares, or in the power of the company
to resume them.
If a man is induced by misrepresentation to buy an article, and while it is
still in his possession it becomes destroyed or damaged,
he can only recover
the difference between the value as represented and the real value at the time
he bought. He cannot add to it
any further deterioration which has arisen from
some other supervening cause" (per Cockburn C.J. in Twycross v. Grant (1877) 2
C.P.D.
at p.514).
This reasoning makes it necessary to distinguish between the kinds of cause
occasioning the deterioration or diminution in value.
If the cause is inherent
in the thing itself, then its existence should be taken into account in
arriving at the real value of the
shares or other things at the time of the
purchase. If the cause be "independent". "extrinsic", "supervening" or
"accidental", then
the additional loss is not the consequence of the
inducement. . . .
It is almost unnecessary to say that great difficulty must be experienced in
applying this distinction to shares subscribed for in
a company promoted to
carry on a new or speculative enterprise, when, after the lapse of some time,
the shares fall in value or become
valueless. Was it because the enterprise
was misconceived or hopeless from the beginning or was it owing to misfortunes
or difficulties
not reasonably to be expected?
The rigidity of the rule is to some extent alleviated by two qualifications.
For, in the first place, in finding the fair or real
value of shares at the
time of purchase or allotment, the fact that it is then possible to sell the
shares at a price that will go
far to cover the outlay may be disregarded, if
that price is delusive or fictitious, is the result of a fraudulent
prospectus, manipulation
of the market or some other improper practice on the
part of the defendant or those associated with him: See Twycross v. Grant
(1877)
2 C.P.D. at p.489; Broome v. Speak (1903) 1 Ch. at p.606.
The second qualification is that the real value of what the plaintiff got must be ascertained in the light of the events which afterwards happened, because those events may show, for instance, that what the shares might have sold for was not their true value or that it was a worthless company (See per Cotton L.J. and Hannen P. in Peek v. Derry (1887) 37 ChD at pp 592, 594; or looking back for subsequent events to the earlier state of the company it may appear that at the time the shares were taken the assets of the company did not correspond in value to the money paid: Cf. per Collins M.R. in Broome v. Speak (1903) 1 Ch. at p.623."
Apart from the High Court decisions in Toteff v. Antonas and Alati v. Kruger, the Australian decision concerning the measure of damages in deceit probably most discussed in this Court in connection with the damages recoverable under the Act is the judgment of the Full Court of New South Wales in McAllister v. Richmond Brewing Co (NSW) Pty Ltd (1942) 42 SR (NSW) 187. In that case, in the course of a lengthy discussion of the remedies available to a plaintiff who has been defrauded, Jordan CJ. at p.192 stated what is the measure of damages in tort generally. It is unnecessary, for present purposes, to consider whether his Honour's formulation would wholly accord with modern notions. It is sufficient, for the moment, to note that it might well encompass consequential losses in appropriate cases. On the same page, his Honour went on:
"This is the measure of damages in tort generally and in deceit in particular; and there is no reason in principle why it should not be applied to deceit inducing a contract of purchase as well as to any other form of deceit: Clark v. Urquhart (1930) A.C. 28 at 67-8. A rule of practice is, however, now well established where a person complains that he has been induced by deceit to buy something and pay more for it than it was worth, the amount of damages which he is entitled to recover is restricted, prima facie at any rate, to the amount by which the price which he has paid exceeds the true value of the thing bought at the time when he bought it: Potts v. Miller [1940] HCA 43; 64 C.L.R. 282. The rule is well settled and exceptional circumstances are necessary to justify an award of anything more by reference to the general principle, but such circumstances may occur."
At p.200, Davidson J. who had delivered the leading judgment in an earlier decision of the New South Wales Full Court in Selman v. Minogue (1937) 37 SR (NSW) 280 said:
"Apart from a recent remark by Lord Atkin that he still considered the matter as open for argument: Clark v. Urquhart (1930) A.C. at 69, the principles upon which damages in an action for fraud to be assessed have generally been regarded as finally settled. The measure of damages usually is the difference as at the date of the contract between the market value of what was purchased and the price that was actually paid."
Both judgments discuss the different situations which exist where rescission is granted and where it is not, whether because it has been lost by affirmation or because it has become impossible, and deal with the circumstances in which losses incurred after the purchase may be brought to account in connection with the assessment of the value of the business as at the date of the contract. There is, of course, reference to other consequential losses elsewhere in the authorities. For example, in Selman v. Minogue, supra, Davidson J. at p.284 explained why, in his opinion, expenses incurred in connection with the entry into a transaction which is not disaffirmed are not recoverable.
Doyle v. Olby (Ironmongers) Ltd (1969) 2 QB 158, involved a purchase of a business which was induced by fraudulent misrepresentations. The trial judge assessed the plaintiff's damages on a basis put forward by his Counsel but which was unfavourable to the plaintiff. The plaintiff appeared in person before the Court of Appeal. There was no transcript of the evidence below, but the plaintiff informed the Court of Appeal of his financial position. In an apparently unreserved decision, the Court took up the views which had been expressed by Lord Atkin in Clark v. Urquhart (1930) A.C. 28, at pp. 67 and 68; see per Lord Denning M.R. at p.167 B-E; per Winn L.J. at p.168 F-H, and per Sachs L.J. at p.171 B-H. The Court held that the proper measure of damages for deceit was all the damage flowing directly from the tortious act of fraudulent inducement which was not rendered too remote by the plaintiff's own conduct whether or not the defendants could have foreseen such consequential loss. The plaintiff's position before the fraudulent inducement should be compared with his position at the end of the transaction. As in Clark v. Urquhart, the plaintiff had been tricked into buying a business which he would otherwise not have bought at all, the Court decided that it should award him his overall loss up to his final disposal of the business, less any benefits he had received.
The same broad test was soon afterwards adopted by the English Court of Appeal in relation to loss occasioned by negligent misstatements in Esso Petroleum Co Ltd v. Mardon, supra, but subject to the limitation in such a case that the damage must have been reasonably foreseeable. No such limitation had been considered appropriate in respect of the tort of deceit in Doyle's Case, supra, because of the deliberate nature of the defendant's wrong-doing.
In Johnson v. South Australia, supra, the High Court said at pp. 169-170:
"(4) Damages
The principle which underlines the award of damages in tort is, generally
speaking, that of restitutio in integrum. The object is
to restore the
plaintiff to the position in which he would have been placed if the wrongful
act had not been committed. The measure
will vary as between deceit and
negligence. In deceit, the plaintiff recovers the difference between the
amount paid and the value
of the property acquired, the object being to place
him in a position equivalent to that which he would have occupied had the
transaction
not taken place. The defendant being guilty of a deliverate wrong,
the damages will include the whole loss directly flowing from
the fraudulent
inducement because, as Lord Denning MR declared in Doyle v. Olby (Ironmongers)
Ltd (1969) 2 QB 158 at 167, "it does not lie in the mouth of the fraudulent
person to say that they could not reasonably have been foreseen."
It is otherwise in cases of negligent misrepresentation. Althought the
wrongdoer is liable for the damage which flows directly from
his wrongful act
or omission, the plaintiff's damages are limited to that which was reasonably
foreseeable. This limitation applies
in accordance with the general principle
in negligence.
Subject to this limitation, the consequence is that if the effect of the
negligent misrepresentation is that the victim has lost profits
or income
which he would otherwise have earned, he should recover damages in respect of
them. We are speaking here, not of loss of
profits under a contract into which
the plaintiff enters by reason of the misrepresentation, but of profits which
the plaintiff would
have made had he not acted on the misrepresentation. . .
.
The measure of damages recoverable in the United States for negligent
misrepresentation is similar. There the plaintiff recovers what
is necessary
to compensate him for the pecuniary loss caused by the misrepresentation,
including (a) the difference between the value
of what he has received in the
transaction and its purchase price or other value given for it; and (b) other
pecuniary loss suffered
as a consequence of the plaintiff's reliance upon the
misrepresentation: see the Restatement (Second), Torts; para 552B.
In Shaddock, as no question of loss of profits arose, it was appropriate to
award the plaintiff compensation by reference to the difference
between the
amount paid by the plaintiff for the property and its actual value plus other
incidental expenses."
In the context, particularly the reference to Doyle v. Olby (Ironmongers) Ltd, supra, the statement as to the measure of damages in deceit should probably be seen only as a reference to the rule which is generally regarded as prima facie applicable where a transaction has been affirmed.
However, even if that is not so, if the measure of damages in respect of the tort of deceit in Australia is different from that in England, it is not easy to see what relevance either bears to the measure of damages recoverable under the Act, although no doubt the wisdom and learning which has been involved in the development of appropriate measures of damages in other connections can guide the way as to what logically ought be considered to meet the statutory test.
Recission at common law and in equity is always the act of the party himself; courts exercising jurisdiction in respect of the tort of deceit claim no power of recission. Further, both at common law and in equity, restitution in integrum is a pre-requisite of recission, although the recission insisted upon in equity may be less precise, at least in form, than that essential at common law. The economic redress which a plaintiff may recover against a defendant in an action for deceit is very much bound up with the application of the doctrines of recission and restitution. It is by no means obvious that similar doctrines should be permitted to intrude into the exercise by this Court of its functions under ss. 82 and 87 of the Act or to what extent its powers are circumscribed.
In Taco Co of Australia Inc. v. Taco Bell Pty Ltd [1982] FCA 136; (1982) 42 A.L.R. 177, Deane and Fitzgerald JJ. in dealing with the relationship between s.52 of the Act and passing-off, said in their joint judgment at p.197 after referring to Hornsby Building Information Centre Pty Ltd v. Sydney Building Information Centre Ltd [1978] HCA 11; (1978) 18 A.L.R. 639, 140 C.L.R. 216:
"Whilst, as was pointed out by Stephen J. (ALR, at 646; CLR at 227), the long experience in the courts in relation to passing-off should not be disregarded and some principles which have been developed in that context may be also applicable to s.52, it is, in our opinion, important to heed his Honour's emphatic rejection on the same page of any suggestion that s.52 is no more than a statutory re-enactment of passing-off principles: see, also, the remarks of Brennan J. in World Series Cricket Pty Ltd v. Parish (1977) 16 ALR 181 at 199 and the judgment of Northrop J. in McWilliam's Wines Pty Ltd v. McDonald's System of Australia Pty Ltd [1980] FCA 159; (1980) 33 ALR 394 at 405ff. The backgrounds of s.52 and of the law of passingoff are quite different. Their respective purposes and the interests which they primarily protect are contrasting. Their areas of operation do not coincide. The indiscriminate importation into s.52 cases of principles and concepts involved in passing-off and the associated area of trade mark law is likely to be productive of error and to give rise to arguments founded on false assumptions."
Similarly, in my opinion, whilst common law rules as to the measure of damages in tort may, in appropriate circumstances, provide a useful guide, no justification exists for confining the damages which are recoverable under ss. 82 and 87 of the Act by reference to common law tests. The only limitations which exist in proceedings under the Act are those expressed or inherent in the statutory provisions themselves.
It seems plain that the statutory right to damages now under consideration serves a wider purpose and is intended to have a broader ambit than the common law actions of tort or negligent misstatement. There is no indication of a legislative intention that the relevant common law rules should be first discovered, the reasons that led to their development, understood, and then that they should be adopted or adapted consistently with the policy of the Act, before the Court performs its duty of assessing the amount to which applicants are entitled under the Act. It seems an arid exercise to enter upon such problems when what is in question is a claim founded on the Act. Particularly is this so, where, as in the case of deceit, there is scope for at least a degree of uncertainty as to what is the appropriate measure of damages.
The broad statement of the appropriate measure of damages in deceit which was adopted in Dolby's Case, supra, accords with the statutory test, if, as I think, applicants who establish a cause of action under the Act are entitled to those losses which are the immediate result of the offending conduct and also to consequential losses if sufficiently direct. It is on that footing that I proceed in this case.
There is a further matter to be kept in mind in some cases, and this is one, in which damages are sought under the Act. A purchase of property may be one element in a course of conduct which is embarked upon in reliance on conduct which is misleading or deceptive or likely to mislead or deceive. The statutory entitlement to compensation is not restricted to losses involved in the single element constituted by the transaction of purchase. Applicants for relief under the Act are entitled to have each act or omission shown to have been taken in reliance upon offending conduct considered for the purpose of a determination of whether they thereby suffered loss or damage.
In my opinion, therefore, irrespective of how the applicants' damages might have been calculated had their claim been made and pressed in deceit, it is appropriate, in the determination in these proceedings of the damages to which they are entitled under the Act, merely to seek to identify what were the immediate and what were the direct consequential losses sustained by the applicants by the conduct of the respondent. The operation of that test will, as in all cases, depend on the circumstances. Particularly perhaps where damages claimed relate to alleged consequential losses, care is needed to be satisfied that there is a sufficient causal connection and not a mere following on between the offending conduct of the respondents on the one hand and, on the other hand, the losses of an applicant and that the chain of causation has not been broken by some conduct or event. For that purpose, investigation will often be needed of the relationship between the offending conduct of a respondent, the acts or omissions of an applicant which are said to have been taken as a result and which are alleged to have been productive of loss, and the loss which is said to have occurred in consequence. Commonly, and this case is a prime example, the evidence will be something less than comprehensive and detailed. Whilst in some cases, precise calculation may be necessary or possible, in circumstances such as the present, after the general process of reasoning has been exposed, the final step necessarily involves a broad subjective estimate.
The major step taken by the applicants in reliance upon the respondent's misrepresentations was the entry into and performance of the contract. I will return to that transaction, and its relevant consequences for present purposes, in a moment. Before doing so, it is convenient to notice other claims for loss more closely related to other acts of the applicants which were allegedly induced by the misstatements of the respondents.
One group of the applicants' claims included costs involved in the applicants' move from Melbourne to the Gold Coast, namely, removal expenses $2532.00, legal expenses in respect of the sale of their Melbourne home $1230.00, and increased costs of accommodation $1991.00 (an exercise seemingly involving a comparison of the applicants' Gold Coast rental with their Melbourne mortgage payments). Another group of claims involved disadvantages which allegedly accrued to the applicants by reason of their resigning from their respective jobs in Melbourne to come to the Gold Coast to operate the business. These included net salary which it was said Mr Frith would have earned from the time he left his employment with his former Melbourne employer to the time at which he commenced to be employed in Brisbane after the applicants ceased to operate the business in September 1982, less Social Security payments which he received, $20,475.00, the amount which his Melbourne employer would have contributed to his superannuation had he continued to be employed by his Melbourne employer until the present time, $2337.00, and the amount which Mrs Frith's Melbourne employer would have contributed to her superannuation had she continued to be employed until (I think) compulsory retirement in due course $8552.00.
There was no documentary evidence or, where appropriate, evidence from Mrs Frith to support any of these claims except those relating to the legal and removal expenses. Mrs Frith has not returned to work in Queensland. No reason for that emerged, and it may well have been simply a matter of choice. Such evidence as was given by Mr Frith was given only in the vaguest and most general terms.
I do not think that it is unfair to the applicants to state that, apart from some effort to establish the amounts involved, they were largely content to leave the bases for these claims to be derived by inference from the finding which they sought and which they have, that they were induced to purchase the business by the misrepresentations. No doubt, they purchased the business to operate it. Their resignations from employment, sale of their Melbourne home and move to the Gold Coast at a particular time all were related to their purchase of the business. However, there is no evidence which satisfies me that all these events would not have taken place in any event, perhaps within a very short space of time from when they in fact occurred. Mr and Mrs Frith admittedly planned some such move at some stage in their lives, and I do not accept that "Reliance Drilling Co.", was the only Gold Coast business which would have tempted them from their ordered existence in Melbourne prior to the mid-1980s as their evidence perhaps implied.
The most which I am prepared to find in their favour in respect of these claims is that they were induced by the respondent's misstatements to leave their respective jobs in Melbourne and come to Queensland some time earlier than would otherwise have occurred.
Other claims include amounts expended in connection with the acquisition of the business, including during the negotiations and the applicants' search for finance. Stamp duty on the contract (not yet paid) amounts to $2890.00. The applicants paid $135.00 to a finance broker without apparent benefit. They also spent $641.00 on air-fares, $196.00 on legal expenses in connection with the purchase, $500.00 on legal fees in connection with their transaction with Australian Guarantee Corporation, and $886.50 on legal fees with respect to the security in favour of the first respondent. All of these sums were supported by documentary evidence, although some, if not all, of the air-fares seem to have been expended prior to any reliance by the applicants on the respondents' misrepresentations or are otherwise not able to be readily related to the respondent's conduct.
Subject to that qualification, I consider that, in the circumstances of this case, in which the business operated at a loss and has been closed and the plant and equipment is worth less than was paid for it so that there can be no question of any profit on resale, the award of damages in favour of the applicants should take into account an amount related to the above expenditures.
When attention is turned to the transaction of purchase, it is apparent that all that the applicants really received for their money was a conglomeration of second-hand plant and equipment. There was really no business. There were details of a few possible future customers but there was no work in hand or any goodwill of any substance. Arguably, there had been some profit over a brief period but even that did not establish any valuable goodwill according to a reputable chartered accountant called by the applicants. His opinion that there was no goodwill of any value is, perhaps, reinforced by the absence of remunerative work at any time after the contract. However, quite apart from his evidence, I would have been satisfied of a total absence of valuable goodwill.
The value of the plant and equipment at the date of contract is one of some difficulty on the available evidence. Mr Johnson swore to an offer of $100,000 from another would-be purchaser. That offer was for the business and not merely the plant and equipment. All else aside, it may, for all I know, have been induced by the same misrepresentations as to turnover and profit as influenced Mr and Mrs Frith.
Mr McDermott valued the plant and equipment for the second respondent's listing sheet at $103,000 (and stock at $3,600.00). He gave evidence also of the cost price of the various items, arriving at a figure of $108,681.00. The individual sums making up the two totals of $103,000.00 and $108,681.00 correspond in some cases but diverged more than minimally in others. That probably matters little. More importantly, it emerged through Mr McDermott's evidence that the alleged cost prices included tens of thousands of dollars built in to reflect so-called "extras", "modifications", or "improvements" which were said to have been effected. At least a significant proportion of these amounts related to "wages" never in fact drawn by Mr McDermott or recorded as owing, as well as wages paid in the ordinary course of the business to the casual labourer assisting him. Mr McDermott's figures for some of the items exceeded the then current cost price of the similar item purchased new. I have earlier indicated my view of Mr McDermott's evidence. It did not alter for the better in connection with this aspect of the matter. Records supporting the alleged costs were not tendered. Further, a so-called expert called for the respondents, with whose evidence I am about to deal, valued the compressor (shown in the contract as $27,000 and valued by Mr McDermott as $30,000) at $7,000.
To both Mr McDermott and his expert witness the plant and equipment had a special value because all items were matched and adapted to the purpose of drilling for which they were intended and were available immediately and as a single lot. So much but no more of the evidence of Mr McDermott and his expert, Mr Hassall, may be accepted as assistance in the determination of the value of the plant and equipment as at the date of the contract.
An offer was allegedly made by Mr Hassall to acquire the plant and equipment at the asking price. He claimed to want it urgently because of a special need for a particular transaction in which he could use the equipment to earn very large sums. The price he was allegedly prepared to pay was no reflection of the true value of the plant and equipment or indeed of the true value of the first respondent's business. The contract which Mr Hassall allegedly signed (but retained) possessed curious features. For example, although he allegedly needed the equipment immediately it showed a settlement date a month after the date of the contract (as did the contract between the applicants and the first respondent), and, although he was allegedly interested in acquiring only the plant and equipment, it was a contract for the sale and purchase of the first respondent's business even to the extent of a restraint of trade clause and an apportionment of some of the purchase price to goodwill (again like the contract between the applicants and the first respondent). I refrain from making any more detailed observations about the story put forward by Mr McDermott and Mr Hassall only because, even if the story were accepted, I would not regard it as providing any reliable evidence of the value of the plant and equipment at the relevant time.
At the time he was considering the purchase of the plant and equipment, Mr Frith estimated its value at $70,000 - $90,000. His friend, Mr Chaston, thought that the figure should be lower. Neither was shown to have any relevant expertise. The applicants called a valuer, Mr Isles, who arrived at a figure of $34,895.00 as the aggregate of the individual market values of the items of plant and equipment at the date of the contract, and who valued the same items as a single collection available for use in a continuing business at $54,766.00 at that date.
Unsatisfactory as is the evidence with respect to the value of the equipment at the time of the contract, it is even worse as to the present value. There seems no disagreement that the plant and equipment is now worth considerably less than at the time at which it was purchased by Mr and Mrs Frith, due to a deterioration in the relevant market. However, the only reasonably direct evidence was that given by Mr Isles, who suggested a figure of approximately $22,000 on the basis of a forced sale after repossession by Australian Guarantee Corporation.
Immediately, another problem is introduced concerning the involvement of Australian Guarantee Corporation. Most of what the applicants have thus far paid to the first respondent ($45,000 out of $68,000) was, in effect, borrowed by Australian Guarantee Corporation. (In fact, the evidence revealed that $50,000 was paid by Australian Guarantee Corporation to the first respondent and that $5,000 was returned by the first respondent to the applicants and presumably has been used by them and is reflected in their other claims). There is no acceptable evidence explaining the transaction between the applicants and Australian Guarantee Corporation or the reasons for it or the conduct of the applicants with respect to it. Presumably, the transaction was initially entered into because the applicants needed to borrow to make the payment called for on 26 April 1982. No copy of the lease or hire purchase agreement was put into evidence. There is little, if any, reliable evidence in relation to the applicants' failure to make payments to Australian Guarantee Corporation even after Mr Frith returned to work, how much is now owed to Australian Guarantee Corporation, whether it is still possible for the plant and machinery to be redeemed by payment to Australian Guarantee Corporation and if so how much must be paid, whether the plant and equipment has been sold, or if sold, whether payment is due from the applicants to Australian Guarantee Corporation or from Australian Guarantee Corporation to the applicants, or what amount is involved. No employee of Australian Guarantee Corporation was called to give evidence. For these reasons, and for a further reason which is discussed below in relation to the period from the end of September 1982 to the present, I propose to ignore the transaction between the applicants and Australian Guarantee Corporation. This involves notionally treating the payment of $45,000 as having been made by the applicants from their own funds on 26 April 1982, but, on the other hand notionally treating them as having then purchased the plant and equipment. Any error in these assumptions must operate in favour of the respondents since they ignore, for example, the applicants' interest liabilities to Australian Guarantee Corporation and the lower price likely to be achieved on a forced repossession sale if one has occurred or does take place in the future. Having regard to the manner in which the proceedings have been conducted, at the end of the day it will be the applicants who remain indebted to Australian Guarantee Corporation or are entitled to any advantages under the lease or hire purchase agreement, e.g. to pay it out and obtain the plant and equipment or to receive any excess on sale of what has been repossessed. While the lack of evidence makes it impossible to be sure, it seems unlikely that the applicants will end up with the equipment or any payment from Australian Guarantee Corporation. They have, however, had the benefit of the funds from Australian Guarantee Corporation less any ultimate liability to it which they are called upon to pay.
The applicants also claimed to be awarded something in a little excess of $20,000 in respect of depreciation of the plant and equipment. This claim was supported by the assertion that rates appropriate for taxation purposes had been adopted and, at least in part, by a schedule of calculations. For all that, the claim is, to my mind at least quite meaningless. Other considerations aside, I can discern no connection between the value at any particular time of the plant and equipment and its depreciated value for taxation purposes. Further, insofar as regard is elsewhere had to the value of the equipment at the appropraite date, this claim obviously involves duplication. Accordingly I leave out of account this aspect of the applicants claim.
The matters thus far referred to provide a sound enough foundation for a broad estimate of the difference between what has been paid by the applicants ($68,000 on the hypothesis which has been adopted) and the value of what they received. They provide less assistance as to the current value of the plant and equipment, if that be relevant. Having regard to the point at which the applicants' proof in this case stopped, I consider that it is not relevant.
The applicants did not merely purchase chattels as an investment for resale. The purchased a business to operate and they operated it at a loss. After five months, they closed the business. It had then totally failed. The failure was in no sense attributable to any lack of skill or effort on their part. On the other hand, although the work available had never been as represented by the respondents, the almost total absence of work during the period in which the business was operated by the applicants, was, I find, contributed to by the economic recession.
Nonetheless, the applicants would not have purchased or operated the business but for the respondent's misrepresentations. In my opinion, the fact that the state of the economy was a major reason for the losses incurred in the operation of the business does not severe the causative link between the losses and the respondents' breaches of the Act.
I have already indicated reasons why depreciation and lease or hire purchase charges should be excluded from consideration. If bank fees and interest be ignored, the excess of operating costs over income seems to be in the order of $2,500. If the business had one advantage, it cost nothing to operate when there was no work available. The main reason for that, I assume, was that there were no employees. The labour was provided by the proprietors, Mr and Mrs Frith.
The discussion to date assumes that, if the applicants are entitled to recover operating losses sustained in the business, they are entitled to recover them in respect of the entire period. In the circumstances of this case in view of the amounts involved the question is of little consequence. Were the amounts larger, or the losses continuing because the business was still operating, additional consideration such as whether or not there has been a break in the chain of causation between the offending conduct and the losses of the applicants or whether the applicants acted reasonably might well arise. A variety of questions related to causation or mitigation might fall for decision. There was no real investigation of such issues in these proceedings. There is little which can be pointed to other than Mr Frith's evidence that he became aware of the true position shortly after receiving possession of the business and the books, adding an explanation of how that was achieved which ranged from the incomprehensible to the incredible, the fact that the proceedings were started in August and that the original Statement of Claim included the presently relevant allegations, the fact that the business was continued until the end of September, and the fact that relief originally sought included recission but that that claim is not now pursued.
When these matters are taken with the lack of documentary proof of some of the items of operating expenditure claimed and with the fact that some of the amounts claimed involved an apparently arbitrary apportionment of part of some larger expenditure to personal or domestic purposes, a degree of mental discounting of the amounts claimed seems appropriate.
By a parity of reasoning it seems to me appropriate to choose some point of time after the contract as the appropriate date, in this case, at which to assess the value of the plant and equipment which they received in return for the purchase monies paid. It is the figure thus arrived at, not the value of the plant and equipment at some other date, which falls to be deducted, in the calculation of their loss, from the payments which have been made to the first respondent. Any loss in value of the plant and equipment over the period during which it was legitimately retained by the applicants for use in the operation of the business in reliance upon the misrepresentations of the respondents seems but another element of loss resulting from the operation of the business especially perhaps where, as here, no reason exists for attributing the loss in value to effluxion of time or wear and tear or, indeed, to other than the market downturn.
On the other hand, the applicants' failure to dispose of the plant and equipment even after the close of business at the end of September 1982 is wholly unexplained. If it is explicable, e.g. by unsuccessful attempts at sale or perhaps an inability to sell for sufficient to pay out Australian Guarantee Corporation, no attempt was made to deal with such matters by evidence. Had the plant and equipment been sold and Australian Guarantee Corporation paid out, then, of course, no question of repossession and perhaps additional loss by reason of forced sale would have eventuated.
It might, in some cases, be appropriate to fix the date chosen for such an exercise as I have been discussing with some precision. That is not the position here. The "rough-and-ready" estimate called for permits no more, on the available evidence, than recognition that there was some further relevant loss of value of the plant and equipment after the date of the contract.
The applicants' claim for bank fees and interest can conveniently be considered with their claims for loss of interest on their own money which they expended. The bank fees and interest claimed in respect of the period to 30 June 1982 amounted to $481 and related to interest and other charges incurred by the applicants in respect of their borrowing of the initial deposit of $12,300. A similar claim in respect of the period after 1 July 1982, which was undocumented was quantified at "say $400.00". The applicants also claimed $304.00 as interest (at the rate of 11.75% per annum) which they say they would have otherwise received over some unspecified period from a building society from which they say they withdrew $2,600.00 for use in the business, and interest on the second deposit of $10,700.00 which they say they paid from funds they received as superannuation on retirement. Consistently with the approach which I have adopted as to the transaction between the applicants and Australian Guarantee Corporation, it might be that they would also seek to recover interest in respect of the payment of $45,000.00 to the first respondent which I have treated as notionally made by them, whilst at the same time denying them any right to deduct the interest payments they have made or are liable to pay to Australian Guarantee Corporation. I reject all these claims as unproven, save in respect of the interest and bank charges related to the initial deposit of $12,300. Obviously, some approximation is required, particularly in respect of the period after 1 July 1982. As a matter of principle, if borrowing or the termination of an investment occurs in reliance upon misrepresentations, I cannot perceive why the cost of those steps to the injured party ought not be recoverable.
No further payment is called for by the applicants to the first respondent under the contract or the supplementary Agreement. The payments which have been made by the applicants seem to me to exceed the value which they have received on any view of the matter. The Court's power under s.87 of the Act and the relief claimed are wide enough to permit me to exonerate the applicants from further performance of the contract and the supplementary agreement and I propose to do so.
The damages, if any payable by the respondents to the applicants fall to be assessed on that basis. I have indicated the matters which, in my view, ought to be brought to account and the manner in which that ought be done. I assess the damages payable by the respondents to the applicants at $30,000.00.
After the conclusion of these proceedings, I was contacted by Counsel for the respondent. He informed me, and I of course accept, that Counsel for the applicants was aware of the request which he proposed to make to me and raised no objection. He asked that, should the applicants be successful, I determine as between the respondents what responsibility each should bear for the applicants' loss or damage.
Upon consideration I am satisfied that I should not accede to that request. A variety of reasons all point in the same direction. It is perhaps sufficient to note that the proceedings were not conducted on a footing which would permit such an exercise to be carried out with any sufficient degree of accuracy. At least until I was contacted by their counsel, the respondents were content to have these proceedings conducted as a contest between the applicants on the one hand and the respondents on the other. On the basis on which the proceedings were fought, no ground emerged for distinguishing between the consequences to the applicants of the statements and conduct of the different persons who represented the respective corporate respondents. The most that can be said is that I am satisfied that nothing was said or done by or on behalf of the second respondent for which Mr McDermott, and thus the first respondent, does not bear ultimate responsibility. I have concluded that each of the respondents is fully responsible to the applicants for the loss and damage which they suffered. I do not think that it is appropriate to go further and I do not propose to do so.
The order of the court is that the contract between the applicants and the first respondent dated 4 February 1982, the subject of these proceedings, be varied so as to reduce the purchase price payable by the applicants to the sum thus far received by the first respondent, such variation to have and to have had effect on and from the date of the said contract.
The court declares that any provision in the said contract or in the supplementary agreement between the applicants and the first respondent dated 26 March 1982 obliging or purporting to oblige the applicants to pay any further sum to the first respondent in addition to moneys thus far received by the first respondent be declared void ab initio.
The court further orders that the money standing to the credit of an account in the name of the solicitors for the parties with the A.N.Z. Bank be released from the bank by the solicitors for both parties and paid to the solicitors for the applicants on behalf of the applicants.
The court orders that the respondents pay to the applicants $30,000 damages.
The court further orders that the applicants recover from the respondents their taxed costs of and incidental to these proceedings including reserved costs if any.
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URL: http://www.austlii.edu.au/au/cases/cth/FCA/1983/28.html