CATCHWORDS Trade Practices - consumer protection - agreement to purchase business - representations made to purchaser as to turnover and profit margin and as to firm orders for future work - whether such representations were in breach of s.52 of the Trade Practices Act - whether such representations induced purchaser to enter into agreement - damages ~ appropriate test fcr assessment of damages - whether trial Judge's award of damages was excessive. Trade Practices Act 1974 ss. 52 and 82. GOLD COAST MINERAL SPRINGS PTY. LTD., PARK AVENUE ENTERPRISES PTY. LTD., BRIAN PATRICK McDERMOTT v. JAMES ROYCROFT FRITH and BETTY CLARISSA FRITH Coram: Lockhart, Morling and Neaves JJ 2 September 1983 Sydney a oe oo \ IN THE FEDERAL COURT OF AUSTRALIA ) ) QUEENSLAND DISTRICT REGISTRY ) No. G22 of 1983 ) ) GENERAL DIVISION ON APPEAL FROM A SINGLE JUDGE OF ' THE FEDERAL COURT OF AUSTRALIA BETWEEN: GOLD COAST MINERAL SPRINGS First Appellant ' PARK AVENUE ENTERPRISES PTY. LTD. 1 Second Appellant BRIAN PATRICK McDaRMOTT Third Appellant AND: JAMES ROYCROFT FRITH and BETTY CLARISSA FRITH Respondents ' CORAM: Lockhart, Morling and Neaves JJ DATE: 2 September 1983 ORDERS The orders of the Court are that: 1. The appeal be dismissed. 2. The appellants pay the respondents' costs of the appeal. Zowom IN THE FEDERAL COURT OF AUSTRALIA )} QUEENSLAND DISTRICT REGISTRY } No. G22 of 1983 GENERAL _ DIVISION ) ~ ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN : GOLD COAST MINERAL SPRINGS Pry. LTD. First Appellant PARK AVENUE ENTERPRISES PTY. LTD. Second Appellant BRIAN PATRICK McDERMOTT Third Appellant AND: JAMES ROYCROFT FRITH and BETTY CLARISSA FRITH Respondents CORAM: Lockhart, Morling and Neaves Jd. DATE: 2 September 1983 REASONS FOR JUDGMENT THE COURT: This is an appeal from a judgment of the Court - constituted by a single Judge (Fitzgerald J.) in proceedings commenced by James Roycroft Frith and Betty Clarissa Frith ("the respondents") against Gold Coast Mineral Springs Pty. Limited, Park Avenue Enterprises Pty. Limited and Brian Patrick McDermott ("the appellants"). The proceedings concern an agreement, and the negotiations preceding it, made on 4 February 1982 between the respondents and Gold Coast Mineral Springs Pty. Limited ("the first appellant") for the purchase by the respondents from the first appellant of a drilling business... Fitzgerald J. found that breaches had occurred of sub-s. 52(1) of the Drade Practices Act 1974 which provides:—- "A corporation shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive." His Honour held that certain false and misleading representations had been made to the respondents which they had relied upon in entering into the agreement. The Court, in exercise of the powers conferred by sections 80 and 82 of the Trade Practices Act 1974 read with s. 75B thereof, ordered that the agreement be varied so that the respondents were under no obligation to make any further payment to the first appellant under or pursuant to that agreement. A further order was made that the appellants pay to the respondents damages assessed at $30,000. Under the agreement the first appellant agreed to sell to the respondents and the respondents agreed to purchase, for a purchase price of $123,000, all the right, title and interest of the =~ first appellant in and to a business carried on at Mermaid Beach in the State of Queensland under the name Reliance Drilling Co. together with the goodwill of that business and the fixtures, fittings, plant and equipment identified in the schedule to the agreement. The business comprised the operation of a rig adapted for drilling bores for water and the provision and installation of the necessary casing, pipes and pumps to provide a water service to property owners. By the terms of the agreement the purchase price was apportioned as to $103,000 to plant, equipment and stock in trade and as to $20,000 to goodwill. The agreement was subsequently varied, but nothing turns on that in the present appeal. The statements on which the respondents relied were alleged to have been made by the third appellant, Brian Patrick McDermott, who was a director and shareholder of the first appellant, and by one Iam Chenebix Johnson who was an employee of Park Avenue Enterprises Pty. Limited ("the second appellant"). That company was the real estate agent involved in the sale on behalf of the first appellant. His Honour found considerable discrepancies in the evidence given as t6 what was said and done by Mr. Frith, Mrs. Frith, Mr. McDermott and Mr. Johnson. He did not accept the totality of the evidence of Mr. and Mrs. Frith but, in general, he "formed a clear preference for their descriptions of what occurred to Mr. McDermott's version of events". It appeared to his Honour that Mr. McDermott's evidence was basically unreliable. There was evidence before Fitzgerald J. which established that Mr. Johnson had between 2 and 4 February 1982 informed Mr.. and. Mrs. Frith of the details of the turnover and profit of the business as shown on the second appellant's listing sheet prepared in connection with the sale. A copy of the listing sheet was given to Mr. Frith. It stated that the turnover was $20,000 to $25,000 in the dry season (8 months of the year) and $10,000 to $15,000 in the wet season (4 months) and that the profit margin was approximately 65 per cent. His Honour was satisfied that that information had been provided to Mr. Johnson by Mr. McDermott and was given to him for the purpose for which it was used. His Honour found that the representations made as to the turnover and the profit margin of the business were demonstrably false. Counsel for the appellants did not contest this finding. However, he submitted that his Honour was in error in finding that the representations were naterial because, so it was argued, the respondents did not rely upon them as an inducement to enter into the agreement. Counsel for the appellants further submitted that his Honour was in error in finding, as he did, that "the position as portrayed to Mr. Frith was that there were orders for bores, including an order from the then unnamed articled clerk-developer, and that the number of bores mentioned was 40 or thereabouts" and that the statements made by the appellants to the respondents with respect to work in hand prior to the signing of the agreement were false and misleading. Counsel submitted that the correct conclusion upon the evidence was that no representation had been made by the appellants concerning work in hand at the time of the sale. In the alternative it was submitted that, if a representation in the terms found by his Honour was made, the correct view on the evidence was that it had not been shown to be untrue. Counsel did not contest that, if the representation was made, the respondents relied upon it as an inducement to enter into the agreement. The following passage from Fitzgerald J's reasons summarises the view his Honour took upon the evidence concerning the alleged representation as to work in hand at the date of sale:- "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 deepended 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, wath 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 anythrng further about the matter until the ~ ™~ SS -6- 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." Later in his reasons his Honour said:- "I reject entirely the respondent's 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." Counsel referred us to those parts of the evidence relevant to the issues raised in the appeal. While it is unnecessary to refer in these reasons to the whole of that evidence, reference must be made to its salient features. Mr. Frith in answer to the question - "What statements made to you at McDermott's house did influence you?" said - "The fact that it was a good business, and that there were orders in hand." Further, in answer to the question - "Which representations were made to you that were important in persuading you to buy the business?" he replied - "That the turnover in the dry months was between $20,000 and $25,000 and in the wet months between $10,000 and $15,000 and that the prortit margin was 65 per cent, and that there were 44 bores." There was other evidence to similar effect in relation to one or other of the representations said to have been made to Mr. Frith. Mr. Frith said that during a conversation with Mr. McDermott on 3 February 1982 there was some discussion concerning an articled clerk who was also a developer (subsequently identified as a Mr. Finn) and who had ordered 40 wells. Following that conversation, at which Mr. Johnson was present, Mr. Frith said that he had a further conversation with Mr. Johnson on the same day. During that conversation, after being given a copy of the listing sheet and the list of plant and equipment which eventually became part of the agreement between the respondents and the first appellant, Mr. Johnson was asked about the number of bores on order. Mr. Frith said that Mr. Johnson telephoned Mr. McDermott and, after discussing the matter with him, said - "Yes there are firm orders for in excess of 40 wells." In cross-examination Mr. Frith agreed that an examination of the order book kept in respect of the business showed that there was not a firm order for 40 bores from Mr. Finn but he maintained that he had not been shown the order book prior to the agreement being signed. He saw 1t, he said, for the first time on 5 April 1982. Mr. McDermott, on the other hand, asserted that at the meeting that took place on 3 February 1982 there was an item by item discussion of the entries in the order book in the course of which the current position in respect of each of the entries was explained to Mr. Frith. He asserted that Mr. Frith had been informed that the entries represented not orders placed for bores but inquiries made and estimates and quotations given. In relation to Mr. Finn, Mr. McDermott said that he had, in response to a telephone request, given to Mr. Finn in December 1981 a written quotation for a number of bores, approximately 40, and that Mr. Finn had said that he was interested in having the bores drilled and that - "he would be ready early in the New Year - sometime early in the New Year - as soon as the wet is over we can get stuck into the work on the bores". Mrs. Frith also gave evidence. She said that in the course of telephone conversations she had with him on 2 and 3 February 1982, Mr. Johnson had informed her of the turnover and profit margin of the business and that there were "in excess of 40 bores ordered". In answer to the question - "What was it that was said during all these conversations that induced you to enter into the contract?" Mrs. Frith replied —- "The percentage of water, of work in the wet and dry months - that was a big factor. The number of bores, over 40 bores, to start with because that meant $80,000 or $82,000, which meant paid up to a profit of say, $52,000 because we were told there was 52 (sic) per cent profit margin. There was that work. Jim would be slower than an experienced worker, but there was that work to go on with. He was drilling and I was prepared to go to agents and -9- try to get more work and advertising and finance. That was the reason we went into the business. It was because- of the turnover, the percentage was 65 per cent, and also a big factor was the work that was ordered." Upon a consideration of the evidence that was before him, we do not think that his Honour fell into error in holding that the representations concerning the turnover and profit margin of the business were relied upon by the respondents when entering into the agreement on 4 February 1982. It is clear that Mr. Frith displayed a lack of acumen in his dealings with the appellants, but it is to us inconceivable that a person, particularly one with an acccuntancy background, who was purchasing a business and who was given turnover and profit figures would not take those into account as one of the matters inducing him to enter into the purchase agreement. But we are not left to speculate because both Mr. and Mrs. Frith in their evidence stated, in terms, that they relied on the representations made to them on those matters. Fitzgerald J. accerted what they said on this point and rejected the evidence of Mr. McDermott. We are satisfied that it was clearly open to his Honour to do so. So far as the work in hand is concerned, Fitzgerald J. accepted the evidence of Mr. Frith that he had been informed that "firm orders" had been received. There 15, of course, a difficulty in ascertaining, on the one hand, what those words were meant to convey to the listener by the person using them and, on the other hand, what the listener understood them to mean. His Honour recognised this difficulty. It is plain on the evidence that the true position was NN -10- that inquiries had been made and estimates or quotations given for a substantial number of bores; but none had in fact been ordered in the sense that Mr. McDermott had been told to proceed with the work. Mr. Finn had shown interest in having bores drilled, but had indicated that the work could not be commenced far some time. It must have been apparent that whether the work eventuated would depend upon whether the development project which Mr. Finn had in contemplation proceeded. In the light of our conclusion that Fitzgerald J. did not fall into error in holding that the respondents had been induced to enter into the agreement by false and misleading representations as to turnover and profit margin, the question whether they were also induced to enter into the agreement by false and misleading representations as to work in hand loses much of 1ts significance. We say this because Mr. Frith made it plain in the evidence to which we have referred that the representations as to turnover and profit were "important in persuading (him) to buy the business." In the circumstances, it is unnecessary for us to consider the correctness of his Honour's finding that the respondents were induced to enter into the agreement by false and misleading representations as to work in hand. Counsel for the appellants also submitted that Fitzgerald J.'s finding on the question of damages should be set aside. He invited the Court to either determine the damage itself or . order a new trial on the issue of damages. He argued that $30,000 was an excessive assessment of the damages to which the respondents were entitled. It was also contended that his Honour's reasons disclosed an error of law in that they did not sufficiently identify the method by which he arrived at the assessment. Fitzgerald J. calculated damages upon the basis that the respondents were "entitled to those losses which are the immediate result of the offending conduct and also to consequential losses if sufficiently direct". All parties accepted that this was an appropriate test for determining damages in this case. His Honour's judgment canvasses at considerable length the principles upon which damages should be assessed in a case in which contraventions of s.52 of the Trade Practices Act are established. However, in the light of 'the acceptance by the parties of the test adopted by Fitzgerald J. we do not find it necessary to consider whether any other test should have been adopted. Before considering the arguments of Counsel, it is convenient to refer to the more important findings of fact relevant to the question of damages. Fitzgerald J. found that, notwithstanding that in the purchase agreement the parties ascribed a value of $20,000 to the goodwill of the business, there was in fact no goodwill. He said:- pa ete et ne ee ee me ee wad ~ 12- "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 cailed 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 rave been satisfied of a total absence of valuabl: goodwill." There was abundant evidence to support this finding, including the evidence of an experienced chartered accountant. Indeed, we were not referred to any evidence to the contrary. Fitzgerald J. also found that the respondents had expended certain moneys in connection with the acquisition of the business. These included stamp duty, a small fee paid to a finance broker, air fares and legal expenses. His Honour held that the award of damages in favour of the respondent should take into account an amount related to these expenses, which totalled about $5,000. It was not suggested in argument that his Honour was in error in so finding. It is reasonably clear from his Honour's reasons that he included $2,500 in the damages to cover the excess of operating costs over income during the short period the respondents conducted the business. A further sum of about $500 in respect of interest and bank charges on a loan obtained by the respondents was also allowed, these two last mentioned sums making a total of about $3,000. Again, 1t was -13- not argued that these amounts could not properly have been included in the damages. It was common ground that the respondents had paid $68,000 to the first appellant as part payment of the consideration payable under the agreement. The respondents also sought to have included in their damages a variety of other items which it is unnecessary to menticn. His Honour allowed nothing in respect of these items and gave his reasons for rejecting them. As the respondents did not cross-appeal these items need not be considered. Having regard to the manner in which the case was conducted, the only remaining matter to be resolved on the question of damages was the value of the plant and equipment. There was conflicting evidence before his Honour on this matter. According to Mr. McDermott it was worth $103,000 at the time of sale. He said that its cost price was in excess of $108,000. Mr. McDermott's evidence was severely criticised by his Honour and it is plain that he did not accept it. Evidence was given of an offer said to have been made to acquire the plant and equipment. His Honour was unimpressed with this evidence and drew attention to some curious aspects of it. With respect to the offer he said:- -14- "I would not regard it as providing any reliable evidence of the value of the plant and equipment at the relevant time." No attack was made, nor could it have been made, on this finding. The respondents called a valuer, Mr. Isles, who arrived at a figure of $34,895 as the aggregate of the individual market values of the items of plant and equipment at the date of the agreement, and who valued the same items as at the same date asa single collection available for use in a continuing business at $54,766. Mr. Isles said that the items would have had a value of about $22,000 on the basis of a forced sale at or about the date of hearing. He also gave evidence that there was a falling demand for drilling equipment in 1982. It is a fair inference from his evidence that the value of the plant and equipment would have fallen after the date of the agreement. The evidence to which we have so far referred makes it plain that the assessment of damages cannot be attacked as being excessive. As a direct consequence or immediate result of entering into the agreement the cespondents made payments or incurred expenditures totalling not less than $76,000, being the total of the sums of $68,000, $5,000 and $3,000 to which we have already referred. The only advantage that the respondents obtained from entering into the agreement was ownership of the plant and equipment. It is clear enough that his Honour must have valued the plant and equipment at about $46,000, and deducted this sum from $76,000 to arrive at the sum -15- of $30,000 which was his estimate of the respondents' damages. This figure could. only be shown to be excessive if it could be established that $46,000 was an unreasonably low estimate of the value of the plant and equipment. But if Mr. Isles' evidence is accepted (and no reason was advanced why it should not be) it was open to his Honour to determine the value of the plant and equipment at that sum. It is to be remembered that his Honour found that there was, in fact, no business when the respondents acquired the plant and machinery. In these circumstances his Honour might well have adopted Mr. Isles' lower figure of $34,895. We therefore think that the award of damages has not been shown to be excessive. We turn now to consider the argument that his Honour did not. sufficiently identify in his reasons the method by which he arrived at his assessment of the damages. In support of this argument Counsel for the appellants relied upon the following passage from the judgment of Stephen J. in Gamser v. Nominal Defendant (1977) 136 C.L.R. 145 at 149: "I do not, of course, advocate any process whereby items of damages are quantified in isolation and are then simply aggregated; that is no way to go about the task. But to condemn that approach should confer no merit upon another, no less objectionable, whereby the total amount to be awarded is stated without any disclosure of the mental processes by which that sum has been arrived at. An award of damages is not, nor should it ever be, arrived at intuitively. Only if it were would particularity as to its component parts be otiose; and if an award is to be the result of a process of +e -16- reasoning, often quite complex, that process should be exposed, both for the satisfaction of the parties and for the enlightenment of appellate courts should there be an appeal." In the course of his reasons Fitzgerald J. made the £ollowing abservations: "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 appellants' argument fastened upon this passage in his Honour's judgment. It was submitted that $30,000 was no more than a subjective estimate unsupported by sufficient reasons to enable it to be examined and tested on appeal. We have already referred to the more important findings on matters affecting the quantum of the respondents' loss. What we have said in answering the argument that the award was excessive also answers the argument with which we are presently concerned. It 1s true that his Honour did not state, in terms, that the sum of $30,000 was calculated by deducting the value of the plant and equipment from ' the total of the amounts paid and losses incurred by the respondents as a consequence of their entering into the agreement. But we think that a fair reading of the whole of his Honour's reasons discloses that this 1s the approach that he took. ' There may have been some substance in this submission if Fitzgerald J. had found that, as a result of entering into the ate ee ee ee ee re eee oo ce ee — Os -L7- agreement, the respondents had obtained benefits in addition to the plant and equipment. If that had been the case and if no value had been placed upon those additional benefits it would not have been possible to identify the approximate value placed upon the plant and equipment. But that was not the case. Because of his Honour's finding that the only benefit that the respondents received from entering into the agreement was the plant and equipment, there 1s no real difficulty in identifying the reasoning adopted in arriving at the ultimate assessment. We think that it does less than justice to his Honour's careful reasons to treat his reference to "a broad subjective estimate" as meaning that the award of damages was arrived at intuitively. Faced with the factual difficulty of placing a value on the plant and equipment as at the date of the agreement or shortly thereafter, it was incumbent upon his Henour to make an estimarce of its value on the avidence which was before him. He did not know, and had no means of knowing, whether it could have been sold on a going concern basis. Thus, valuing the plant and equipment involved a subjective assessment in the sense that his Honour had to form his own opinion as to what it might have brought had it been offered for sale at or shortly after the date of the agreement. But in no sense was the ultimate assessment of damages arrived at intuitively. In our opinion the appeal should be dismissed with costs. -18- | certity tnat this and the [7 preceding pages are a true copy of the reasons for judgment herein of the DE ba Associate Dated LD SEPTEINGER 9B Ce