CATCHWORDS TRADE PRACTICES - misleading or deceptive conduct - representations by lessor concerning future renovations to service station and restaurant - failure to carry out work within designated period - no misrepresentations of present intentions. CONTRACT - breach of collateral warranty - lessees entering into lease and purchasing business in reliance on promise ~ effect of operation of business by trustees under family trust. DAMAGES - entitlement to damages for breach of collateral warranty ~ lessees' voluntary determination of lease and sale of business - loss of profits for period of operation of business - consequential loss due to reduced value of goodwill upon sale of business - independent intervening cause leading to sale - no entitlement to damages for future loss of profit or on sale of plant and equipment. Trade Practices Act 1974 35.52 ROGER CHARLES STEEDMAN, MARGARET OLIVE STEEDMAN and ANOR v GOLDEN FLEECE PETROLEUM LIMITED No. VG 69 of 1983 Woodward J. Melbourne 24 December 1985 {N THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY No. VG 69 of 1983 GENERAL DIVISION BETWEEN: ROGER CHARLES STEEDMAN, MARGARET OLIVE STEEDMAN (who sue as the Trustees of the Steedman Family Trust alternatively for their own benefit) and VICTORIAN PROPERTY LISTINGS PTY. LIMITED (who sues as the Trustee of The Steedman Family Trust) Applicants and GOLDEN FLEECE PETROLEUM LIMITED Respondent MINUTES OF ORDER COURT: Woodward J. DATE: 24 December 1985 PLACE: Melbourne THE COURT ORDERS THAT: 1. There be judgment for the applicants on the application. 2. There be liberty to apply, in relation to damages and costs in light of these reasons for judgment. (Settlement and entry of orders is dealt with by 0.36 of the Federal Court Rules). IN THE FEDERAL COURT OF AUSTRALIA ) ) VICTORIA DISTRICT REGISTRY ) No. VG 69 of 1983 ) ) GENERAL DIVISION BETWEEN : ROGER CHARLES STEEDMAN, MARGARET OLIVE STEEDMAN (who sue as the Trustees of the Steedman Family Trust alternatively for their own benefit) and VICTORIAN PROPERTY LISTINGS PTY. LIMITED (who sues as the Trustee of The Steedman Family Trust) Applicants and GOLDEN FLEECE PETROLEUM LIMITED Respondent COURT: Woodward J. DATE 24 December 1985 PLACE: Melbourne REASONS FOR JUDGMENT This action concerns the leasing of a service station and restaurant business by the first and second-named applicants ('the Steedmans') from the respondent company ('Golden Fleece'). The Steedmans allege that during the course of negotiations representations were made, and warranties given, about work that would be performed promptly at the premises by Golden Fleece - particularly in the restaurant and kitchen areas - if the Steedmans were to buy the business from the outgoing lessees and Sign a three-year lease from Golden Fleece. In the event, they say, they went into possession in reliance upon these representations and warranties, but the promised work was not carried out at all for six months and then only part of 1t was done. By this time the Steedmans had given notice that they wished to leave the business and transfer the lease as soon as they could find a purchaser acceptable to Golden Fleece. They finally left after running the business for nine months. The Steedmans now claim damages for misleading or deceptive conduct within the meaning of s.52 of the Trade Practices Act 1974, for breach of warranty and for negligent misrepresentation. Some difficult questions arise as to the extent of damages, if any, to which the Steedmans are entitled - particularly since they ran the business quite profitably and their decision to part with 1t was strongly influenced by the ill-heaith of Mrs Steedman. The situation is further complicated by the fact that between the negotiations with Golden Fleece and their going into possession, the Steedmans established a family trust which became the equitable owner of the business - a fact unknown to Golden Fleece. These then are the broad outlines of the case. There 15 little dispute as to the facts - hardly any evidence was adduced by the respondents. The difficulties in the case lie in determining the legal significance of the undisputed facts, and in the assessment of damages 1f that should prove necessary. Mr Steedman worked as a technical officer with Telecom Australia for many years. In 1981 he and his family were living at Gisborne. Mrs Steedman, ain addition to looking after their children, had had part-time employment in the catering field for several years. Mr Steedman had become dissatisfied with the lack of challenge in his work for Telecom and decided to look about for a business which he and his wife could run. I think it is probable that, if the opportunity of the Golden Fleece service station had not presented itself, he would have gone into some other venture within a year or so. As it was, the Steedmans saw, in early February 1981, an advertisement for an opportunity to take over a Golden Fleece service station and restaurant in Bairnsdale. They liked the sound of it and liked the area, so they went to inspect it - at first unannounced and, the next day, hy arrangement with the then proprietors of the business. It was obvious that the place was run-down, unattractive and not achieving its potential. The holders of the lease had little continuing interest in the business, and employed other people to run it for them. Nevertheless the business was well-situated, on the Melbourne side of the town and the correct side of the road for travellers from the city. It was ina developing residential area which the Steedmans believed lacked a convenient restaurant. It seemed that, if 1t were substantially renovated, 1t could be built up into an attractive and profitable business. Mr Steedman was hoping that, with the income from the service station, milk-bar counter and restaurant, and the savings arising from the family's living and eating on the premises, he would be able to bank a total of $100,000 over a three or four- year period. That was the task he was notionally setting for himself and his wife - to build up a substantial nest-egg which could then be used in another business, or in some other way, to provide for the1r longer-term future. Mr and Mrs Steedman are both in their forties and are obviously hard-working, intelligent people who would not take ona challenge such as the service station represented without thought and planning and a determination to see it through. They were both impressive witnesses and I have no hesitation in accepting them as truthful. On returning to Gisborne, the Steedmans contacted Golden Fleece and were visited soon afterwards by a Mr Tyrrell, the Catering Manager for the company. He is no longer working for Golden Fleece. He was called by the Steedmans to give evidence, which substantially corroborated what they had already told me about the conversations between Mr Tyrrell and themselves. I find that in that first, quite lengthy, discussion, the Steedmans and Tyrrell agreed that there was a good deal which needed to be done at or about the time of hand-over of the business, if the Steedmans were to take 1t. The residence, which had not been used as such for some time, needed repainting and certain other renovations. The kitchen needed new flooring and new benches and an effective new canopy and extractor fan over the cooking appliances. (This last item may not have been mentioned in the first conversation.) The coolroom needed replacing or substantial repairs. The restaurant required repainting, new curtains and new floor covering, and work was also needed in the milk-bar area - particularly a new floor covering. There were other items mentioned, but these were the major ones, and will suffice for present purposes. Mr Tyrrell knew the premises well. He agreed with the Steedmans' list of necessary works, but made it clear that he did not have power to authorise them. He was impressed by the Steedmans' initiative 1n going to look at the site and by their obvious willingness to work hard in order to succeed. He believed the Steedmans' goal of saving $100,000 in three or four years to be a realistic one. A day or two later, Mr Tyrrell obtained the verbal approval of Mr Jarvis, the Golden Fleece Retail Sales Manager, to the lifting of the priority of the Bairnsdale premises, in the company's list of service stations requiring renovation, to enable the work to be done promptly. This was all he needed to be able to assure the Steedmans that they could proceed on this understanding. He rang to tell them that the work had been approved, as they had discussed. A three-week training course was arranged for the Steedmans in March. In April Mr Steedman gave notice to Telecom, and the Gisborne house was put on the market and sold. On 4 May the Steedmans moved into their new premises at Bairnsdale. On 6 May they signed their lease and their contract to purchase the business of the outgoing lessees for a price made up of the agreed value of certain fittings, equipment and the stock. There was nothing included in the purchase price for the coolroom, which was the property of the vendors, but which was accepted as having no value in its existing condition. Nor was there anything included in the purchase price for goodwill. Before the Steedmans had moved in, the residence at the rear of the premises had been renovated to their satisfaction by Golden Fleece. No question arises about that work. The other work had not been done, but that was understandable, and accepted by the Steedmans, because it would have been awkward to inconvenirence the outgoing lessees. In my view the clear understanding between Mr Tyrrell, on behalf of Golden Fleece, and the Steedmans, was that work on the restaurant and the kitchen would be carried out very soon after they went into occupation. At first 1t was hoped to do it before the May school holidays, but when this proved irmpracticable, the expectation was that the work would be performed 1n June. Whatever his precise words may have been, Mr Tyrrell had given the clear impression that the work would be performed in a matter of days or weeks rather than months. He had given this impression in all honesty, because that was his belief. Unfortunately for the Steedmans, between the time they negotiated with Mr Tyrrell the conditions on which they would take the lease and their moving in, Golden Fleece had been effectively taken over by Caltex (presumably Caltex Oil (Australia) Pty Ltd). The Steedmans had been told of this development at a meeting, held on 31 March 1981, which they attended along with existing Golden Fleece employees and lessees and Caltex and Golden Fleece Management representatives. Assurances were then given that the lessees would not be affected by the changeover, because Golden Fleece would maintain its separate identity. The result of the take-over, however, according to Mr Tyrrell, was first a period of general uncertainty, when it was difficult to get decisions made, and then a general tightening of financial controls, which made it very hard to get approval for any expenditures which could possible be avoided. In the case of the Bairnsdale premises this meant that nothing was done until, at the insistence of the local health surveyor, work was done in the kitchen in November. In fact, that work was performed in such an incompetent manner by a local contractor that, while it was in progress, the health surveyor closed the restaurant down for a week. Even when he allowed it to re-open, the work had not been done to his complete satisfaction. The cooking canopy and exhaust fan were still not functioning properly. Iam satisfied that, from about June onwards, the Steedmans were making constant complaints to the district representative, Mr Ron Ellam, who was not called by Golden Fleece to give evidence, although available. They also, on a number of occasions, tried to get action by ringing the Melbourne office of Golden Fleece, but it was all to no avail. Before this occurred, the Steedmans had worked hard to clean the place and have it looking as well as was possible without renovations. The condition of the kitchen, in particular, meant that cleaning at the end of the day took much longer than 1t should have. Mr Steedman said that it was work which they could not ask the staff to do and it took much of their time and energies. They were conscious of the health surveyor looking over their shoulders all the time - even though he was sympathetic to them personally. The generally dingy atmosphere of the restaurant, 1n spite of the work done on it, meant that local residents were not tempted, in any numbers, to use 1t in the slack winter and spring months, out of school holiday time, when 1t was not greatly used by tourists. This had been the Steedmans' plan and expectation. I have no doubt that the continuing failure of Golden Fleece to honour the undertaking given on its behalf by Mr Tyrrell had a depressing and demoralizing affect on the hard-working Steedmans. They felt let down, unable to achieve their ambition of a restaurant of which they could be proud, and which they could promote successfully in Bairnsdale. They also had to work much harder then they had expected, or would have 1f the works had been carried out, simply to maintain reasonable standards, particularly in the kitchen. This was the state of affairs when Mrs Steedman suddenly discovered that she had breast cancer, requiring immediate surgery. This was performed on 22 August 1981. Soon after this, Mr Steedman decided that he could not expect his wife to continue working as hard as she had been while there was a question mark over her health. Accordingly, on 14 October, he wrote to Golden Fleece giving notice that he wished to sell the business and transfer the lease. He said, "The major factor which has led to this decision was the serious surgery my wife recently underwent". In December he found a suitable buyer, and the lease and business were transferred on 8 February 1982. The business was sold for an amount which included $10,000 for goodwill - indicating that the business had been built up by the Steedmans in spite of the difficulties and frustrations they had encountered. These then are the central facts upon which the Steedmans' claims are based. In my view they do not disclose a cause of action under the Trade Practices Act 1974. Although Mr Tyrrell's representations as to the work which Golden Fleece would perform proved to be inaccurate, they were made honestly and with a reasonable expectation that the work would be performed (see Bill Acceptance Corporation Ltd v GWA_Ltd (1983) 50 ALR 242). This much was not contested by counsel for the Steedmans. It was, however, argued that by the first week in May, when the Steedmans went into possession and signed the lease, the then management of Golden Fleece must have known that the commitment would not be met and should have so informed the Steedmans. -~ 10 - In my view there 1s insufficient evidence to support such an argument. I think the probabilities are that no-one in the company could have said, at the beginning of May, what was going to happen to the restaurant and kitchen in Bairnsdale. The claim under s.52 of the Trade Practices Act accordingly fails. The claim for negligent misrepresentation was not pressed by counsel for the Steedmans and also fails. There was no evidence to show that Tyrrell failed to make sufficient enquiries when he made the representations to ensure that the work could be done. He had no reason to doubt the effectiveness of the approval given by Mr Jarvis. However, I find that there was a clear breach by Golden Fleece of a warranty collateral to the lease agreement. This was a warranty to renovate the kitchen and restaurant areas of the premises promptly after the lease began. This warranty was of a promissory nature (Jd Savage & Sons Pty Ltd v Blakney (1970) 119 CLR 435) and was relied on by the Steedmans when they purchased the business and signed the lease. I find that they would not have entered into the lease without it. It was clearly broken when the kitchen was not renovated until the health surveyor virtually compelled the performance of the work six months later, and the restaurant work was not performed during the Steedmans' tenancy. In these circumstances [I have no doubt that the Steedmans are entitled to the damages which flowed directly from the breach of warranty. They are also entitled to any -ll- consequential damage which would have been in the contemplation of the parties had they foreseen the breach at the time the collateral contract was entered into. However, the calculation of those damages is no easy matter. There are several reasons for this. In the first place, the Steedmans did quite well from the business, due to their hard work, and 1t 1s not easy to assess how much better they would have done if the warranty had not been broken. Secondly, they are claiming damages for loss of future earnings, related to a period beyond the time when they surrendered their tenancy. This raises questions of causation. It must be asked whether the tenancy was transferred because of the breach of warranty or because of Mrs Steedman's illness and operation. I shall deal first with the damages suffered while the Steedmans continued to run the business. I have no doubt that if the work had been done the Steedmans' earnings would have increased. Mr Tyrrell, who I accept as an expert witness for this purpose, said that, in such a case, renovations and a bright new atmosphere could easily have increased takings by 20-30% and, in an exceptional case, takings could be doubled. In the present case there are many complicating factors which need to be borne in mind in arriving at a figure, which will necessarily be an arbitrary one. These include: (a) (b) (c) (d) (e) (f) -12- the takings from the restaurant must be the major factor, but these would lead to some increase 1n takings from the milk-bar and petrol sales, restaurant takings would increase more in the off-peak times than in holiday times, when they were quite often working to capacity anyway, increased takings would involve increased expenditure on petrol and on foodstuffs, but would have little effect on overhead expenses, less time spent in the depressing daily task of cleaning up the kitchen would have allowed the Steedmans more time, and left them with more energy and enthusiasm, for promotion and expansion, the benefits achieved would have been felt over a period of time, as the new reputation spread; they would not have been uniform over the period, the capacity to benefit from improvements must have been affected, to some extent, by Mrs Steedman's 1llness and Mr Steedman's concern for her, and the closure of the premises for four or five days in November was a setback to the reputation of the premises. It resulted directly from the negligence of the contractor but, in my view, 1t was sufficiently causally - 13 - related to the breach of warranty for it to be brought ianto account. I say this because the failure to carry out the promised work was a source of continuing annoyance to the health surveyor as well as to the Steedmans. It is clear that by November his patience was exhausted. If the work had been done in June, as part oft the normal Golden Fleece improvement programme, there 1s no reason to believe that it would not have been properly supervised and carried out. In the event, it was late, ill-organized and uncompetently managed and carried out - apart from the new flooring in the kitchen and milk-bar areas which was done well by a competent tradesman. However it would be pointless to make any precise finding of damages for these few days when a global award must be made to cover all other relevant circumstances. Bearing in mind all these factors, I think it is reasonable to assume that, over the period they were in the business, the Steedmans' takings would only have increased by about 10% if the collateral warranty had not been broken. Evidence was given that the gross profit of the under- taking over the period of the Steedmans' occupation was $81,904. This 1s the figure arrived at after deduction of petrol costs and costs of foodstuffs and other items sold at the milk-bar. A 10% - 14 - increase in this figure, after some slight allowance for extra costs of some overheads, gives a round figure of $8000. Doing the best that I can with a complex situation, that seems to me to be a reasonable allowance for loss of profits over the period. I make no deduction for taxation, as urged by counsel for the respondent, because I think 1t is quite possible that the applicants will be required to pay tax on this amount. In addition, I think the Steedmans are clearly entitled to claim any loss on re-sale of the business due to reduced goodwill because of their lower profits. I accept the evidence given by an accountant that a proper allowance for goodwill can be calculated by taking the net profits of the business for a year, deducting an allowance for the wages of the proprietors, deducting an allowance for tax, capitalizing the resulting figure on the basis of a 20% profit after tax and then deducting an appropriate figure for the net investment in plant and stock. I accept most of the accountant's figures for the purposes of this calculation. However the expected net profits, which I have already dealt with ona nine-months basis ($22,000 actually earned and $8,000 additional potential) and which can, I believe, be fairly directly extrapolated for a further three months, should be allowed for in the round figure of $40,000. -~ 15 - Further, I do not believe that the figure of $22,000 allowed by the accountant 1s sufficient for the two proprietors' wages, bearing in mind the long hours they had to work in the business. In my view, $27,000 would be a more appropriate figure to use. The calculation of goodwill then reads as follows: Net profit $40,000 Less wages $27,000 Business profit $13,000 Less tax (30%) 5_3,900 Profit after tax 9,100 Capitalized 45,500 Less plant and stock 15,000 Value of goodwill 30,500 Since the best the Steedmans could obtain for goodwill was $10,000, I believe that they are entitled to total damages, related to their period of occupation, of $20,500 for loss of goodwill and $8,000 for loss of profits, a total of $28,500. Turning then to the claim for loss of future earnings, in my view no such entitlement has been established. I think that the main cause of the Steedmans quitting the Golden Fleece premises was the operation undergone by Mrs Steedman and the state of her health. By the time that they concluded their agreement with their successors in the business (in about December 1981), the kitchen had been largely renovated. There were still complaints about the cooking canopy and the exhaust fan, but the - 16 - floor had been well done and the benches and cupboards adequately done. The hardship had been taken from the kitchen work. The milk-bar floor area had also been renovated. It 1s true that the restaurant was still untouched, and this was a source or frustration and annoyance, as well as reduced income, mainly in the non-holiday periods. However the profits from the business - at a rate of $30,000 for the first full year - were up to the Steedmans' original expectations. Had they stayed in the business, Golden Fleece might have renovated the restaurant, either in the ordinary course of events oras a result of further pressure from the Steedmans - including perhaps an action for specific performance of the collateral contract. Alternatively the Steedmans might have stayed 1n the business and established a larger claim for loss of profits over the full three years of their lease. Another possibility 1s that they might have persuaded Golden Fleece to let them renovate the restaurant at their own expense - without prejudice to any claims they might have against the company. Certainly they could not have done this without the consent of Golden Fleece; the terms of the lease did not otherwise permit it. While these courses were open to them, they were not, in my view, entitled to leave the business, take other work in the district, and then sue for the difference between those earnings and what they might have earned had they stayed on. Such damages would be appropriate if they had been forced out of the premises by some misconduct on the part of Golden Fleece. But that 1s not the case here. They left of their own accord, and mainly for a ~17 - reason unconnected with the breach of warranty - though I am prepared to accept that 1f all had gone well with their tenancy they would have been more likely to have stayed on in spite of Mrs Steedman's illness. [I am, however, unable to find that they would probably have stayed, in view of Mr Steedman's strong assertion, both in his letter of 14 October and in his evidence, of his desire to protect his wife's health from any overwork. There are thus two possible interpretations of the facts. Either the Steedmans left the business because Mrs Steedman's health forced them to do so; or they left of their own free will, due in part to Mrs Steedman's health and in part to their annoyance and frustration at the breach of warranty of which Golden Fleece was guilty. In neither case, in my view, are they entitled to damages for future loss of earnings. In either case, any further losses flowed not from the breach, but from a new intervening cause. This is clear enough on the first hypothesis. On the second hypothesis, the Steedmans made a conscious decision to try other fields of work. Mr Steedman in fact entered into a venture, which subsequently failed, and then obtained salaried employment. In my view the decision to work elsewhere, freely and deliberately made, broke the chain of causation so far as any further liability of Golden Fleece to the Steedmans was concerned. For the same reason that loss of future earnings cannot be claimed, I believe that an item - 18 - of $1104 for loss on sale of equipment, referred to by the Steedmans' accountant, cannot be allowed. This loss arose from the fact of sale and not from any loss of profits due to breach of contract. It only remains for me to deal with the question of the family trust, referred to at the outset of these reasons for judgment. I accept the submission of counsel for the Steedmans that this does not affect their right to sue and recover damages for the breach of warranty which I have found. The fact that the Steedmans saw fit to establish this trust to own the business which they would run, places certain duties on them with regard to moneys obtained pursuant to contracts they entered into as the legal representatives of the trust. It does not affect the other contracting parties, whether they be purchasers, suppliers, employees or landlords. They still have an obligation to observe their contracts and, if they fail to do so, they can be sued by the Steedmans in their representative capacity. For the reasons given above, there should be judgment for the applicants in the sum of $28,500, with costs to be taxed. However, counsel for the applicants have foreshadowed a claim for interest on the sum awarded and, accordingly, I shall make no formal orders for damages or costs until this matter has been dealt with. I reserve liberty to apply inthe light of these reasons for judgment. - 19 - I certify that the eighteen (18) preceding pages area true and accurate copy of the Reasons for Judgment herein of The Hon Mr Justice Woodward Cee Associate Dated: 24 December 1985 Counsel for the applicants : Mr D.M. Byrne QC and Mr D.Ross Counsel for the respondent : Mr F.X. Costigan QC and Mr D.S. Levin Solicitors for the applicants : Keith Hercules & Sons Solicitors for the respondent : Russell, Kennedy & Cook