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Federal Court of Australia |
COURT
IN THE FEDERAL COURT OF AUSTRALIACATCHWORDS
Trade Practices - misleading or deceptive conduct - pre-contractual representations - sale of video wholesale business - contract - breach of contract - measure of damages.Trade Practices Act 1974 s.52, s.82
Pavich v Bobra Nominees Pty Ltd (1988) ATPR (Digest) 46-039
Munchies Management Pty Ltd v Belperio (1988) 84 ALR 700
Nella v Kingia Pty Ltd (1989) ATPR (Digest) 46-047
Wheeler Grace & Pierucci Pty Ltd v Wright (1989) ATPR 40-940
HEARING
PERTHCounsel for the Applicants: Mr J. Gilmour
Solicitors for the Applicants: Claudio Russo Shaw
Counsel for the Respondents: Mr R.E. Birmingham
Solicitors for the Respondents: Stables & Co.
ORDER
1. There be judgment for the applicants against therespondents in the sum of $178,886.Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
2. The cross-claim is dismissed.
3. The respondents are to pay the applicants' costs of the
application and the cross-claim.
4. There be liberty to apply within seven days to correct
arithmetical error in the judgment.
DECISION
In April 1985 Philip Austin-Crowe and his wife, Marion, purchased a video film wholesale business in Brisbane Street, Perth, run by a Melbourne based company called Fourteenth Mandolin Pty Ltd. Their involvement in that business was disastrous and they suffered financial loss as a result, which they say exceeded $138,000. They now sue the company and its managing director, Josef Rabaiov for representations made to them by the company's selling agent, Bernard Crooks, by its general manager in Western Australia, John Morgan, and by Rabaiov himself. They also allege that the company has breached agreements with them in various respects. The company cross-claims against them for the unpaid balance of the purchase price of the business and for video tapes which were supplied to them. Before turning to the evidence, it is convenient to review the way that the parties have defined the issues in their pleadings.2. It is alleged and admitted that Fourteenth Mandolin Pty Ltd ("Fourteenth Mandolin") is a trading corporation incorporated in Victoria, which until April 1985 carried on a video wholesale business known as King of Video at 134 Brisbane Street, Perth (para.1). So too is the fact that Rabaiov was at all material times its managing director and chief executive officer (para.2). And it is common ground that in February, March and April 1985 the Austin-Crowes negotiated with Fourteenth Mandolin for the purchase of the business and that this negotiation took place through Rabaiov and Crooks (paras. 3 and 4). Although not directly pleaded, it was not disputed at trial that Morgan, the general manager of the business for Fourteenth Mandolin, also took part in this process.
3. The various oral representations said to have been made to the
Austin-Crowes by Crooks in February include the following:
(a) - which is not admitted - that FourteenthAnd between the 1 and 4 April at meetings in Fourteenth Mandolin's premises at St. Kilda in Melbourne, Rabaiov is said to have represented:
Mandolin would sell to the applicants, readily
saleable video tapes from existing stock at
the premises to the value of about $12,000
which would give them a very good start in the
video wholesale business.
(b) - which is not admitted - there was very
little that the Austin-Crowes could do wrong
in the business because they would not have to
select their own video stock but that good
quality readily saleable video tapes would be
supplied from Melbourne by Fourteenth
Mandolin.
(c) - which is admitted - that the Austin-Crowes
could count on the strong support of
Fourteenth Mandolin in carrying on the
business.
(d) - which is admitted - that Fourteenth Mandolin
would contact them each day in order to take
orders and to see how the business was going
in general.
(e) - which is not admitted - that Fourteenth
Mandolin had recently acquired the sole and
exclusive distribution agency in Australia for
all ESSEX video tapes and that ESSEX was one
of the biggest and best distributors of video
tapes in America and that this new connection
was going to be a huge asset to the business.
(f) - which is not admitted - that because of the
Essex agency referred to, the price which the
first respondent wanted for goodwill, being a
figure in excess of $100,000 was justified.
(para.5)
(a) - which is denied - that Fourteenth MandolinAs to (a) the defence contends that Rabaiov told the Austin-Crowes that "Fourteenth Mandolin had entered into an agreement for the sale and exclusive rights to distribute a limited range of video tapes from Essex International in Australia (emphasis added). A copy of the agreement with Essex International was shown to the applicants. And further as to (e) it is said to be "implicit in the representation that the Austin-Crowes would operate the business in a proper businesslike manner and consistent with the terms of any contract to be concluded between the parties". Further it was denied that any of the alleged representations were made to induce or had the effect of inducing the Austin-Crowes to enter into an agreement to purchase the business.
had the sole and exclusive rights to
distribute the entire range of video tape
product for the American company Essex
International in Australia.
(b) - which is admitted - that Fourteenth Mandolin
would contact the Austin-Crowes daily to take
orders and advise them of new products.
(c) - which is admitted - that Fourteenth Mandolin
would do everything necessary to assist the
Austin-Crowes in the new business.
(d) - which is admitted - that Fourteenth Mandolin
was holding back five brand new and readily
saleable video tape releases from Western
Australia until the Austin-Crowes commenced
business and that these releases would be
delivered to them immediately they did so.
(e) - which is admitted - the Austin-Crowes would
have the exclusive right to distribute in
Western Australia the entire range of video
tapes produced by the first respondent.
(para.6)
4. The Austin-Crowes further allege that on or about 7 April 1985, Morgan represented to them that the net profit of the business for the year ended 30 June 1984 had not been derived from any income from the sale of X-rated video tapes (para.6A). This must be taken as a reference to a notional net profit which, as will be seen, was calculated by Morgan on the basis of sales for the year ended 30 June 1984 and made available to the Austin-Crowes. The allegation is denied and the defence pleads that Morgan not only disclosed that sales had shown a marked increase from February to September 1984 as a result of the introduction of X-rated videos in January of that year, but also showed them figures of monthly sales including X-rated video tapes and copy press releases by the Federal Attorney-General for September and October 1984 in relation to video censorship.
5. A written offer to purchase the business for $115,000 together with stock to the value of $15,000 and the acceptance thereof are alleged and admitted, as is the execution of a distributorship agreement (paras.7 and 8). The agreement and payments of $60,000 in respect of the purchase price and $15,000 for stock are said to have been made in reliance upon the representations (para.9). The payments are admitted but the reliance is denied, it being said that the Austin-Crowes relied on their own inspection and independent investigation and inquiries.
6. They allege that the representations on which they relied were untrue. And as to those of the representations which were still live issues at trial, they say that the stock sold by Fourteenth Mandolin was not of good quality nor reasonably saleable and that Fourteenth Mandolin did not have any sufficient, good quality, readily saleable video tape to supply to them and that they were supplied tape of poor quality which was not readily saleable (paras. 10(a) and (b)). It is said that Fourteenth Mandolin did not give them strong support in carrying on the business and had no intention of doing so at the time that the promise to that effect was made (para.10(c)). Further, Fourteenth Mandolin did not contact the Austin-Crowes daily to take orders and to see how the business was doing generally and had no intention of doing so when the relevant representation was made (para.10(d)). It is alleged, that the company did not at any time have the sole and exclusive distribution agency in Australia for Essex or Essex International video tapes (para.10(e)). And the five new video releases which were provided were old and not readily saleable (para.10(g)). As to that the defence contends that the stock was good "B grade" quality and readily saleable and that in any event the distributorship agreement provided for the return of any poor quality or unsaleable stock to Fourteenth Mandolin and its replacement by other stock. Reference is made to the purchase of some $14,716 worth of additional stock on 29 April 1985 and the return of some $14,290 worth on 4 June 1985, which amount was credited to the Austin-Crowes.
7. Fourteenth Mandolin contends that it maintained daily contact following commencement of trading but that subsequent to the Austin-Crowes' failure or refusal to pay for stock, ordered and supplied, it ceased contacting them daily and they did not require or request it to do otherwise. Alternatively it is said that the company was under no obligation to maintain contact because of repudiation of the agreements on the part of the Austin-Crowes. Nor was there any reason to seek orders from them when it was clear that they would not comply with contractual requirements for payment. The five brand new video tape releases were new releases by the company in Western Australia and were readily saleable.
8. The Austin-Crowes plead that the representations constituted conduct in trade or commerce on the part of Fourteenth Mandolin which was misleading or deceptive or likely to mislead or deceive and thereby in contravention of the provisions of s.52 of the Trade Practices Act 1974 (para.11). Cognate contraventions of s.55A are also pleaded, as is the accessorial liability of Rabaiov under the provisions of s.75B of the Act (paras. 12 and 13). The representations are alternatively alleged to have been fraudulent on the part of Fourteenth Mandolin and negligent on the part of Rabaiov. All of these allegations are denied (paras. 14 and 15).
9. A restraint of trade clause and a requirement that the company remain in the business for a period of twenty eight days to assist the purchaser are pleaded and admitted and their breach by competitive activity is denied (paras. 16 and 17). The refusal by Fourteenth Mandolin to supply tapes to the Austin-Crowes after 25 July 1985 is said to constitute a repudiation of the agreement and the distributorship agreement which repudiation was accepted by the Austin-Crowes and this too is denied (para.17A). Likewise, an alleged failure to comply with the requirement that Morgan remain in the business for 28 days after sale is denied, it being said that it was agreed that he would remain in the business for the first and third weeks of the Austin-Crowes' proprietorship and that Fourteenth Mandolin need not have any representative present for the second and fourth weeks (para. 18). Other breaches of the distributorship agreement arising out of competitive activity by Fourteenth Mandolin, its failure to supply tapes and refusal to take returns of "slow moving" tapes from the applicants are also pleaded and denied (paras. 19 to 23).
10. The Austin-Crowes claim as against Fourteenth Mandolin, damages under s.82 of the Trade Practices Act and for fraudulent misrepresentation, breach of the purchase and distributorship agreements and "damages for repudiation" of those agreements. As against Rabaiov, damages under s.82 are also claimed, as well as damages for negligent mis-statement.
11. Fourteenth Mandolin cross-claims for the unpaid balance of the purchase price, being some $55,000 and for $28,988.10 for video tapes and spare covers sold and delivered to the Austin-Crowes between 29 April 1985 and 25 July 1985. It also contends that it was an implied term of the distributorship agreement that the Austin-Crowes would continue to operate the business in as near as may be the same manner as Fourteenth Mandolin had done, namely as a video wholesale business and that in breach of that term they commenced trading as a video retail exchange outlet causing loss and damage by virtue of a decrease in sales volume. Further, it is said to have been an implied condition of the distributorship agreement that the Austin-Crowes would continue to market its videos in accordance with the established practice of the business and that they breached this condition causing loss and damage to Fourteenth Mandolin. Their termination of the services of a female employee, Cindy Phillipsz, was said to have been one such breach as was their failure to call on certain video retailers who had been regular customers of the company. So too, is their trading on a retail basis contrary to advice from Morgan and the fact that they began exchanging some of the products received from Fourteenth Mandolin for other products. Damages are sought arising out of these alleged breaches. Fourteenth Mandolin also claims a declaration that the Austin-Crowes repudiated the distributorship agreement and that it accepted and validly terminated that agreement. All parties seek interest on damages claimed.
12. Against this background it is necessary to turn to the history of events
as disclosed by the evidence.
Factual Background
13. In February 1985 Philip Austin-Crowe had been a school teacher for about 18 years and was due for 3 months long service leave. His wife, Marion, had completed a two year course at a Teacher Training College in December 1984 and had received an offer of work as a school teacher. But instead of Mr Austin-Crowe resuming his employment and Mrs Austin-Crowe embarking on hers, they decided to go into business together. Neither had any experience of the commercial world.
14. They first investigated the possibility of buying into a toy shop, then an advertisement for a computer business led them to a business broker, Mr Bernard Crooks, employed by Action Realty Pty Ltd. He was concerned about their lack of experience and advised them against that enterprise. He did, however, have on his books a business for the wholesale distribution of video films operated from premises at 134 Brisbane Street, Perth by Melbourne based manufacturer, Fourteenth Mandolin Pty Ltd which distributed throughout Australia video tapes reproduced from imported masters. The business traded principally as King of Video, but also sold tapes under other names including Box Office International Video and Pink Video. Crooks told the Austin-Crowes that because the company manufactured the stock, it had a vested interest in its successful distribution. And given their lack of experience this would be a significant factor in their favour. They could expect the company to be very liberal with credit terms.
15. Crooks and his wife themselves sold and hired video films through service stations and had had occasion to buy from King of Video. He told the Austin-Crowes that he had always found its manager, John Morgan, good to deal with although there had been problems with the quality of some of the videos supplied. Morgan had assured him that Fourteenth Mandolin's production machinery had improved with a corresponding improvement in product quality. At the time of the listing Crooks had seen some of the current products and regarded them as being of good quality. His remarks in this regard must be taken as a reference to technical quality and not the artistic or other merits of the films. He also said that the films distributed by Fourteenth Mandolin fitted into the budget or cheaper end of the market. There was always room in the market for a cheaper new title. The Austin-Crowes would get a lot of assistance from the Melbourne head office. It would select and purchase the films for distribution, reproduce them and send them to the Perth outlet. There would be daily contact if necessary to ascertain their stock needs.
16. Crooks produced a handwritten document prepared by Morgan and entitled
"Sales and Gross Figures for 12 Months Ended 30 June 1984".
This reported
sales for the year of 8,712 tapes at $15 per tape, yielding $130,680. Sales
of 47,666 blank PVC covers at 50 cents
each had yielded $23,833. The figures
necessarily represented notional margins on resale, for at that time King of
Video was an
activity of Fourteenth Mandolin and not a reseller of its
product. Total gross income was calculated at $154,513. Fixed overheads
including wages of $52,000 came to $74,130. Net profits after personal
drawings of $20,800, should be approximately $80,000 per
annum "based on 1st
year's operation" . The document went on:
"Any tapes/films which become slow moving can beA list of monthly sales of tapes and covers from July 1983 until September 1984 inclusive was attached.
exchanged at no cost for latest release titles. A
minimum of 80 new titles per year will be
guaranteed.
I would suggest that commencement stock should be
in the vicinity of say 300/400 units at a cost of
approx. $12,000. Bearing in mind one can order Ex
E/states on a daily or weekly basis. Stock takes 3
days X E/states. No min or max stock req'd to be
ordered monthly. All damaged tapes will be
replaced at no cost."
17. The Austin-Crowes agreed to visit the King of Video premises and meet Morgan. Crooks was present at the meeting which took place in the last week of February. Morgan said that he was anxious to see the business sold as he had not had a holiday for two years and was booked to go away on 1 April. Later he would be travelling around Australia hiring tapes to hotels and motels. He told them they would get every support from Fourteenth Mandolin and repeated what Crooks had said earlier, that they would be contacted frequently and if necessary daily, by the Melbourne office. They really could not go wrong.
18. There was discussion of the technical quality of the tapes. Morgan said they were all of good quality and that the company was about to install a new machine to upgrade the standard of the reproductions and enable costs of production to be maintained. He told them that on his estimate they would need no more than $12,000 worth of stock on settlement as he envisaged a delivery time of 48 hours from Melbourne for replacement stocks. The company, he said, had a very good selection of every censorship classification and supplied childrens', religious and historical as well as R-rated films. Crooks said that Joe Rabaiov, the principal of Fourteenth Mandolin, spent nearly ten months of each year looking for new tapes for the company. Stock was obtained largely from the United States but also from Europe. Either Morgan or Crooks said that the company had just concluded an exclusive contract for a seven year term to sell the products of a large American distributor, Essex International. This was in fact the name of a division of Essex Distributing Inc., a corporation based in California. Crooks told them that this promised to be "a real windfall" for the business.
19. There was some discussion about the value to be placed on the goodwill. According to Crooks, the claimed net profit and the Essex contract "would more than substantiate the goodwill" which, at that time, was priced at $120,000. Wages paid to the existing staff were mentioned and the Austin-Crowes were told that Cindy Phillipsz, then on holiday in England, was an "outstanding salesgirl". Morgan also suggested to them that the premises could be used in part for a small video library as well as the wholesale operation.
20. Following these discussions, Mr and Mrs Austin-Crowe returned to the
premises on at least two further occasions. Two written
offers were made and
rejected. The documents themselves were not in evidence, but they apparently
proposed a price of $115,000 for
the business and $15,000 for stock. During
March there was a break in negotiations because Rabaiov was in the United
States. In
the meantime, the Austin-Crowes engaged Mr K. Bradbury of the
accountants Forbes Bradbury to provide them with an evaluation of the
business. On 22 March 1985 he sent them a letter entitled "PROPOSED PURCHASE
OF "KING OF VIDEO" - INTERIM REPORT" in which he referred
to discussions with
Morgan and a Miss Kit Tong, the company's accountant in Melbourne. Because
the Perth business was run as a division
of the operation of Fourteenth
Mandolin, there were no separate financial statements or taxation returns
prepared to it. This, it
was pointed out, caused "difficulties due to the
lack of information relating to the specific operations in Perth". Bradbury
indicated
in his report that he had requested from Miss Tong a profit and loss
statement and details of the landed cost of video tapes and
PVC covers into
Perth. He also suggested that if a decision were made to purchase the
business a formal written assurance as to
the accuracy of the information
supplied should be obtained from the vendor. A member of his staff had
inspected sales records to
check the accuracy of the sales information
supplied and to determine the composition, value and ageing of debtors. His
principal
observations were:
1. Sales invoices existed totalling the monthly21. The handwritten information provided by Morgan would support an adjusted net profit of $101,183 after adding back the manager's salary ($20,800). After taking out $30,000 as a reasonable salary to the owners and $2,250 return on the cost of stock and fittings, a super-profit of $68,933 remained. On this basis, goodwill would be in the vicinity of $140,000. The letter concluded:
sales results provided by Morgan.
2. Morgan claimed the gross profits per video and
cover were respectively $15 and 50 cents.
This could not be confirmed as no information
had been made available on landed costs Ex
Melbourne. But the sale price of video tapes
and covers ranged from $30 to $50 and $1 to
$1.50 respectively.
3. No debtor records were available other than a
Kalamazoo system introduced in January 1985.
4. The range of clients was large and there was
therefore less likelihood of the business
being adversely affected by any single client.
5. The landed cost of video tapes and covers
should be about $23 and 75 cents respectively.
Any significant variation in these figures
when advised by Miss Tong would require
further investigation.
6. Debtors at 28 February 1985 amounted to
$56,892.85. 21.28% were over 90 days which
was not a healthy position. Although Morgan
had attributed this to loose collection
procedures, Bradbury did not accept that
explanation and thought that their ageing
might indicate that some of the clients were
experiencing difficulties which could
adversely affect that business.
"On the basis of the information provided, it would22. Shortly after the accountant's report came to hand, arrangements were made for Mr and Mrs Austin-Crowe to visit Fourteenth Mandolin's headquarters in Melbourne. They were to pay their own airfares and the company would meet accommodation costs. They arrived in Melbourne on 1 April 1985 and booked into the Southern Cross Hotel. That evening they had a meal with Rabaiov and his general manager in Melbourne, George Mol, but beyond some talk about outlets in the other States, the occasion was social. The following morning at 10 or 11 am, they went to the company's premises at 181 Barkly Street, St. Kilda. They met Rabaiov in his office on the third floor. Also present were Mol and a secretary. Rabaiov began by telling them that he wanted to sell the business in Perth so that Morgan could be freed up for other activities. He repeated what they had previously been told, that Fourteenth Mandolin would give them every support and maintain daily contact to see how they were getting on and to take orders from them. Morgan would stay for a time to help them out with the business and they would receive a regular supply of new releases. In particular he said that there were five new titles which he was about to release in the other States, but would hold back in Western Australia until they began trading. Rabaiov referred to the notes prepared by Morgan and asked whether they were happy with them. Mrs Austin-Crowe said something to the effect that if they had been unhappy they would not have been there.
appear that the value attached to the goodwill,
i.e. $115,000 is reasonable. However, I believe
that further investigations are required to confirm
the financial results provided and to assess the
future viability of the business with respect to
debtors, etc."
23. She asked Rabaiov if he had the agreement with Essex of which they had
been told. He said that he had exclusive distribution
rights in Australia for
a term of seven years and had some 68 titles ready to go. He showed them a
press release which had been
prepared under the Pink Video logo. The release
was headlined:
"ESSEX INTERNATIONAL AND PINK VIDEO INK.(sic)And in its text the following statements appeared:
IMPORTANT SEVEN YEAR AGREEMENT"
"PINK VIDEO have finally inked a deal to obtain theThe release conveyed the unmistakeable message that Fourteenth Mandolin, under the name Pink Video, had acquired exclusive rights to distribute all of the products of Essex International in Australia and other places for a term of seven years. Rabaiov gave evidence of negotiations with a woman called Leslie Dillon, the Director of International Distribution for the American corporation. In evidence in chief, he said that in 1984 he had pressed Miss Dillon for the right to distribute all the Essex tapes. Contracts were negotiated for particular films or groups of films and, according to Rabaiov, Miss Dillon agreed in February 1985 that future titles would be available at $US1,500 each. There were, he said, some 70 titles available at the time but he could not afford to pay for them all. One contract dated 8 February 1985 made with Fourteenth Mandolin under the name World Wide Video House, embodied an exclusive licence for Australia and New Zealand in respect of three films: Kate and the Indians, Rhinestone Cowgirls and Sheer Panties. The agreement was said to be valid for a period of seven years.
exclusive rights for ESSEX INTERNATIONAL in the
territories of -
Australia, New Zealand, Oceania and the Far East.
Lengthy negotiations lasting several months were
only concluded in the early weeks of January
cementing arrangements between the two companies."
.
.
.
"A continuing flow of quality product in Adult
Entertainment from ESSEX will be released under the
PINK VIDEO banner for the next seven years.
The initial PINK VIDEO package from ESSEX
INTERNATIONAL totals 68 titles never before seen in
Australian video release."
.
.
.
"The union between ESSEX INTERNATIONAL and PINK
VIDEO gives further proof of the recognition PINK
VIDEO has enjoyed as leaders (sic) in the field of
Adult Entertainment across the continent."
24. The evidence, including correspondence with Miss Dillon, supports the proposition that Essex was prepared in January and February to continue dealing with Fourteenth Mandolin and to sell to it exclusive rights to distribute particular films as they became available. It does not support the existence of any agreement on the part of Essex to confer exclusive rights of distribution for all of its available products for a period of seven years.
25. According to Rabaiov, he told the Austin-Crowes in Melbourne that he had the exclusive rights to 68 to 70 Essex titles and this, he said, was what he believed to be the case then. The defence filed by himself and his company denied that he had represented that Fourteenth Mandolin had the sole and exclusive rights to distribute the entire Essex range in Australia and went on to say that he told the Austin-Crowes that the company had entered an agreement for the exclusive rights "to distribute a limited range of video tapes from Essex International in Australia". And that it seems was the case, for the company had the licence for three films to which reference has already been made. But the plea is inconsistent with his testimony as asserting a right to distribute all available tapes and it is certainly not what he told the Austin-Crowes. In my opinion, the representation which was alleged in this regard was made and was false. The fact that Mrs Austin-Crowe was at some time shown the contract of 8 February, did not detract from the effect of the representation which asserted an overarching agreement.
26. Rabaiov went on to propose at his meeting with the Austin-Crowes on 2 April that they commit themselves to take a minimum order of 500 tapes per month and that Fourteenth Mandolin should take 20% of the capital gain on any resale of the business in the future. He had also worked out an arrangement to avoid sales tax under which the operators of the Perth business would enter into a sham agency agreement with Fourteenth Mandolin purporting to sell tapes on behalf of the company when their true position would be that of resellers. It is likely, in my opinion, that although they signed such an agreement, the Austin-Crowes had no real appreciation of its significance.
27. Terms of payment were discussed. Rabaiov said he wanted $130,000 which could be paid on the basis of $115,000 for the goodwill and plant and $15,000 for stock. The Austin-Crowes made it clear that they would require vendor finance. They could afford to pay $50,000 immediately from their own resources, but on a total purchase price of $115,000 would need time to pay the balance of $65,000.
28. That night they discussed the matter between themselves and made a list of points for negotiation with Rabaiov. The next day they went through these points with him. He agreed not to insist upon the 20% of capital gain on resale of the business and also to drop the minimum purchase requirement. He agreed to accept repayment of $65,000 of the purchase price by 26 monthly instalments of $2,500, being interest free. Rabaiov, in his evidence, said that the question of vendor finance was not raised until they had returned to Western Australia, but nothing turns on that discrepancy.
29. Having had these discussions with Rabaiov, the Austin-Crowes returned to Western Australia. One outstanding issue they wished to resolve was the extent to which the figures provided by Morgan had included X-rated videos. This matter had not been raised with Rabaiov. The sale of these items had been permitted in Western Australia between January and August 1984. At the end of that time a pre-existing ban had been reimposed. During that period Morgan's figures showed sharply increased sales. For the six months ending December 1983 3,373 tapes were said to have been sold representing a monthly average of 562, while for the following six months the number was 5,339, an average of 890. For the three months, July to September 1984, some 3,074 tapes were sold, a monthly average of 1,024. Morgan's projections of profitability were based on the sales of tapes and covers for the year ended 30 June 1984. According to Mrs Austin-Crowe, when they asked whether any of the figures included sales of X-rated videos, Morgan said that there were no such tapes in his sales figures.
30. Mr Austin-Crowe recalled the occasion because he and his wife had
disputed the necessity for the inquiry, she suggesting that
he was probing for
faults. According to Morgan, he told the Austin-Crowes at their first or
second meeting with him, that when the
ban on X-rated videos had been lifted
in 1984, Fourteenth Mandolin was one of the first companies to get them into
Western Australia
and it had affected sales significantly in the period
February to July 1984. He also claimed in evidence-in-chief to have explained
this to Crooks. He knew, he said, that questions would be asked by the
accountants about the marked increase in sales over those
months. In
cross-examination however he was unable to recall what he had said to Crooks
on this subject. He would, he said, have
mentioned that the X-rated tapes had
been legalised over the period January to September and that there was a
possibility, in the
light of a press release dated 26 October from the Office
of the Commonwealth Attorney-General, that they would be reintroduced at
a
later stage under a new classification. Cross-examined about the absence of
any reference to X-rated sales in his handwritten calculations
of notional
profit for the year ended 30 June 1984, he claimed that those figures were
purely historical:
"As I mentioned I asked (sic) both people who wereThe ingenuousness of his testimony was not supported by the patently prospective terms of the notes which stated that profits "shud (sic) be approx. $80,000 pA based on 1st year's operation". And although he attempted to argue that it was possible, even after August 1984, to purchase X-rated tapes by ordering them out of the Australian Capital Territory, he had to accept that the Austin-Crowes had indicated from the outset that they did not wish to sell such tapes.
interested in purchasing the business they must get
the advice of their accountant. All I did was
extract, as I said extract actual figures and
presented what had happened in the space of time
since I had been there."
31. It is notable that in the report prepared by the accountant, Bradbury, he refers to discussions with Morgan but makes no reference to X-rated sales or their temporary impact upon the figures on which he was basing his opinion about the business. Morgan did not recall meeting the accountants but accepted that they may have called into the shop. In any event, there was no suggestion that he ever told the accountants of the X-rated sales. Nor was there any evidence to suggest that Crooks had raised the question of the X-rated sales with the Austin-Crowes.
32. It is true that the Austin-Crowes stopped short of asking Morgan for an
explanation of the February to August figures. However,
given the differences
of view between them as to whether the probe about X-rated sales was justified
at all, it is perhaps understandable
on emotional if not rational grounds that
Mr Austin-Crowe did not push the matter any further. I am satisfied that
their account
of the result of their inquiry is correct. I am reinforced in
that view by evidence that it was not the first time that Morgan had
been
economical with the truth in his business dealings. On 29 January 1985 he
wrote to Rabaiov complaining about three new release
films which had not been
supplied: Driller Killer, Drive-In Massacre and Doctor Jeckel's Dungeon of
Death. He claimed in the letter
that he had expectations of selling "in the
vicinity of 1100 tapes of the release". In cross-examination he conceded that
this was
not true and that he had said it to "stir" Rabaiov into action. And
another claim in the letter "that the general feeling of consensus
within the
trade is that we have been false advertising..." was he agreed, "a complete
falsehood". Asked whether he was prepared
to lie to his managing director to
"stir him" he said:
"I would say, exaggerate heavily, yes I did."Without that evidence, but in any event reinforced by it, it is my opinion that Morgan told the Austin-Crowes that the sales figures that he had produced did not include X-rated tapes. In so doing he lied to them and for the purpose of s.52 of the Trade Practices Act, if no other, his conduct was that of Fourteenth Mandolin.
33. On 10 April 1985, the Austin-Crowes signed a written offer to purchase
the business which offer was accepted on 15 April. The
purchase price was
$115,000 of which $110,000 was allocated to goodwill and $5,000 to plant and
chattels. That did not include the
stock which on the standard form offer was
to be priced at "the sum equal to the cost price to the vendor of such stock
in trade
on the premises at the date of possession with due allowance made for
depreciated or damaged stock". This however, had to be read
in the light of
the special conditions found in schedule 1 to the agreement which provided,
inter alia:
"2. Any stock required in excess of $15,000The terms of payment of the purchase price were otherwise provided in special condition 3:
(Fifteen Thousand Dollars) shall be paid to the
vendor on terms to be negotiated separately from
this agreement."
"3. The sum of $50,000 (Fifty Thousand Dollars) to34. The outstanding balance of purchase price was to be secured by second mortgage over the Austin-Crowes' house at 39 Lee-Steere Drive, Wanneroo. The agreement was also expressed to be subject to "...the purchasers' solicitors preparing a suitable contract of agreement which in his opinion locks the W.A. Distributorship into the Melbourne parent Company on a perpetual basis". On 25 April the parties executed a Supplementary Agreement under which Fourteenth Mandolin agreed to assign to the Austin-Crowes "all business names owned by the vendor and used in connection with the said business in Western Australia including "Box Office International Video" "Pink Video" and "King of Video Australia" "Essex" and "Kung Fu". In cl. 4 of the Supplementary Agreement it was provided that Fourteenth Mandolin would grant the Austin-Crowes the exclusive right to distribute its video tapes within the State of Western Australia except to hotels and motels (4(i)). And the company agreed that during the continuance of the franchise no other person or corporation should sell, hire or distribute its video tapes in any way within Western Australia. The franchise was to commence on the date of settlement and continue until 1 January 2035 (4(iii)). Fourteenth Mandolin agreed to supply from the whole range of its products such quantities of "good quality video tapes" as the Austin-Crowes might require for hiring to the public. The prices per tape for the first 12 months were fixed as follows:
be paid on settlement. A further $15,000 (Fifteen
Thousand Dollars) to be paid on the 30th day after
settlement. The balance of $65,000 (Sixty Five
Thousand Dollars) to be paid over 26 months at
$2,500 (Two thousand Five Hundred Dollars). 26
post dated cheques to be issued at settlement for
the full amount of $65,000 (Sixty Five Thousand
Dollars) @ $2,500 (Two Thousand Five Hundred
Dollars) each."
"Pink Video - $25 per tape35. There was also provision for a review of the price and arbitration in default of agreement (4(iv)(b)). Payment was to be cash on delivery or otherwise as agreed (4(v)) and Fourteenth Mandolin was to do everything in its power to ensure that the Austin-Crowes had at all times an adequate supply of video tapes for their business, but was not to be liable for loss or damage caused by non-delivery due to any cause beyond its control (4(vii)). A minimum purchase and supply of 80 video titles per year was prescribed (4(viii)) and Fourteenth Mandolin was to pay all sales tax on the video tapes, while the Austin-Crowes would pay freight from Victoria to Western Australia. Fourteenth Mandolin was to pay freight on covers (4(ix)). Promotional and advertising material was to be supplied free of charge (4(x)). And under 4(xii) it was provided:
King Video - $30 per tape
Box Office - $30 per tape
Spare covers for same - 90c large 80c small"
"The Vendor will replace all damaged video tapes36. There was a restraint of trade provision in 4(iv) whereby Fourteenth Mandolin undertook not to carry on within Western Australia during the period of the franchise the business of sale, hiring or distributing of video tapes or to be in any way interested in carrying on such business other than sales or hiring or distribution to hotels or motels.
free of charge and proved "slow moving" video tapes
may be returned by the Purchasers to the Vendor for
replacement. Any dispute as to whether a video
tape is slow-moving shall be referred to an
arbitrator for determination."
37. Asked why she decided to enter the agreements, Mrs Austin-Crowe said:
"Well there was figures there that did not containAnd as to that, I am satisfied that Rabaiov's representation as to the Essex contract and the absence of any X-rated component in the profit calculations prepared by Morgan were both material factors inducing the Austin-Crowes to purchase the business and enter the supplementary agreement with Fourteenth Mandolin.
the X-rated, the support that we had been promised
whilst we were in Melbourne that we would be
getting and also the contract that they had with
Essex Video for the future supply of really first
class tapes."
38. The Austin-Crowes decided that they would conduct their business through a company called Hesperia Holdings Pty Ltd of which they were the only shareholders and directors. So far as their claim for damages relates to loss suffered by the company, they are losses effectively sustained by the Austin-Crowes and the joinder of the company is not necessary. Nor was any point taken on this issue by the respondent.
39. The Austin-Crowes took possession of the premises on Monday 29 April. Some stock had been removed on the Saturday by Morgan who had explained to them on that occasion that it was surplus and was being returned to Melbourne. Settlement evidently took place on or about 2 May. Hesperia Holdings entered into a lease agreement with the owners of the premises for a term of three years from 1 May 1985 at an annual rental of $8,400 payable by monthly instalments of $700.
40. In order to meet the first instalment of the purchase price, the Austin-Crowes borrowed $82,000 from the Teachers Credit Society secured by a first mortgage over their home. Mr Austin-Crowe cashed in his superannuation entitlement of some $12,000 to help meet the $15,000 stock price. The balance of $65,000 owing after payment of the first part of the purchase price was proferred by way of 26 post-dated cheques each for the sum of $2,500. That amount was secured by a registered second mortgage over their home in favour of Fourteenth Mandolin.
41. A deposit of $6,500 was evidently paid upon execution of the agreement. This, together with stamp duty of $2,225 on the contract and a balance of $44,551,41 paid at settlement amounted to a payout by 2 May 1985 of $53,276.41. Part of that figure was attributable to various outgoings associated with the settlement including search fees, a lease fee of $714, settlement agents fees of $175 and adjustment of rates, taxes and the building insurance premium as at 1 May. Legal costs in relation to the lease were $400 and legal costs and stamp duty on the sale agreement and second mortgage came to $2,710. In addition payments to the Teachers Credit Society in relation to the loan of $82,000 comprised a $200 establishment fee, a $75 valuation fee and $295 for costs on the first mortgage.
42. Post-dated cheques of $2,500 each drawn on the Teachers Credit Society account of Hesperia Holdings Pty Ltd trading as King of Video were given to Morgan who took them with him to Melbourne. In due course four of those cheques were presented and met making a total additional payment off the purchase price of $10,000.
43. As to the operating stock, Morgan took a significant role in deciding
what should be left on the premises. Initially, he said,
an opening stock of
some 300 to 400 tapes was contemplated, but when that number was on display
the premises looked bare by comparison
with the number of titles that he had
carried. He suggested that the quantity of stock on the premises should be
increased and that
special terms for payment between 60 and 90 days could be
offered. He prepared an invoice for stock remaining on the premises as
at 29
April which came to a total of $29,716. This was made up as follows:
586 video tapes @ $30 $17,580A further ten tapes at $29 each produced an overall total of $29,716. It is common ground on the pleadings that on 4 June 1985 the Austin-Crowes returned some $14,290 worth of these tapes and were credited accordingly by Fourteenth Mandolin. The reason was that they could not afford to commit themselves to so much opening stock. It is also common ground that they paid $15,000 for the stock by two payments, one of $9,000 on 6 June and the other of $6,000 on 17 June.
8 " " @ $10 $ 80
310 " " @ $25 $ 7,750
4,418 covers @ 90 cents $ 3,976
50 " @ 80 cents $ 40
500 " at no cost
$29,426
44. According to Morgan he remained on the premises helping the Austin-Crowes for some two weeks. At the end of that time Rabaiov asked if he would go to Adelaide as Fourteenth Mandolin's manager there had suffered a heart attack and was undergoing by-pass surgery. The Austin-Crowes, he said, agreed to this and he went to Adelaide for a period of two or three weeks out of the month that he was to have been assisting them with the business. There was some inconsistency between his evidence and that of Mrs Austin-Crowe on the period and times at which he was present on the premises. What is apparent, is that she was not much concerned about his departure as he gave little of the promised assistance. Mr Austin-Crowe said that Morgan did not take him to see any of the video library operators. One outlet, Barbarella's, was a substantial buyer of erotic films. Morgan told him the manager's name was Smith and that he should visit him as he was just around the corner. Austin-Crowe did so. That visit did not yield any fruit. Smith wanted to pay a discounted price which he did not think worthwhile having regard to the landed cost of the tapes in Perth. Morgan did introduce him to customers who came to the premises, but these visits were not by appointment.
45. From the outset the Austin-Crowes experienced difficulty in managing their staff. Mrs Austin-Crowe had the feeling that they did not have their respect and that they seemed to her to owe their principal allegiance to the Melbourne office. Cindy Phillipsz, a former employee of Fourteenth Mandolin, had been represented as a person of considerable ability in securing sales. She was absent for two days in the first week and again in the fourth. She produced a doctor's certificate for one of those days but on the second absence telephoned late to say that she was at the wharf at Fremantle taking delivery of a Jaguar motor vehicle for her boyfriend. Her sales system involved ringing people from a number of client cards and recording the dates of the calls on each card.
46. The other salesperson, Roy Goulden, had been employed at King of Video
since 1983. His duties involved making personal calls
on all the video
libraries around Perth and country trips once a month. He would deliver
promotional materials from the Melbourne
office to the various outlets, a
letter drop as he called it, and would follow up with tapes which he carried
around in the boot
of his car. Up to and a little after the arrival of the
Austin-Crowes he was paid a commission on sales and a car allowance. He
regarded himself as self employed. He did not establish a close rapport with
the Austin-Crowes. It was necessary, he said, to take
a down to earth
approach with the kind of people running the sort of outlet to which King of
Video sold its products. His approach
and that of Ms. Phillipsz, he thought,
appalled the Austin-Crowes. Asked to describe it he said:
"Well sometimes a slap and tickle on the backside or47. He thought that Mr Austin-Crowe, coming from the background he did, would have some difficulty adapting to his new occupation. This was simply Goulden's speculative opinion and is not evidence of the fact, but there is undoubtedly an element of truth in what he said. The transition from school teacher of 18 years standing to wholesaler of B grade and worse video tapes, cannot have been easy. Goulden agreed in cross-examination that he had not taken Mr Austin-Crowe around with him to introduce him to customers as he thought it might be detrimental to his sales.
stand to attention or - depending on the person -
that you know just by experience of going round to
them. Some you can go and say "cup of tea" and,
you know treat them as a friend."
48. Sales during May were slow. The new releases promised by Rabaiov did not
appear to have much impact. They were:
1. Smash Up Alley - described by Mr Michael BrockGoulden evidently had little success in his attempt to sell these products and at one time kicked the container they came in, saying they were "rubbish". It had always, he said, been a well known fact in the industry that the B class films marketed under the Pink Video, King of Video and Box Office International video titles were "a hard sell as opposed to a soft sell".
a film critic and founding president of the
Video Association of Western Australia, as a
boring and poorly directed and filmed
production about a stock car race which would
only appeal to fans of stock car racers.
2. Psyclomaniacs
3. The Rivals - described by Brock as a low
budget film made for television and of a
normal television standard.
4. The Thorn - characterised by Brock as an
amateur production, technically poor in sound
and vision and of low rentability.
5. Glen Miller - A Moonlight Serenade - this was
a recording of a concert held in or around
1970 by some members of Glen Miller's original
band. It was described and appears
technically fair, but would be unlikely to
have wide appeal.
49. Mr Austin-Crowe went out on the road direct selling, having agreed that Goulden would cover the metropolitan area south of the river and he the northern region. He drew up a schedule of visits and saw some ten outlets daily except for Fridays which he set aside to be on the premises. He carried that practice on into July. He and his wife were working six days a week in the business and also making evening and weekend visits to libraries to get there when their managers were on the premises. In an endeavour to improve their staff performance, the Austin-Crowes increased their remuneration. On 10 May, Mr Austin-Crowe told them that unless they could secure more sales the business would not even cover its overheads. They did not seem to appreciate that he and his wife were the new proprietors of the business and not just its new managers. He told them that they had to sell in order to survive. The sales results did not, however, improve. At the end of the following week Mr Austin-Crowe asked Cindy Phillipsz to give him a breakdown of her sales. In one week she had only sold five tapes. When she showed him a total of about 130 over three weeks, he pointed out that 20 were the result of incoming phone calls taken by his wife and that another 28 tapes had been returned. Effectively she had sold 92 in three weeks.
50. In the meantime, without informing the Austin-Crowes, Morgan had arranged with Mol that Fourteenth Mandolin would pay Phillipzs and Goulden a commission of $1 for every tape they sold. He was unable to give any explanation for this secret dealing with the Austin-Crowes' staff. In the circumstances it is not surprising that Mrs Austin-Crowe had the feeling that they owed a greater allegiance to the Melbourne office than their Perth employers.
51. In spite of their efforts, Phillipsz and Goulden's results did not improve and at the end of May they were dismissed. They were replaced by Mr Ed Murphy, whom Mr Austin-Crowe had met while out on the road selling videos. Murphy had recently come to Australia from the United States where some years before he had had some experience as the owner/operator of a video store. He began working for the Austin-Crowes from about the middle of June. He operated as an on the road salesman, but would telephone libraries in advance to try to arrange appointments. Generally speaking, he said, he was not well received. It was elicited from him in cross-examination that some operators told him they would not do any business with John Morgan. After a fortnight he found he was not making significant sales and told the Austin-Crowes that he could not continue on a commission basis. They then decided to put him on a salary of $250 per week with a commission of $1 for each film sold and a car allowance of about $100 weekly.
52. Murphy found that he was able to pre-sell between 50 and 70 of the promised Essex's tapes but it appears that delays in their delivery resulted in cancellation or returns of a number of orders. He recognised some of the Essex titles as those of films which had been distributed about ten years earlier in the United States. The American versions were X-rated, but those delivered by Fourteenth Mandolin had been censored or "cut back" to bring them within an R classification. There was, he said, "no story" in them.
53. Murphy suggested to Mr and Mrs Austin-Crowe that they establish a video library on the premises and try to build up stock for it by swapping tapes with other library outlets. They agreed. He then visited library outlets and offered to take two or more of their old tapes which were slow moving, for one of the King of Video tapes. The stock thus acquired was to form the basis of a video library for the Austin-Crowes.
54. In July Murphy attempted to make sales in Bunbury and Busselton. Some of the stock he was trying to sell to libraries there under the Pink Video and Essex brands were already on sale in those same libraries at $12 each. He was trying to sell the same product for $40. Not long after his trip to Bunbury and Busselton, he left the Austin-Crowes' employment.
55. On Rabaiov's evidence, he had no contact with the Austin-Crowes after their Melbourne meeting until about the end of May when there was a telephone conversation concerning the five new release titles and the Essex tapes which he passed on to Mol. He presented four of the post-dated cheques for $2,500 and these were met, although one was initially dishonoured. However due to the poor cash flow from the business the Austin-Crowes were unable to meet payments for stock delivered by Fourteenth Mandolin and as time went on Rabaiov became more concerned. On 29 July he had a telephone conversation with Mrs Austin-Crowe in which she asked him for more time to pay. He refused as, he said, they were already overdue by 60 or 90 days. He told Mrs Austin-Crowe that there would be no more stock until outstanding invoices were paid.
56. It was Rabaiov's evidence-in-chief that following this he instructed Morgan to set up another wholesale outlet for Fourteenth Mandolin in Perth. To that end the name Golden West Video was registered as a business name showing Morgan as the proprietor. Rabaiov's evidence-in-chief gave the impression this step was taken as a reaction to his final conversation with Mrs Austin-Crowe when he told her he would stop supply. But there was evidence that Morgan had some two and a half weeks previously registered the names "Queen of Video" and "Blue Angel" as business names, showing him as proprietor and in each case the nature of the business described as "video wholesale distributors and pre-recorded tapes". These registrations were effected on 12 July and it is reasonable to infer that the decision to do so was taken at least a day or two earlier. It is clear from Morgan's evidence in cross-examination that he registered these names on Rabaiov's instructions, although he rather implausibly claimed not to know the reasons for the registrations. I am satisfied, despite Rabaiov's failure of recollection on the point, that he had decided at least as early as the second week of July that the relationship with the Austin-Crowes was not going to survive and that he would open another wholesale outlet in Western Australia.
57. Fourteenth Mandolin commenced trading as Golden West Video on 26 or 27 August with opening stock of 1,892 tapes. According to Morgan, he sold 911 units in the first month. He instructed his staff to try to obtain prices between $40 and $49.95 for the tapes subject to his right to vary them. He sold bulk packages at lower prices. On one occasion a batch of 500 tapes was sold at $18 to a second hand wholesaler. On another he sold a batch of 200 at the same price. He said he was happy with the way the business progressed and with the volume of his sales. He would have been doing as well, if not better, than when he was operating King of Video.
58. It is apparent however that no inference should be drawn from this evidence adverse to the way in which the Austin-Crowes conducted their business between May and August 1985. For as an analysis by Mrs Austin-Crowe of invoices discovered by Fourteenth Mandolin shows, it was selling its tapes in Perth in the period January 1985 to April 1985 for prices ranging from $30 to $38. A price range of $18 to $35 was disclosed for the period January 1986 to August 1986 when it was operating as Golden West Video. The Austin-Crowes however, were paying Fourteenth Mandolin $25 for Pink Video tapes and $30 for all others. To achieve a $15 gross profit posited by Morgan in his original handwritten calculations, they would have had to sell to retailers in a price range of between $40 and $45. In this regard I accept the submission of counsel for the Austin-Crowes that the business was labouring from the outset under a price structure that had never burdened Fourteenth Mandolin when it sold its products direct.
59. Golden West Video continued operating until 4 October 1987 when it was sold to a company connected with one Mavis Toghill for $130,000. The company subsequently went into receivership, although no evidence was given as to the reasons for its failure.
60. In the meantime the Austin-Crowes began operating as a fully fledged video library from September 1985. The assets of the new business were those which they had purchased from Fourteenth Mandolin, including what was left of the opening stock, plant and equipment. Nothing ordered from Fourteenth Mandolin and not paid for was used in that business. Operating losses suffered by Hesperia Holdings Pty Ltd for the years ended 30 June 1985 and 30 June 1986 totalled $14,280. Because the Austin-Crowes were unable to pay off the Teachers Credit Society loan, their house was the subject of a mortgagee sale in February 1986. From then on they lived on the premises at 134 Brisbane Street. With them were there two children aged 14 and 15 respectively. They had no kitchen or bathroom facilities and had to use an outside toilet. They lived there for a year.
61. Ultimately they built up the video library business to the point where they were able to sell it in March 1987 for $35,500, which sum was repaid to the Teachers Credit Society. During the term of their loan from the Society they paid interest and loan charges totalling $12,039.93. Costs on the mortgagee sale were $3,217.10.
62. Mr Austin-Crowe gave evidence that had he not purchased the business and
instead resumed his occupation as a schoolteacher, he
would have earned a
total net salary between 1 May 1985 and 30 April 1987 of $38,673.24. As to
this however, I am satisfied on the
evidence that he and his wife were set
upon going into business together and had it not been the video business, then
they would
have purchased some other. Whether in such event they would have
been successful or otherwise, is a matter of speculation. The
uncertainty of
any prognosis in that regard is heightened by their lack of commercial
experience.
The Trade Practices Claim
63. I am satisfied on the evidence that the applicants were induced to purchase the business of King of Video by the misleading and deceptive conduct of Fourteenth Mandolin Pty Ltd. That conduct comprised the false representations by Rabaiov and Morgan as to the granting to Fourteenth Mandolin of exclusive rights to distribute Essex tapes in Australia and as to the non-inclusion of X-rated tapes in the sales figures which they were shown prior to purchasing the business. It cannot be said that they were careless of their own interests in investigating the business. To satisfy the Teachers Credit Society they engaged accountants to consider the figures and information placed before them. This precaution however was consistent with the fact, as I find, that they relied upon the truth of Rabaiov's and Morgan's representations. The losses they suffered may have been to some degree the result of their own inexperience, the lack of initial working capital and the price structure under which they operated. But these factors do not break the causal chain between conduct and loss - Pavich v Bobra Nominees Pty Ltd (1988) ATPR (Digest) 46-039. Where misleading or deceptive conduct is established, the resulting loss may vary according to the capacity, skills and financial power of the victim and other incidents. It may nonetheless be caused by the contravention. According to the circumstances there may be a question whether the applicant's conduct or some other factor is so dominant as to break that causal connection. In this case, that question can be answered in the negative - Munchies Management Pty Ltd v Belperio (1988) 84 ALR 700; Pavich v Bobra Nominees (supra); Nella v Kingia Pty Ltd (1989) ATPR (Digest) 46-047.
64. I am also satisfied that when Rabaiov made the representations concerning the Essex agreement he had no proper grounds for doing so and was in the relevant sense knowingly involved in the company's contravention so far as it related to that representation and is liable, along with the company, for damages pursuant to to s.82 of the Trade Practices Act. Although the facts are different his position is analogous to that of the respondent Collins in Wheeler Grace & Pierucci Pty Ltd v Wright (1989) ATPR 40-940, 50,246 (Neaves and Burchett JJ), 50,252 (Lee J.).
65. Although the findings made on the representations relating to Essex and X-rated tapes are sufficient to dispose of the Trade Practices claim in favour of the applicants it is appropriate to refer to the other representations allegedly made by Crooks and Rabaiov.
66. As to Crooks, I am not satisfied that he made any explicit reference to the saleability of the Fourteenth Mandolin products. He did say he regarded them as being of good quality in the technical sense and that there was always room in the market for a cheaper new title. And as a general proposition that has the virtue of common sense. But the extent to which a "cheaper" product is "saleable" or will find a place in the market, must depend upon its price and other factors. To the extent that it is made out in substance, if not in the form pleaded, this representation did not involve misleading or deceptive conduct. The question whether an opening stock of $12,000 would give the Austin-Crowes a good start in the business was a matter of opinion and in any event they opened with stock to the value of $15,000.
67. The statement that the Austin-Crowes could not go wrong was made by Morgan. Crooks had said that the interests of Fourteenth Mandolin in furthering the distribution of its products would be a significant factor in their favour and they could expect the company to be liberal with credit terms. So far as those statements constituted predictions of success they did not fall into the category of misleading or deceptive conduct by being proved wrong. Nor did the promise of daily contact as required, constitute a contravention of the Act. I am not satisfied that it was not intended when made.
68. In connection with the justification of the goodwill figure, this was related in Crooks' statement to the Essex contract. No new element was thereby introduced.
69. So far as the representations attributed to Rabaiov are concerned, I find that he told the Austin-Crowes that Fourteenth Mandolin would give them every support and maintain daily contact to see how they were getting on and to take orders from them. However I am not satisfied that these statements which are of a rather vague character were unsupported by any intention to promote the success of the Perth outlet.
70. Rabaiov also said that he was about to release five new titles which he
would hold back for Western Australia. As to that, I
am satisfied that the
titles in question could not, on any account, be regarded as "new". The
statement was, I think, misleading
but although it may have played some part
in persuading the Austin-Crowes to purchase the business, I would not regard
it by itself
as causing their loss in the sense necessary for the purposes of
s.82.
The Contract Claims
71. The Austin-Crowes made a bad bargain when they bought the business of King of Video from Fourteenth Mandolin. And to the extent that they suffered loss as a result of their entry into the agreements made with the company they are entitled to be compensated for that loss by virtue of the statutory cause of action under the Trade Practices Act.
72. They go further in this case and claim damages for breach of contract. The various breaches alleged have already been referred to in the outline of the pleadings. The claim is only really significant to the extent that it may support a greater measure of damages than is recoverable under the Trade Practices Act. In this regard it was submitted that the appropriate measure would put the applicants in the position they would have been had the breaches not occurred. And on this basis it was proposed that damage should be calculated on the assumption that the applicants would have made $80,000 per annum over the two years they operated the business in accordance with the projections prepared by Morgan and given to Crooks at the beginning of 1985. On that basis there was said to be a claim for $160,000 after adding back the manager's salary over two years and deducting tax at 40%. In addition it was said the capital value of the business, including stock, would have been of the order of $160,000 at the time of disposal in 1987 assuming a 10% appreciation over its value in 1985. After crediting the sum of $35,000 actually realised by the business the contract measure would be $285,000.
73. These calculations however are based upon the assumption that if the agreement had been performed according to its terms the business was capable of yielding the projected profits. But the prices at which the Austin-Crowes agreed to purchase their stock made the achievement of the $15 margin on which those projections was based difficult if not impossible. And while they were promised "good quality video tapes" the content of the quality was to be measured by reference to what was on the premises. On the evidence of their own witness Brock, it was low grade material. It was clearly directed to the cheaper end of the market. Assuming that the company did not commit any breaches of its agreements with the Austin-Crowes, I am not satisfied that it has been shown that the business would have been profitable. Such damages as are recoverable for breach if proven are not, in this case, shown to exceed those arising under the Trade Practices Act claim. The applicants made a bad bargain. They cannot be compensated by reference to the bargain they thought they were making, but only for the loss actually suffered.
74. So far as the cross-claim is concerned their liability, if it still
exists, to pay the outstanding balance of the purchase price
would be an
element of recoverable loss under the Trade Practices Act. The cross-claim
cannot therefore succeed in that regard. In relation to the claim for
$28,988.10 for video tapes sold and delivered
to the applicants that too if
paid would be an element of the loss sustained by them as a result of the
respondents' conduct. In
my opinion that cannot be recovered although the
respondents are entitled to the return of such of the tapes as are in the
possession
of the applicants.
Damages
75. In the circumstances, the applicants are entitled to recover against the
respondents damages under s.82 of the Trade Practices Act calculated as
follows:
1. Moneys paid to the First76. The claim for the loss of Mr Austin-Crowe's teaching salary between May 1985 and May 1987 (net of income tax) is, as I have already indicated, speculative. In my opinion it is quite unlikely that he would have returned to school teaching had he and his wife not purchased King of Video. In my opinion they would have embarked upon another small business. Given their small capital base and their lack of commercial experience, there would have been some risk of failure as well as the possibility of success. In my opinion the damages under this head are more properly assessed on a loss of opportunity basis. Taking Mr Austin-Crowe's school teacher's salary as a conservative indication of what he would have earned in some other business if successful, I discount for the possibility of failure and allow $15,000 under this head. On that basis the total damages award comes to $114,558.
Respondent $75,000
2. Losses incurred in running the
business in 1985/86. Figures
for 1986/87 were not available
and that element of the claim was
abandoned. $14,280
3. Fees and costs associated with
the lease of the premises
including agent's fees,
solicitors' costs and stamp duty $ 1,163
4. Stamp duty on agreements $ 2,710
5. Establishment costs on loan $ 570
6. Loan charges $ 135
7. Fees associated with mortgagee's
sale of house, being agent's and
settlement agent's fees $ 3,400
8. Replacement value of assets
sold to provide ongoing funding
for applicants $ 2,300
77. The applicants will be entitled to interest at the claimed rate of 14% on
the following components of the award as from 1 July
1985, they being losses
incurred about or prior to that date:
1. $75,000Interest at the same rate should be paid on the trading losses, outgoings associated with the mortgagee's sale and replacement value of assets, together with half the loss of income opportunity from 1 July 1986 i.e.:
2. $ 1,163
3. $ 2,710
4. $ 570
5. $ 135
$79,578
1. $14,280Interest on the balance of $7,500 will be calculated on the basis of 14% from 1 July 1987.
2. $ 3,400
3. $ 2,300
4. $ 7,500
$27,480
78. The first component of interest so calculated to 16 November 1989 is $48.818. The second is $13,010 and the third is $2,500. Total interest comes to $64,328. In the event the applicants are entitled to judgment against the respondents in the sum of $178,886.
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