~ oF Voor 409 CATCHWORDS TRADE PRACTICES - misleading and deceptive conduct - sale of business - representations as to takings and profit - heads of damage - mitigation. Trade Practices Act 1974 ss.52, 82 and 87 FUN re Fea \ MICHAEL CORBIDGE and THE BAKERY FUN FACTORY Pee=ppp', ' LES SCHEFFER and RODNEY MORLEY and THE BAKERY FUN FACTORY FUN SHOP PTY. LTD. and MICHAEL CORSBIDGE No. VG 168 of 1983 Woodward J. 4 October 1984 Melbourne FEDER,, a IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY No. VG 168 of 1983 GENERAL DIVISION BETWEEN: MICHAEL CORBIDGE Applicant and THE BAKERY FUN FACTORY PTY. LTD., LES SCHEFFER and RODNEY MORLEY Respondents and THE BAKERY FUN FACTORY FUN SHOP PTY. LTD. Cross-Claimant and MICHAEL CORBIDGE Cross-Respondent JUDGE: Woodward J. DATE: 4 October 1984 REASONS FOR JUDGMENT This is a claim by the purchaser of a business against the company which sold the business and its directors. The applicant alleges misleading and deceptive conduct, in contravention of s.52 of the Trade Practices Act 1974, ('the Act') on the part of the respondents in the course of the negotiations leading up to the sale. He says that by these statements and conduct he was induced to purchase the business and, as a result, he has suffered damage. It is not disputed that, if the alleged conduct occurred, it was the act of a corporation in trade and commerce within the meaning of s.52 of the Act and the second and thard respondents were 'involved in the contravention' within the meaning of s.75B. The undisputed facts of the case are that a "Fun Factory" opened in a disused bakery building on the corner of Toorak Road and Chapel Street, South Yarra on 18 December 1981. The aim of the complex was to provide entertainment for young people, and one part of the set-up was a "Fun Shop", just inside the main entrance, which sold novelties and toys. The respondent company took up the lease of the area to contain the shop and built the necessary partitions, counters and other fixtures and fittings which constitute the shop premises. There was a gala opening, and both the overall project and the shop got away to a very good start over the December 81/January 82 school holidays. This may have been contributed to by the fact that Luna Park, which attracts many young people, was closed by a fire at the time. However it seems not to have made any great difference to attendances at the Bakery Fun Factory when Luna Park reopened some months later. In the opening weeks the two directors of the respondent company, Mr. Scheffer and Mr. Morley, both worked in the shop, alongside the manageress they had appointed, Miss Fairman, and other casual staff. However they both had other extensive business interests and after the first few weeks their activities were confined to purchasing stock (which was done by Mr. Scheffer, who was in the business of importing toys and novelties and giftware) and overall financial management (which was done by Mr. Morley, whose other chief interest was an estate agency specializing in Toorak Road shop and office properties). Miss Fairman proved to be a very capable manageress and, with the aid of several casual employees, she ran the shop until it was sold to the applicant. After things settled down the hours the shop was open were: Thursdays 3 p.m. to 1l p.m. Fridays 2 p.m. to ll p.m. Saturdays 12 noon to 1 a.m. Sundays 12 noon to ll p.m. Public Holidays 12 noon to ll p.m. During school holidays the shop was also opened from 12 noon to 6 p.m. on Mondays, Tuesdays and Wednesdays and it opened earlier, at 12 noon, on Thursdays and Fridays. Although there were understandable variations due to holidays and weather conditions, there developed, as 1982 progressed, a general downward trend in attendances at the Bakery Fun Factory and in takings at the shop. During the time the respondent company owned the business, several advertisements for its sale were inserted in the daily press. The first of these appeared on 23 December 1981, a few days after the shop opened. It read, "RETAIL SHOP FIRST TIME OFFERED Outstanding easily run retail business cl. to City. Small stock requirement. Very cheap, long lease. Ability for husband and wife to earn in excess of $2000 clear p.w. This would be one of the best opports. we have had the pleasure to advertise. Purchase price $85,000 plus stock." On 19 May 1982 the advertisement read, "RETAIL SHOP CASH BUSINESS Outstanding easily run business in South Yarra. Small stock requirements and cheap long lease. Easily run by husband and wife team if you don't mind weekend work. Purchase price $46,500." Three days later this was amended by deleting the reference to weekend work, dropping the price to $40,000 and indicating that finance was available. The same advertisement was repeated a week later. reading, Next, on 14 August appeared a larger advertisement "CASH BUSINESS OWNERS MUST SELL Thriving, easily run, part time retail business in South Yarra location, currently run under management. Interested parties would double takings. Very low stock content required. FULL PRICE $23,000 plus stock FINANCE AVAILABLE TO APPROVED PURCHASERS." This advertisement was repeated on August 28 with the added information that the business concerned was "gift and novelties". The final advertisement appeared on 11 September. It read, "BUSINESS OPPORTUNITY OWNERS MUST SELL PRICE SACRIFICED Small easily run near city retail business avail. immediately. Advantage of Xmas trade. Only $17,500 plus stock (approx. $10,000) at cost." These advertisements are set out in some detail not because they are complained of by the applicant, who did not see them, but because they provide some evidence of the declining nature of the business during the year and of the keenness of Mr. Scheffer and Mr. Morley, by August -"4 S-ptember, to make a sale. They also have some relevance to credit, as discussed later in this judgment. The respondents were keen to sell the business because they were each heavily involved in their other business activities. Mr. Morley had opened a restaurant during the year, after months of preparation, and Mr. Scheffer had to make a number of interstate and overseas trips in connexion with his importing business. Neither of them wanted to be burdened by a business of declining profitability such as the Fun Shop. It was against this background that the applicant appeared on the scene. Mr. Corbidge is a Yorkshireman who has lived in Australia for many years. For the last 12 years he has had a contract with the Kwikasair company for the making of truck deliveries on behalf of that company. This work theoretically involves him in being available to make deliveries until 6 p.m. on weekdays, but in practice he is usually finished by 5 p.m. For the last 8-9 years, until 1983, Mr. Corbidge had a stall at the Thomastown market on Sundays (and occasionally on Saturdays) from which he sold toys, novelties and gifts. He had to work from 7 a.m. to 5 p.m. on those days, though some days were foreshortened or washed out by rain. In the course of his Kwikasair deliveries Mr. Corbidge was a regular caller at Mr. Scheffer's importing business. He also purchased a good deal of the merchandise for his Thomastown stall from Mr. Scheffer - most of it in the form of marked or slightly damaged goods or otherwise discounted lines. These were cash transactions. Mr. Corbidge did not include his profits from the Thomastown stall in his income tax returns. It appears that, for some time, Mr. Corbidge had had an ambition to own a shop; so when in June or July 1982 he heard from one of Mr. Scheffer's employees that there was a shop for sale, dealing in goods similar to those he sold at Thomastown, he was interested. He spoke to Mr. Scheffer, probably about the end of July, but was told that the asking price was $40,000. He said that was well beyond his means, and Mr. Scheffer said that it might be possible to arrange a lower price after he had spoken to his partner in the shop business. It is convenient to break off the narrative at this time, before coming to disputed questions of fact, in order to deal with questions of credibility. This has not been an easy case to decide, because there are some important disputed issues on which I have only conflicting oral testimony, with lattle or no independent confirmation, and no great help to be had from the inherent probabilities of the case. Credibility is therefore very important, but I have been unable to reach a clear-cut decision which would enable me to say with confidence that I prefer one side's account of these matters to the other's. I should say immediately that none of the three main witnesses - the applicant and the second and third named respondents - is a person whose evidence I would treat with great suspicion. On the other hand I am bound to say that none of them is a person whose evidence I would confidently accept at all times. Apart from the inevitable problems of defective memory, I received the impression that any one of the three would be prepared at least to stretch or otherwise tailor the truth to suit his own interests, 1f he thought 1t necessary to do so. In this, of course, they were no different from most witnesses who have a good deal to lose or gain from their testimony. Mr. Scheffer and Mr. Morley are both rather wordy and fast-talking salesmen; this is particularly true of Mr. Scheffer. Of course they are both by now quite well-established businessmen, but they still give the impression of being persuasive salesmen of their respective goods and services. Mr. Corbidge is a much less sophisticated man, with a simpler and more straight-forward manner of speech. This makes it more difficult for him to dissemble or evade questions and there are several important points on which, bearing this in mind, I prefer to accept his testimony rather than that of the respondents. The advertisements quoted earlier indicated that at least Mr. Morley (who inserted them, no doubt after consultation with Mr. Scheffer) was prepared to specify, quite recklessly, the earning capacity of the business after a few days of atypical trading. Later descriptions of the business as thriving, and easily-run, with capacity for doubled takings, were also, in my view, inaccurate and somewhat reckless, though perhaps not much beyond the range of exaggerations often to be found in such advertisements. The only independent evidence I have of Mr. Corbidge's honesty is his failure to declare part of his income to the income tax commissioner. This shows him not to be a person of complete integrity; but a failure to declare secondary sources of income 1s, unfortunately, all too common in the community and, in my view, provides no more than a warning light as to a person's basic honesty in business dealings or inclination to lie in the witness box. Having carefully considered the evidence of the witnesses, together with surrounding circumstances, I have, as I gay, reached the conclusion that on several crucial points, but not on all matters, I should prefer the evidence of the applicant to that of the respondents. The following findings of fact reflect that preference. Early in September 1982, the applicant went to Mr. Scheffer's office at his invitation, to discuss further the sale of the shop. They were joined by Mr. Morley for most of the discussions. In the course of these discussions the following representations were made to the applicant:- (a) the applicant could be sure of making $200 - $300 profit from the business each week, and (b) the takings of the business would be at least $1000 per week even in the poorer months. These representations were made in the knowledge that, because of his Kwikasair business, Mr. Corbidge would not be able to open up the shop until about 5.30 on Thursdays and Fridays and would have to rely upon his wife or casual labour to serve in the shop during the afternoons of most school holidays. They were also made in the knowledge that Mr. Corbidge would have to borrow the money needed for the purchase of the shop. Indeed I am satisfied that the respondents offered to help arrange bank finance for the purchase. The representations lettered (a) and (b) above were sworn to by the applicant and neither was totally denied by the respondents. As to the first, the respondents did not clearly admit that $300 was mentioned in this context, but in this they were contradicted by their own answers to interrogatories. As to the $1000 takings, the respondents maintained that all they represented in writing and orally was that they had enjoyed average takings of $1000 in the poorer months from June to the time of the meeting. But Mr. Corbidge was adamant that they had told him "at least" $1000 and, given the respondents' keen desire to sell, and their alleged belief (repeated in evidence) that a husband and wife ownership team could double the takings without paying wages, I accept the applicant's version of the words used. The puzzling aspect of the whole arrangement, brought out by this evidence, is that the applicant was apparently satisfied to think that he could earn $200 - $300 profit, on an outlay of $20,900, for working 36 hours in most weeks and 65 hours in school holidays, with his wife also we-king with him or standing in for him over many of those hours. In my view this circumstance further tends to support the applicant's account of the assurances he received. He would not have been attracted by any less. The applicant further says, and I accept, that in the course of the several conversations he had with Mr. Scheffer, including the one at which Mr. Morley was present, Mr. Scneffer said, on a number of occasions, "You can trust me", and told him 1t would not be necessary for him (Mr. Corpidge) to spend money on a solicitor. Mr. Scheffer denies these statements, but I can readily imagine him asserting that Mr. Corbidge should not worry and should trust him. Indeed, after a number of years of friendly and trouble-free dealings, Mr. Corbidge did trust him. So far as the reference to a solicitor is concerned, I think it 1s more likely than not that this was said. I do not accept Mr. Scheffer's evidence that on "numerous occasions" he specifically advised Mr. Corbidge to consult both a solicitor and -ll- an accountant. Such gratuitous and unselfish advice at a time when the respondents were most anxious to complete a sale does not sit comfortably with what actually happened so far as the production of written records was concerned. The respondents said that, at the main meeting in September, they produced their daily sales sheets, their cheque butts, and their takings book for Mr. Corbidge's inspection, and they offered to let him photocopy them. Mr. Corbidge says that he was shown cheque butts by Mr. Morley, who pointed out items of expenditure on fixtures and fittings. It is common ground that the respondents told Mr. Corbidge they had spent $11,000 on fitting out the shop and, though the amount was challenged by the applicant, I am satisfied that this was a truthful statement. It 1s also common ground that the respondents represented that there was $9000 worth of stock in the business. Since the sale price included stock, this must in my view be taken as meaning that there would be $9000 worth of stock in the business when it was handed over. I shall deal later with the actual value of stock at that time. Mr. Corbidge admits to seeing the sales records, indicating the type of goods sold and the amount of each sale, but lacking any daily or weekly totals. However he flatly denies that the takings book was produced to him. It is a small book in a bright orange cover, and quite easily recognized. The first page now contains the total takings for each week up to 30 October 1982. Later pages give daily takings which, the respondents tell - 12 - me, were taken from the cash register addition at the end of each day. I accept that this takings book is a genuine and reliable record of the takings of the business. I do not believe that it was shown to Mr. Corbidge. Mr. Corbidge says that he asked for takings figures and was told that they would be supplied. It is common ground that a few days later he was provided with a summary of takings. It is convenient to set out here the weekly takings of the business as disclosed by the takings book, together with (on the right side of the page) the summary which the applicant actually received. Week No. Weekly Amount SUMMARY - FUN FACTORY FUN SHOP 1 18/12-24/12 $5,969.00 PERIOD ONE: CHRISTMAS (8 WEEKS) 2 25/12-31/12 3,994.00 Best Week $5969.00 3. 1/1/82-7/1 3.940.00 Worst week $2827.00 4 8/1-14/1 3,444.00 § 15/1-21/1 2,527.00 6 22/1-28/1 3,177.00 7 29/1-4/2 3,257.00 8 5/2-11/2 1,435.00 9 12/2-18/2 1,350.00 10 19/2-25/2 1,833.00 ll 26/2-4/3 1,489.00 12. 5/3-11/3 2,114.00 13. 12/3-18/3 1,315.00 14 19/3-25/3 1,171.00 15 26/3-1/4 1,586.00 PERIOD TWO: FEBRUARY TO MAY 16 2/4-8/4 1,477.00 Average $1700.00 17 9/4-15/4 1,958.00 18 16/4-22/4 1,182.00 - 13- Weekly Amount 1,284.00 1,138.00 1,175.00 1,786.00 1,132.00 816.00 1,037.00 1,488.00 1,086.00 1,145.00 995.00 1,189.00 1,144.00 881.00 906.00 723.00 770.00 1,125.00 1,480.00 978.00 827.00 916.00 897.00 788.00 739.00 766.00 948.00 SUMMARY - FUN FACTORY FUN SHOP PERIOD THREE: JUNE TO NOVEMBER Restricted trading days, Average $1000.00 A summary of these figures, prepared on behalf of the Week No. 19 23/4-29/4 20 30/4-6/5 21 =7/5-13/5 22 14/5-20/5 23) 21/5-27/5 24 28/5-3/6 25 4/6-10/6 26 11/6-17/6 27 «+18/6-24/6 28 25/6-1/7 29 2/7-8/7 30 9/7-15/7 31 16/7-22/7 32 23/7-29/7 33 30/7-5/8 34 6/8-12/8 35 13/8-19/8 36 20/8-26/8 37 27/8-2/9 38 3/9-9/9 39 10/9-16/9 40 17/9-23/9 41 24/9-30/9 42 1/10-7/10 43 8/10-14/10 44 15/10-21/10 45 22/10-28/10 respondents, figures for the worst week; shows that (a) in Period One there was a discrepancy of $300 in the has no great significance; this was probably a typing error and - 14 - (b) in Period Two the actual average, compiled from the takings book, was $1464.06; and (c) in Period Three the actual average to 28 October was $977.90. Of course the figures in the summary contained an element of prediction, for the months September to November. The discrepancy in Period Two is quite important and could not be explained by the respondents. But much more significant is the steady decline in the figures shown by the takings book (allowing for public and school holidays) which is concealed by purporting to average the June to November takings. I have no doubt that this was deliberate and that the takings book was never produced. If it had been, there would have been no point in doing otherwise than supplying the applicant with the actual takings figures in writing - which would have been the normal and fair thing to do in any event. The other very significant omission on the part of the respondents was the supply to the applicant of a certificate pursuant to s.52 of the Estate Agents Act (Vic) 1980. Since Mr. Morley 18 an estate agent himself (though not experienced in tne sale of businesses, as distinct from business freeholds and leaseholds), I believe that this was a deliberate omission on the part of the respondents. If such a statement had been given it would have shown that the business was trading at a loss. It would also have shown details of the respondents' expenses which, under the heading of rent or separately stated, would have included the outgoings of some $4000 per year which the applicant -~ 15 - would be obliged to pay to the owner of the Bakery Fun Factory ain addition to the rent. These outgoings included a share of the costs of cleaning common areas, security, and electricity used in common areas. The applicant says that he was only told that he had to pay rent and perhaps something for advertising the Fun Factory, 1f£ he agreed to such advertisements. There was no mention of other charges. The respondents claim that they did tell Mr. Corbidge that he would have to pay other charges, but I find it significant that neither of them suggested that any figure was mentioned. I find it hard to believe that they could have told him of outyoings without becoming involved in a discussion as to their amount, and I prefer to accept Mr. Corbidge's evidence on this point. It 1s consistent with the paucity of the information supplied by the respondents, who were, I believe, aware of their obligations and who had told the applicant to trust them and not to spend money on independent advice. Mr. Corbidge, with an introduction from the respondents, arranged a bank loan from the Toorak Road branch of the ANZ Bank. He was charged a flat rate of interest of 13.5% and he was obliged to repay principal and interest in monthly instalments of $497 over three years. The respondents were generally aware that such an arrangement had been made, but may not have been told the precise amount of the instalments. - 16- The parties signed a contract, drawn up by the respondents' solicitors, on 8 November 1982. This provided for the applicant to pay $20,000 on going into possession and a further $5000, together with interest, by monthly instalments of $200. The applicant took possession of the premises on 15 December 1982. In fact only $19,700 was paid by the applicant because the bank deducted $300, by way of charges, from the amount advanced. The applicant says that he spoke to the respondents about the cost of obtaining finance and they said, in effect, that they would take care of those payments and he need not worry about them. 1 do not believe the applicant invented this conversation; it would have been consistent with the strong desire of the respondents to conclude a deal, and 1t 1s quite possible that they have forgotten this comparatively trivial matter. I accept Mr. Corbidge's evidence on this point. It is common ground that, before signing the contract, Mr. Corbidge asked if he could visit the shop and talk to the manageress. The respondents asked him not to, because knowledge of an impending sale would upset the staff and might cause them to leave prematurely. However Mr. Morley did take Mr. and Mrs. Corbidge to see the shop one Saturday before it was due to open. I accept Mr. Morley's evidence that Mr. Corbidge looked round it for a few minutes only and Mrs. Corbidge did not even go in. Mr. Corbidge did not take the opportunity, as he could have done, to visit the Fun Factory and the shop at some time, without declaring his interest, to see his potential investment in operation. This was typical of the rather naive and uncritical approach of Mr. Corbidge to the whole transaction. I accept Mr. Scheffer's evidence that he offered to introduce Mr. Corbidge to other suppliers in the trade and that this offer was not taken up. Mr. Corbidge seems to have had great confidence in his own ability to make the project a success, while at the same time being very trusting about what he was told. This was in contrast to his wife's distrust of the whole venture; but it seems that after one serious argument on the subject, Mrs. Corbidge decided to keep quiet and let her husband have his way. I have referred earlier to the stall at the Thomastown market which Mr. Corbidge took each Sunday. He gave evidence that his average sales from this stall amounted to $500 which, based on a consistent 100% mark-up, meant a weekly profit of $250. He kept no records and so could produce no confirmation of this figure except through his wife, who often helped him count the takings at the end of the day. If this figure is accurate it 18s even more difficult to understand why Mr. Corbidge would wish to give up a lucrative profit for Sunday work, on which he paid no tax, in exchange for a similar profit for 36 hours per week, on which tax would be much more difficult to evade, One possible explanation is that he hoped to keep both operations going, with his wife keeping the shop on Sundays. He did in fact try to do this for a few weeks, but found that the task was beyond his wife's unaided resources. He did not want to pay wages to an experienced person, so he gave up the stall. Another possible explanation is that he hoped the shop would develop well beyond the $200 - $300 profit which had - 18 - been represented to him. In doing so he no doubt relied on the representation as to $1000 per week takings in each of the six poor months and $1700 in intermediate months, with greatly improved figures in December and January. With gross profits at half these figures (allowing again for 100% mark-up), rent at $151, a few sundry expenses, and payments to the vendors and the bank totalling $160 per week, he might well have been hopeful about his prospects in this business. Had he known of an extra $80 or $90 per week for outgolngs payable to the landlord, he must have hesitated. Mr. Corbidge gave evidence of his takings at the shop. He said that, for the first two weeks he took no more than $500 in each week. He then started keeping a note of his takings, and he put in evidence an exercise book with a few entries, one sheet of takings figures which appeared to have been torn from the exercise book, two other loose pages showing takings, three pages purporting to summarize the takings, and one page showing a period of bank deposits. The records of takings were thus in a very unsatisfactory state; two of the apparently original sheets overlapped considerably and most of them looked as if they could have been compiled at one sitting rather than over a period of months. In spite of the poor quality of these records, I am prepared to accept them as representing a broadly accurate picture of the takings which Mr. Corbidge was able to achieve. The way in which they came into existence was not made the subject of any detailed questioning, although their scrappy nature was strongly - 19 «- criticized; and they do correspond quite closely with the records of expenditure on stock which Mr. Corbidge was able to produce to his accountant from his cheque butts - allowing for the 100% mark-up which seems to be the standard for such goods. They also correspond reasonably well with the incomplete figures of bank pay-ins produced to the Court - after allowance is made for a degree of direct expenditure from the takings. The takings were as follows: Week ended Takings 2. 1.83 $519.83 9. 1.83 487.20 16. 1.83 511.83 23. 1.83 563.20 30. 1.83 570.01 6. 2.83 426.55 13. 2.83 401.00 20. 2.83 376.00 27. 2.83 466.10 6. 3.83 372.00 14. 3.83 653.00 20. 3.83 557.56 27. 3.83 792.00 4. 4.83 821.96 10. 4.83 570.48 17. 4.83 688.57 25. 4.83 645.91 1. 5.83 511.44 8. 5.83 684.55 15. 5.83 947.20 21. 5.83 1,008.62 29. 5.83 704.56 5. 6.83 416.13 12. 6.83 936.08 19. 6.83 488.83 26. 6.83 518.54 - 20 - Week ended Takings 3. 7.83 670.36 10. 7.83 611.36 17. 7.83 583.58 24. 7.83 505.21 31. 7.83 676.28 7. 8.83 445.83 14. 8.83 598.33 21. 8.83 816.10 28. 8.83 924.30 4. 9.83 899.93 ll. 9.83 669.79 18. 9.83 377.81 25. 9.83 417.28 2.10.83 460.05 9.10.83 492.63 16.10.83 481.36 23.10.83 471.80 30.10.83 546.97 6.11.83 310.00 13.11.83 248.00 20.11.83 356.00 27.11.83 444.94 3.12.83 571.00 10.12.83 316.00 17.12.83 298.00 24.12.83 389.00 31.12.83 419.00 5. 1.84 398.00 12. 1.84 599.50 19. 1.84 556.56 26. 1.84 441.00 2. 2.84 448.00 8. 2.84 303.86 15. 2.84 369.50 22. 2.84 328.54 29. 2.84 375.12 4. 3.84 287.93 11. 3.84 205.00 - 21 - Week ended Takings 18. 3.84 431.86 25. 3.84 532.80 1. 4.84 445.00 7. 4.84 419.00 14. 4.84 418.70 21. 4.84 618.50 29. 4.84 309.63 2. 5.84 308.00 9. 5.84 768.00 16. 5.84 723.00 23. 5.84 610.00 30. 5.84 458.50 6. 6.84 500.47 13. 6.84 469.53 20. 6.84 354.20 27. 6.84 488.00 4. 7.84 490.00 ll. 7.84 556.00 18. 7.84 586.00 25. 7.84 498.00 1. 8.84 542.00 8. 8.84 316.00 15. 8.84 308.00 It will be seen from these figures that the takings were well below any that had been represented by the respondents. Before considering possible explanations for this, it 1s instructive to look at the respondents' takings in the last weeks before the business was handed over on 16 December 1982. The respondents were unable to produce takings records for this period; they said that they did not bother to keep them once the contract for the sale of the business had been signed, - 22 - relying on their bank pay-ins for tax purposes. These pay-~ins showed the following receipts for the period: Week ending Pay-in 4 November 516.75 11 November 345.00 18 November 393.35 25 November 461.00 2 December Nil 9 December 1268.00 16 December 265.95 It will be seen that the average for these seven weeks was $464.30. Up to the end of October, the ratio of pay-ins (ancluding an amount of $5330 deferred from this period and paid un on 16 December) to takings is 100:111. On the assumption that the same ratio continued into November and December the actual takings would have averaged $515. There was evidence that October and November were the worst months of the year for the Fun Factory as a whole. The applicant maintains that these figures of the respondents' later takings and his own simply mark the continuing downward progression of the potential takings of the Fun Shop. It is said that they clearly demonstrate the misleading nature of the representations made. The respondents, on the other hand, claim that the applicant's takings were lower than they should have been because he neglected the business, failed to maintain fresh supplies of attractive stock, failed to keep the shop clean and inviting in appearance, and was a poor salesman. A number of witnesses were called, on both sides, to deal with these matters and I have found them difficult to resolve. I am inclined to believe that Mr. Corbidge, although prepared to work hard and for long hours, as his work record shows, would not be as good at selling toys and novelties as Miss Fairman. I might say in passing that I do not accept the respondents' opinions that any competent shop owner can be expected to double the takings of a good shop manager simply by reason of greater enthusiasm and attention to the details of the business. So far as the quality of stock maintained by Mr. Corbidge was concerned, I believe that it had been allowed to run down to some extent even before he took over, and that he was, as he deposed, encouraged by Mr. Scheffer not to restock in the first few weeks (because he was short of cash) as there would be enough stock in the business to carry him over that period. After that, as it became apparent that takings were well below expectations, Mr. Corbidge found himself in something of a dilemma. If he spent large amounts on new stock, and especially on new lines, he might attract more sales and boost the business. On the other hand, at a time when money was generally in short supply and Fun Factory attendances tending to decline, he might merely increase the gap between expenditures and receipts. It is clear that, generally speaking, he elected to keep both expenses and receipts at a moderate level and this would have had an effect on his takings as time went on. However I do not believe, taking the evidence as a whole, that Mr. Corbidge neglected his business, or the appearance of the shop, in any significant way, so as to have a marked impact on the takings in the early months of his occupancy. I think that, in more recent months, he has become dispirited and this probably has affected his business. But his takings in the earlier part of his ownership of the business do, in my view, serve to support his claim that the takings and profit of the business were described to him in terms which, in the event, proved to be misleading and deceptive. I should make it clear that I accept the applicant's argument that, in large measure, the representations made did relate to the future. Although the presentation of summary takings figures was in terms a representation as to the past, the representations as to the applicant taking not less than $1000 per week and clearing at least $200 to $300 per week, clearly related to the future. And in my view there was an implication in the representation of $1700 as an average figure from February to May, that the respondents Knew of no reason why those figures should not be repeated in the following year. The same might also be said of the figures quoted for December and January, but I am conscious of the fact that the applicant was aware that those figures had been affected by the circumstance that the Fun Factory had just opened. They could therefore be seen as atypical. Takings such as those experienced were clearly not sufficient to enable Mr. Corbidge to show a reasonable profit. His own records show outgoings for his first 50 weeks in the business as follows - 25 - $ Bank charges 115 Cleaning 80 Interest on borrowing 3178 Power 450 Rent and outgoings 12451 Sundries 1483 Casual wages 634 18391 The weekly average of these expenses is $367.82. To show a profit of $300 would have required takings of ($368 + $300) x 2, allowing for 100% mark-up, or $1336. A profit of $200 would have required $1136. In addition to these figures, the applicant needed to find funds to pay off the balance of his indebtedness to the respondents at $46 per week and to repay the capital of his bank borrowings at $77 per week ($20000 repayable over five years). These payments together would have required additional takings of $246 per week to service them. The expenses shown by the applicant are not inconsistent with those of the respondents. Their records, taken from the notional s.52 statement prepared for the Court by the respondents' accountant, showed average weekly expenses of $265.65 excluding wages and of $586.75 for wages, a total of some $852. In addition to their own expenses, the respondents knew that the applicant would have to pay a higher rent ($17 per week in the event) and pay interest on the money borrowed to purchase the business ($63.50 per week, as it turned out). Even without wages these expenses came to $346 per week. To make a profit of even $200 would have required takings of $1100. A consideration of these figures leads me firmly to the view that Mr. Corbidge would not have purchased the business had it not been for the misleading and deceptive conduct of the respondents in (a) representing that he would have takings of at least $1000 every week in the foreseeable months ahead, (b) representing that he could expect +: average takings of $1700 from February to May, at least for the year 1983, (c) representing that the only payments he would have to make to his landlord were for rent and perhaps advertising, whereas other outgoings in fact averaged $80-$90 per week, (d) representing that he would make a profit of at least $200-$300 per week in the coming months over and above those expenses which the respondents had themselves incurred (other than wages) and which they knew Mr. Corbidge would incur. This would have required takings of $1100 to $1300 each month. It will be seen that in formulating these representations I have tried to allow for in implied proviso that any representations could only apply to ¢ reasonably foreseeable future. - 27 - The applicant having succeeded in establishing his claim of misleading and deceptive conduct, he is entitled, under s.82 of the Trade Practices Act 1974, to recover the amount of any loss or damage he has suffered as a result of that conduct. This will include losses which are the immediate result of the offending conduct and also consequential losses if sufficiently direct (see Frith v Gold Coast Mineral Springs Pty. Ltd. 1983 ATPR 40-339 and cases there cited). In approaching the question of damages in a Trade Practices Act case where a purchaser has been misled as to the takings or profits of a business, but has not sought to avoid the contract, the main question to be decided is whether, had the true facts been known, the purchaser would have been content to buy at a lower price or would not have bought at all. In the first case it may well be that the only damage the purchaser will have suffered is the immediate damage of the difference between the price paid and the true value. In the second case the purchaser will also be entitled, provided damages are mitigated where possible, to any losses consequential upon the running of an unprofitable business. Loss of earnings from an alternative profitable business which the purchaser can show would have been carried on 1f the deception had not occurred are also, in my view, sufficiently direct to justify additional damages. - 28 - In the course of the hearing, counsel for the applicant reformulated the claim for damages, without objection, in the following terms. "1. §16,000.00; The difference between the amount paid by the Applicant pursuant to the agreement of the 8th day of November 1982 and the actual value received by the Applicant viz $4,000.00 worth of stock." Subject to any question of mitigation of damage, to which I shall return later, the applicant 1s clearly entitled to the difference between the true market value of the business which he took over and the price which he paid. The applicant concedes that he received some value in the form of stock which is put at $4000, based on a valuation made by the applacant in January 1983. It was later conceded that some $1000 must be added to this for stock sold between takeover and valuation. I am not satisfied by the applicant's evidence that an additional $1500 worth of stock was so shopsolled or damaged as to be unsaleable. I prefer Miss Fairman's evidence that, although the levels of stock had run down to some extent before takeover, all the stock on the shelves was in saleable condition. I think Mr. Corbidge only reached his conclusions about unsaleability some time after the valuation. Doing the best I can with the issue, I would value the stock at takeover at $7,500. In doing so I have ignored the arbitrary figure of $4000 placed on stock in the respondent company's tax return for 1981/82. - 29 - So far as the goodwill of the business is concerned, I accept the evidence of the applicant's accountant that it had no value. The business was a losing one in the hands of a very capable manageress. It continued to be so in the hands of an owner-manager. I cannot imagine any potential purchaser in possession of the true facts being prepared to pay for goodwill. Such a person might have paid something for the unexpired portion of the lease, with a view to establishing some other type of business, but it is hard to imagine what type of business could succeed in such a special environment where this one had failed. The respondents called no appropriate independent expert evidence on this point, although they tried to establish it through their own evidence and that of their accountant. I believe, on balance, that only the stock had value for the applicant. I accept the respondents' evidence that they spent $11000 on fittings and furniture, but it is clear that these would have only minimal value if removed from the premises. Any such removal would aiso have raised difficulties under the lease. I find accordingly that the applicant's loss under this head was $20,000 less $7,500, that is $12,500. (1 include here, as a matter of convenience, the $300 in bank charges which was deducted from the $20,000 paid over. The applicant is, I find, entitled to that sum either as part of his overall losses or by way of damages for breach of an agreement to reimburse that particular sum.) "2. $8,045.00; Loss incurred in the running of the business as shown in Profit and Loss Account to the 30th day of November 1983." - 30 = Again, subject to any question of mitigation, I believe that the applicant is entitled to damages for his accumulated losses while running the business which he would not have purchased had it not been misrepresented to him. The claim for $8,045 should be allowed. "3. $10,143.33; Rental obligation incurred pursuant to the lease of premises until the expiration thereof in December 1984 including - (a) Rental arrears December 1983 to August 1984 $5,906.25 (b) Rental September 1984 to December 1984 $2,025.00 (c) Interest @ 15.75% December 1982 to August 1984 $1,612.08 $10,143.33 4. $7,363.01; Outgoings obligation incurred pursuant to the lease of the premises until the expiration thereof as aforesaid including - (a) Outgoings arrears December 1983 to July 1984 $3,247.02 (bd) Outgoings August 1984 to December 1984 $1,951.50 (c) Interest @ 15.75% August 1983 to December 1984 $727.86 $5,926.38" These related claims for rent and outgoings are part of the accumulated losses of the business, the only difference between them and the previous item, numbered 2, 1s that they have not been paid. I have hesitated over the amounts of interest claimed, but in my view they are allowable. The applicant, as the respondents knew, is not a man with any substantial assets. If he had paid the rent and outgoings he would have had to borrow to do - 31 - go and the interest on those borrowings would have been part of his accumulated losses. The interest rate charged is not untoward. I would allow the respective claims of $10,143.33 and $5926.38, without making any further adjustment for interest in recent weeks. "5. $22,500.00; Loss of income being income from Thomastown Market Stall from the 16th day of December 1982 to the 8th day of September 1984 (90 weeks at $250.00 per week). 6. Alternatively to Paragraph 5 hereof $21,151.60; Loss of income being wages determined at appropriate award rate for 40 hour week as follows:- {a) 16/12/82 - 30/6/83: 28 weeks at $225.00 = $6,300.00 (b) 1/7/83 - 6/10/83: 14 weeks at $231.80 = $3,245.20 (c) 7/10/83 $241.80 8/9/84: 48 weeks at $11,606.40" ci] So far the damages I have dealt with have been designed only to compensate the applicant for money he has actually lost, or owes to third parties. These claims are for additional earnings he could have made had he maintained his market stall or been paid wages as a shop assistant instead of going into the Fun Shop. The only evidence of likely alternative earnings I have is that relating to the Thomastown Market stall. I think the applicant's claim of $250 per week as his average earnings there is probably exaggerated. Further, he should have paid tax on those earnings, and the Court must award damages on that basis. I believe $100 per week would be an appropriate sum to allow under this head, for a period of 90 weeks to the date of judgment, giving $9,000. I have based this calculation on 90 weeks because the applicant kept the stall going for several weeks after taking over the Fun Shop. The question which has caused me most concern in determining damages in this case is whether there was anything the applicant could and should have done to mitigate his damage. There are two possibilities. The first is that he could have put more money and effort into the businesa. While I think this is theorev.cally possible, it must be remembered that this was a second job for Mr. Corbidge, and any addition to his own work and that of his wife and children would have involved the payment of wages. Similarly, money spent on improved decorations or more and better stock would not necessarily have been recouped. I can only gay that, having heard all the criticism of Mr. Corbidye's management of the business, I am not satisfied that he could have mitigated his damage in this way. To illustrate the fact that much of the falling off of takings was due to circumstances beyond the applicant's control, it is instructive to consider the approximate attendance figures at the Fun Factory calculated from the count of an automatic door meter. The following example from a period in January/February will suffice: - 33 - Week ending 1982 1983 1984 24 Jan (approx) 32,000 24,000 19,000 31 Jan 36,000 24,000 17,000 7 Feb 31,000 17,000 17,000 14 Feb 18,000 18,000 N/A 21 Feb 20,000 16,000 9,000 28 Feb 14,000 15,000 10,000 The other possibility of mitigating damage was for him to have quitted the shop at an earlier stage, at some time in 1983 when it had become clear that the business was most unlikely to become profitable. But this would have involved either finding a purchaser, in spite of an honest statement of the shop's continuing losses, or breaking the terms of the lease and faciny an unanswerable action by the landlord for breach of contract. It seems that the applicant was advised to stay in the business until this action could be tried or his lease expired; he followed that course and I am unable to say that he was wrong to do so. I believe the applicant was in a very difficult position in which nothing further could reasonably have been expected of him by way of mitigation of damage. In addition, I note that he has not claimed for business losses, apart from those relating to the lease, incurred after November 1983. The total amount of damages awarded against all three respondents will therefore be $45,614.71. I am conscious of the fact that this must seem, from the respondents point of view, a harsh result. They sold a business for $25,000 and, in doing so, they engaged in conduct which I have - 34 - found to have been deceptive and misleading, but not grossly so. Now they are ordered to pay damages of almost twice the amount they originally received. The reason for this 1s that, although they only mishandled the truth in apparently minor ways, this had the effect of concealing the vital fact that the business was going downhill and was most likely to prove unprofitable. They did this against a background of assurances that they were to be trusted and the applicant did not need independent advice. As a result, the applicant found himself tied to a business which continued to decline and, faced with a difficult decision as to what to do for the best, he decided understandably to stay with the business until his case was heard or his lease expired. As between the parties it is, 1n my view, only fair that the respondents should pay for the resulting losses. In addition I shall direct, pursuant to s.87 of the Trade Practices Act 1974, that the contract between the parties be varied so that the applicant is under no obligation to make any further payments thereunder to the respondents. In the event I have not found it necessary to deal with the alternative claims, which were not pressed, of fraudulent misrepresentation or breach of warranty. - 35 - I hereby certify that the thirty-four (34) preceding pages are a true and accurate copy of the Reasons for Judgment herein of The Hon. Mr. Justice Woodward Vsti YA r~2. ssociate Dated: 4 October 1984 -N IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY VG 168 of 1983 er ee ee ee ee GENERAL DIVISION BETWEEN: MICHAEL CORBIDGE Applicant and THE BAKERY FUN FACTORY FUN SHOP PTY. LID., LES SCHEFFER and ROBERT MORLEY Respondents and THE BAKERY FUN FACTORY FUN SHOP PTY. LTD. Cross-Claimant and MICHAEL CORBIDGE Cross-Respondent CORRIGENDA Amendment to the heading of the catchwords, order and reasons for judgment of The Hon. Mr. Justice Woodward of 4 October 1984. The reference in the title of the action to the name "The Bakery Fun Factory Pty. Ltd." is incorrect and should read "The Bakery Fun Factory Fun Shop Pty. Ltd." (N." Lucarelli) Associate_