CATCHWORDS Trade Practices - sale of business - whether misleading and deceptive conduct. Trade Practices Act 1974 ss.52,82 Estate Agents Act 1958 s.34A Estate Agents (Small Businesses) Regulations 1965 ARTHUR THOMAS DOHERTY and JULIA LOUISE DOHERTY and TUMBLETURN PTY. LYD., GERALD MICHAEL HARRISON and MARION CATHERINE HARRISON V. No. G 62 of 1983 NORTHROP J. 21 APRIL 1986 MELBOURNE (Not considered appropriate for general distribution.) IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V. No. G 62 of 1983 GENERAL DIVISTON BETWEEN ARTHUR THOMAS DOHERTY and JULIA LOUISE DOHERTY Applicants and TUMBLETURN PTY. LTD., GERALD MICHAEL HARRISON and MARION CATHERINE HARRISON Respondents a OURT: NORTHROP J. ATE: 21 APRIL 1986 Is] PLACE: MELBOURNE MINUTE OF ORDER THE COURT ORDERS THAT the application be dismissed with costs. (Settlement and entry of Orders is dealt with in 0.36 of the Rules of Court.) IN THE FEDERAL COURT OF AUSTRALIA ) ) VICTORIA DISTRICT REGISTRY ) V. No. G 62 of 1983 ) ) GENERAL DIVISION BETWEEN ARTHUR THOMAS DOHERTY and JULIA LOUISE DOHERTY Applicants and TUMBLETURN PTY. LTD., GERALD MICHAEL HARRISON and MARION CATHERINE HARRISON Respondents COURT: NORTHROP J. DATE: 21 APRIL 1986 PLACE: MELBOURNE REASONS FOR JUDGMENT The applicants are husband and wife. In September 1980 they purchased a Chicken Bar/Take Away Foods business from the respondent, Tumbleturn Pty. Ltd. Tumbleturn is a corporation controlled by the other two respondents who are husband and wife. Mr. and Mrs. Harrison conducted the business at shops 5 and 6 Safeway Centre, Boronia. The purchase price for the business was $40,000 plus stock at valuation. The applicants paid that price to Tumbleturn. Included in the sum of $40,000 was goodwill, fittings and fixtures. By the income tax returns lodged by the applicants, it appears that the fittings and fixtures were valued at $26,500. The applicants borrowed money to enable them to purchase the business. The business venture failed. In October 1982 the applicants sold the business for $16,000 which included goodwill, fittings and fixtures. By application filed on 28 April 1983, the applicants commenced these proceedings in the Federal Court claiming damages against the respondents based upon' sections 52 and 82 of the Trade Practices Act 1974. Prior to the commencement of the legal proceedings, the applicants had made no complaint to the respondents concerning alleged misleading or deceptive conduct by them with respect to the sale of the business. No letter of demand had been written to the respondents prior to the commencement of the legal proceedings. The misleading or deceptive conduct of the respondents, as alleged in the applicants' statement of Claim, was constituted by representations made by or on behalf of the respondents and were as follows:- "(a) that the average weekly takings of the business were $2,200.00; (b) that the average weekly takings of the business when owned by its previous owners, a French couple, had been some $2,800.00; » (c) that Tumbleturn and/or Mr. and Mrs. Harrison had allowed the business to run down from taking on average $2,800.00 per week to $2,200.00 per week; (d) that the business under capable management, consistent with the capabilities of the Applicants, could again generate average weekly takings of $2,800.00; (e) that the average weekly takings of the business for the period lst duly, 1979 to 30th June, 1980 were $2,209.00; (f) that in the period after 30th June, 1980 up until the date of the sale the average weekly takings continued to be about $2,200.00; (g) that such facts existed and were known to Mr. and Mrs. Harrison as officers of Tumbleturn and/or Mr. Earl to exist from which the representations referred to in sub-paragraph (d) could be reasonably deduced; (h) that Mr. and Mrs. Harrison as officers of Tumbleturn and/or Earl held the opinion that the representation referred to in sub-paragraph (d) was true." At the hearing of the application, leave was granted to the applicants to allege further representations as follows:- "(i) that the net weekly profit and gross annual profit of the business for the period lst duly, 1979 to 30th June, 1980 were s660.00 and $34,295.00 respectively; {j) that in the period after 30th June, 1980 up until the date of the sale the net weekly profit continued to average about $660.00." The applicants allege that each of the representations was false and thus each constituted misleading or deceptive conduct in contravention of s.52 of the Trade Practices Act. At the hearing, in addition to other witnesses, the applicants and Mr. and Mrs. Harrison gave evidence. The evidence relating to the representations was contained mainly in documents. The witnesses were giving evidence of conversations and events which had occurred some five and a half years earlier and of necessity, their recollection must be hazy, particularly that of Mr. and Mrs. Harrison because of the fact that they had no idea that allegations of misleading and deceptive conduct were being made against them until two and a half years after the conversations and events which gave rise to those representations had occurred. After seeing and hearing the witnesses, I have formed the view that Mr. and Mrs. Harrison were witnesses of truth trying to the best of their recollection to recall and describe the conversations and facts which had occurred so long ago. Mr. and Mrs. Doherty, having failed in their business venture, were keen to find an explanation for that failure. Previously, they had been successful in conducting various Milk Bar businesses, but had no previous experience in conducting a Chicken Bar/Take Away Foods business. Prior to September 1980, Mr. Doherty suffered an illness. He is Btill suffering from that illness. This illness may have affected his capacity to conduct a successful business. In any event, following the failure of the new business venture, the applicants sought excuses. To this end, it is my opinion that they read into words said in 1980, more than should have been read into them. In this context, their evidence is not preferred to that of Mr. and Mrs. Harrison where that evidence conflicts with the evidence of Mr. and Mrs. Harrison. My view is supported by the allegations made by counsel on behalf of the applicants that Mr. and Mrs. Harrison had engaged in a highly sophisticated fraud whereby they had deliberately falsified the books of the business to show higher weekly takings than those actually received by the business even though those higher weekly takings formed the basis for the income tax returns submitted by the respondents and resulted in the respondents being liabled to pay a greater amount of tax than they would have been required to pay if the true weekly takings had been disclosed. In my opinion, there is no basis on which that allegation can be based. It is rejected completely. In my opinion, Mr. and Mrs. Harrison had neither the capacity nor the ability to engage in such a fraud. Essentially, they were a homely family with five children. Their main interest was in the country. They came to Melbourne because of the possibility of greater opportunities for their children in the city. They conducted the business as a family concern. Mr. Harrison's real interest remained in the country. The financial strength of the business weakened while they conducted it. They sold the business at a loss. Thereafter, they returned to the country. Mr. and Mrs. Harrison were, in my opinion, honest and frank persons, particularly in their dealings with the applicants, and did not engage in any conduct in contravention of s.52 of the Trade Practices Act. In December 1978, the previous owners of the business were attempting to sell the business. They had engaged R.J. Klemm and Co. Pty. Ltd. as their agent. On 30 December 1978, the agent inserted the following advertisement in the Age newspaper advertising the business for sale:- "CHICKEN AND SALAD BAR, 6-day, short hours, colossal business, beautifully presented, spacious and easy to operate. Takings $3000 pw. Good improver, showing excellent profit. Accountant's figures $930 pw nett. Sole agent. Price $75,000 plus SAV. R. J. KLEMM, 487 Malvern Rd., South Yarra. 24 4211. A.H., 511 3743." Mr. and Mrs. Harrison saw that advertisement. By Contract of Sale dated 28 March 1979, they agreed to purchase the business for $70,000 together with stock at valuation. Possession was to be given on or before June 1979. It is not clear what value was given to the fittings and fixtures. Under the provisions of s.34A of the Estate Agents Act 1958 (Vic.), first inserted into that Act in 1963 by s.19 of Act No. 7012, a person selling a small business of the kind involved in these proceedings is required to give a Prospective purchaser a statement in the prescribed form setting out specified particulars of that business. The form as prescribed is set out in the Estate Agents (Small Businesses) Regulations 1965, being Statutory Rule No. 14 of 1965. The vendors of the business to Mr. and Mrs. Harrison gave such a statement to Mr. and Mrs. Harrison. That statement showed that for the year 1 duly 1976 to 30 June 1977, the average weekly sales of the business were $2,180, the gross profit was $808 per week, the overhead costs were $397 per week and the net profit was $411 per week. The corresponding figures for the year 1 July 1977 to 30 June 1978 and the period 1 July 1978 to 17 September 1978 were $2,264, $991, $389 and $602 and §2,674, $1,327, $394 and $933 respectively. It should be noted that for each period the sum of the overhead costs and the net profit equalled the gross profit. Little weight can be given to the net profit figures since so much depends upon factors peculiar to the proprietor of the business, for example, interest paid on moneys borrowed, whether the premises were owned or rented and other methods of accounting, such as claims for depreciation. The crucial figures were those of takings. In addition to the figures set out above, annual figures were set out on the statement but those were merely multiples of weekly figures. Mr. and Mrs. Harrison kept very simplified and essentially crude records during the time they conducted the business. The records consisted of exercise books in which daily takings were recorded as well as expenses. Some of the expenses were noted at the time of payment, others from bank statements and cheque butts. All the records kept by Mr. and Mrs. Harrison were forwarded to their Accountant for the purposes of the Accountant preparing income tax returns on their behalf and on behalf of Tumbleturn. The same records were used by the Accountant in preparing a s.34A Estate Agents Act certificate which was used by the respondents when they came to sell the business. At the hearing, the respondents produced all the books of the business that they could find. Some were missing, but I draw no inferences adverse to the respondents from the absence of those books. In addition, some of the records produced consisted of sheets torn from other books. Mrs. Harrison in particular was cross-examined vigorously at length on those records, most of which had been kept by her. It was during this cross~examination that the suggestion of the fraud committed by Mr. and Mrs. Harrison was first suggested. I am satisfied that no fraud was committed and in particular, I accept the evidence of Mrs. Harrison concerning the accuracy of those records despite her inability to explain certain apparent inconsistencies appearing in them, particularly in reiation to the date of payment of some expenses. The s.34A Estate Agents Act certificate given by the respondents was for the period 1 June 1979 to 30 June 1980. This was prepared and signed by the respondents' Accountant. The figures contained in it were taken from the records supplied to the Accountant by Mr. and Mrs. Harrison and are the same figures as those used by the Accountant in preparing the income tax returns for the respondents. The figures for average weekly saies, gross profit per week, overhead costs per week and net profit per week for the period 1 dune 1979 to 30 June 1979 and the year 1 July 1979 to 30 June 1980 as set out in the statement are $2,486, $1,125, $965 and $160 and §2,209, $1,020, $360 and s660 respectively. The corresponding annual figures were given for the same periods. In signing the statement, the Accountant gave the following warning as set out on the statement:~- "We, M.A. Trytell & Associates of &7A Chadstone Road, Chadstone. 3148. Phone No. 568.0188 being a practising Public Accountant hereby report as to the correctness of the above figures as follows:- We have relied upon information supplied by the vendor, We have not carried out an audit and do not accept responsibility to persons who may rely on this statement. Please note the following expenses have not been accounted for; motor vehicle (because of the personal nature to the vendor) accounting (because they do not relate to year end figures) and depreciation." The statement had attached to it the trading statement showing how the net profit was calculated. It is to be noted that the figures referred to in the allegations of conduct as set out above, being paragraphs (e) and (i), are based on the figures contained in that statement. From the records supplied by Mr. and Mrs. Harrison and for the purposes of the hearing, their Accountant supplied a statement setting out the takings of the business on a weekly basis for the period 1 July 1979 to 9 September 1980. The business closed for just over two weeks during the Christmas 1979 and New Year 1980 period. During some weeks, the weekly takings were below $2,000 but for most weeks, were well above $2,000. For the first fifty-two weeks, being the financial year ending 30 dune 1980, the average weekly takings were $2,210.63 despite the fact of the closure of the business during the Christmas/New Year period. Over the whole period of sixty-three weeks, the average weekly takings were $2,152.65, while excluding the two weeks the business was closed the average weekly takings were $2,223.23. It appears further that the highest weekly takings generally occurred during the month of December 1979 and the lowest weekly takings occurred during the winter months. - 10 - During the first half of the year 1980, Mr. and Mrs. Harrison decided to sell the business. They engaged R.d. Klemm and Co. Pty. Ltd. as well as another agent to act as their agents. Initially, the price they sought was much greater than $40,000, they having paid $70,000 for the business in 1979. The applicants did not' see any advertisements for the sale of the business. The applicants had had a number of dealings with Mr. Earl of the firm R.J. Klemm & Co. Pty. Ltd. with respect to sales and purchases of Milk Bar businesses. They had approached Mr. Earl for assistance in finding a different type of business to purchase, a business which was not 50 onerous and which was not required to be kept open for such long hours as a Milk Bar business. Mr. Earl was not handling that part of the Estate Agency business dealing with sales of the type of businesses being conducted by Mr. and Mrs. Harrison. From internal arrangements he knew of the existence of that sale. He suggested to the applicants that the business might be suitable for them. At the hearing, Mr. Earl gave evidence. I accept him as a witness of truth. Although formally he was the agent of the respondent Tumbleturn, he was, in reality, more the advisor to the applicant. He obtained the files relating to the sale of the Boronia business to Mr. and Mrs. Harrison. He told the applicants that the previous owner had been taking about $2,700 to $2,800 a week. He obtained those figures from the -ill- records kept by his Estate Agency business. He introduced the applicants to Mr. and Mrs. Harrison. Apart from finance, he played no active part in the sale. Mr. Earl gave the s.34A Estate Agents Act statement to the applicants. The statement also contained the details of finance being obtained by the applicants. Those details were required to be given under the statement. The statement purports to have been signed by Mr. and Mrs. Harrison on 12 August 1980 and by the applicants on 18 August 1980. By their signatures, the applicants acknowledge that they received a copy of the statement on 12 August 1980. Ona day in August 1980, the applicants paid $50 to Mr. Earl as a sign that they were interested in buying the business. Sometime later, namely on 14 August 1980, they paid a deposit of §500 to Mr. Earl. The earlier payment of $50 appears to have been overlooked, but this error was rectified at a later date. The Contract of Sale is undated. The applicants say it was not signed until possession was given on Tuesday, 16 September 1980. The business did not open on Mondays. It is clear that the applicants required time in which to make the necessary arrangements for obtaining the finance needed to purchase the business. The purchase price was paid in full on 16 September 1980. There is no doubt that from 18 August 1980 there was in existence a contract to purchase the business even though that contract may not have been enforceable. I also find that Mr. Earl told the applicants that the business had been run down while controlled by Mr. and Mrs. Harrison. The figures connected with the business - 12- show that fact. I also find that Mr. Earl told the applicants that the business had been run down because Mr. Harrison was more interested in country matters than in the business. That may well be true, but there is nothing to suggest that the business was run down deliberately by Mr. and Mrs. Harrison. In fact, the allegation contained in paragraph (c) above should not be construed as being the result of deliberate acts. It merely alleges a statement of fact that had occurred and in that context is quite correct. A stocktaking of the business was carried out on Monday, 15 September 1980. The applicants each gave evidence that they did not sign the contract until settlement took place on 16 September 1980. They said also that they did not get the s.34A Estate Agents Act statement containing details of the finance to be obtained by them until the same date. I do not accept that evidence. The details of the finance were determined long before 16 September. The contract document would have been necessary to enable the finance to be arranged. I find that the contract was signed by the applicants long before 16 September 1980, but on or after 18 August 1980. After settlement, the applicants took possession of the business. Mr. and Mrs. Harrison stayed for the next two weeks to help them settle in and to explain how the business operated. This was hardly the conduct of persons who had deliberately engaged in misleading or deceptive conduct in contravention of s.52 of the Trade Practices Act. After - 13- settlement and possibly during that handover period, Mr. Harrison told the applicants that the previous owners had average weekly takings of $2,800 or words to like or similar effect and that with proper management, there was no reason why the applicants would not increase the weekly takings above $2,200 per week. There is no evidence to suggest that Mr. and Mrs. Harrison deliberately had allowed the business to run down. It was obvious to all that it had run down, but the Harrisons gave no explanation, apart from their unsuitability for this type of work, as to why there had been a decline in weekly takings during the period they had conducted the business. It is apparent that during the handover period, differences of opinion occurred between the applicants and Mr. and Mrs. Harrison as to how the business should be managed, but it must be remembered that the applicants were then the owners of the business and took responsibility for the way in which the business was conducted after 16 September 1980. The applicants kept far more detailed books of account than those kept by Mr. and Mrs. Harrison. From the records kept by the applicants, a schedule was prepared setting out the takings of the business for each week from 16 September 1980 to 13 September 1981. The business closed for three weeks during the Christmas/New Year period. On the basis of a fifty-two week year, the average weekly takings were $1,646, while on the basis of forty-nine weeks, the average weekly takings were $1,767. The first five weeks takings were $2,000, $2,059, $1,745, $1,679 and $2,017 respectively. the corresponding weeks in the year 1979, but were comparable to the preceding five weeks. There was not the big increase in weekly takings that had occurred in the summer period during 1979-1980, particularly during the weeks leading up to - 14 - Christmas 1979. respect to each of the allegations made by the applicants and It is necessary now to make findings of fact with as set out earlier in these reasons. The findings are from a consideration of the whole of the evidence:- (a) {b) (c) This representation was made before 16 September 1980. It was substantially correct. This representation was made, in substance, by Mr. Earl to the applicants before 16 September 1980. It was substantially correct. Mr. Doherty made a similar statement after 16 September 1980. It was obvious that the average weekly takings had decreased from $2,800 to $2,200, but there is no evidence to suggest that this had happened because of any deliberate action by Mr. and Mrs. Harrison, Those takings were substantially less than for made (d) Ce) (f) (g) (h) - 15 - This representation was, in all probability, said by Mr. Earl before 16 September 1980, but there is nothing to suggest he did not believe it to be correct. In all the circumstances, the statement could not constitute misleading or deceptive conduct under s.52 of the Trade Practices Act. After 16 September 1980, Mr. Doherty said words to similar effect to the applicants. This representation was made before 16 September 1980. It appears in the s.34A Estate Agents Act statement. The representation is correct. No express statement to this effect was made. No inference can be drawn to support it since it ignores the fact of greater sales occurring during the summer months, particularly during the weeks leading up to Christmas. There is no evidence to support this allegation. The finding that para.(d) did not constitute conduct contrary to s.52 of the Trade Practices Act prevents a finding that this representation has been established. ry ~ 16 - (i) This representation was made before 16 September 1980. It appears in the s.34A Estate Agents Act statement. It was correct. (j) The same comments are made as those in relation to para.(f). The contention made on behalf of the applicants that each of the representations was false and thus constituted misleading or deceptive conduct in contravention of 5.52 of the Trade Practices Act, was based mainly on the submission that Mr. and Mrs. Harrison had committed a deliberate fraud. That submission was supported by a contention that Mr. and Mrs. Harrison, having bought a farm property, were desperate to sell the business to enable them to settle their purchase and to take possession of their farm. In reality, that contention is directed to support the fraud allegation. It is rejected. The conduct of Mr. and Mrs. Harrison, in assisting the applicants during the handover period, detracts from the submission. It was further submitted that the drop in average weekly takings during the twelve months period following 16 September 1980, showed that the statements of average weekly takings for the period during which the respondents conducted the business, must have been false. That contention is rejected. The figures showed that there had been a decline - 17 - of average weekly takings from the time Mr. and Mrs. Harrison took over the business. Any inference to be drawn from those facts should be that the average weekly takings would continue to decline unless something occurred to reverse that trend. In my opinion, the applicants thought that with their Management skills, as illustrated by the success of the Milk Bar businesses which they had conducted, they would be able to reverse the decline and restore average weekly takings to their earlier levels. They took a business gamble. The gamble failed and the applicants now blame the respondents for that failure. The Court finds that the applicants have failed to establish that any of the representations alleged were false. It follows that the Court finds that none of the respondents, either by themselves or by their agents, have engaged in misleading or deceptive conduct in contravention of 5.52 of the Trade Practices Act. The applicants have failed to establish that they suffered loss or damage by conduct of the respondents that was done in contravention of a provision of s.52 of the Trade Practices Act; see sub-section 82({1) and 5.78 of that Act. In the circumstances of this case, having made those findings, the Court should not proceed to assess what loss or damage the applicants would have suffered if they had established a case under those sections. , : - 18 - Accordingly, the application shoulda be ' with costs. I ceitify that this and the senentecn (7) preceding pages are a true copy of the Reasons io: Judgment herem of the Honourable Mr. Justice Weorlioe Mince UD ace Associate Ci a ass DATS GN rene dismissed