NOT FOR _ DISTRIBUTION 352. tos IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY No. G 12 of 1985 GENERAL DIVISION BETWEEN : CAVIT MAHMUT and AYSE MAHMUT Applicants AND: POYALA PTY. LIMITED First Respondent GEORGE KOVARI and JUDITH KOVARI Second Respondents MINUTE OF ORDER JUDGE MAKING ORDER : Neaves J. DATE OF ORDER : 10 July 1987 WHERE MADE : Canberra THE COURT ORDERS THAT: 1. There be judgment for the applicants against the respondents in the sum of $10,000. 2. The respondents pay the applicants' costs of the proceeding. Note: Settlement and entry of orders is dealt wit of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY No. G 12 of 1985 wee ww GENERAL DIVISION BETWEEN: CAVIT MAHMUT and AYSE MAHMUT Applicants AND: POYALA PTY. LIMITED First Respondent GEORGE KOVARI and JUDITH KOVART Second Respondents CORAM: Neaves J. DATE: <> REASONS _FOR JUDGMENT This proceeding arises out of the purchase by Cavit Mahmut and Ayse Mahmut ("the applicants") of a take-away food business, called Judy's Food Bar, pursuant to a contract dated 12 October 1983 between the applicants and Poyala Pty. Limited ("the first respondent") of which George Kovari and Judith Kovar1 ("the second respondents") were, and are, the sole shareholders and directors. The applicants claim damages under the Trade Practices Act 1974 (Cth) ("the Act") for alleged breaches of s.52 thereof. Background By their amended statement of claim the applicants allege that the first respondent engaged in conduct that was misleading or deceptive in the sale of the business' to the applicants. Particulars of the conduct relied upon are - (a) The first respondent, by its agent Phillip Charles Miller, orally represented to the applicants that the business was making a profit of $1,500 to $1,800 per week to a husband and wife both working in the business; (b) Each of the second respondents orally made representations to the applicants to the same effect; (c) Mr Kovari orally represented to the applicants that the lessor of the premises had stated that it would provide the applicants with a new lease upon application; (ad) Mr Kovari orally represented to the applicants that the leased premises were part of a building subject to a preservation order and, therefore, would not be developed. It is alleged that the representations (a) and (b) were false to the knowledge of each of the second respondents and that the representations (c) and (d) were false to the knowledge of Mr Kovari. The applicants allege that they suffered loss and damage as a consequence of relying upon the misleading and deceptive conduct of the first and second respondents. Relief is sought against the second respondents on the basis that they were involved in the contraventions of s.52 of the Act by the first respondent (see ss.82 and 75B of the Act). The business was conducted from shop premises at the corner of Little Hunter Street and Curtin Place, Sydney. Little Hunter Street is a narrow street leading from the northern side of Hunter Street to the complex known as Australia Square. The building in which the shop was Situate had a frontage to Hunter Street and was known as 10-14 Hunter Street, Sydney. In that building were the premises occupied by the New South Wales Sports Club Limited ("the Club"). The shop premises, which consisted of a ground floor and basement, were held under lease from the Club, Mr and Mrs Kovari being the assignees under a deed dated 31 August 1979 of a lease which had been granted in 1972 for aterm of 15 years from 1 April 1972. The rent reserved in respect of the last 5 years of the term was $12,000 per annum. There was no provision in the lease for the extension of the term granted. The representations relied on by the applicants are said to have been made either in conversations between the applicants and Mr Phillip Charles Miller, a business broker engaged by the second respondents to sell the business, or in conversations between the applicants and the second respondents at some of which Mr Miller was said to be present. At the relevant time Mr Miller carried on business under the firm name P. Miller & Co. at 45 Market Street, Sydney. 4. It 1s common ground that the first meeting between the applicants and the second respondents took place early in August 1983, that a contract (which did not proceed) was signed on 23 September 1983, that a further contract was signed on 12 October 1983 and that settlement of the sale took place on 14 October 1983. Ido not think it is an exaggeration to say that those basic facts are almost the only facts as to which the parties are agreed. There is almost no consensus as to when particular events occurred, or as to what took place, or as to what was said at any meetings between the participants. Dr Mahmut, who is by profession a geologist, came to Australia in May 1983. He was unable to obtain employment in his chosen profession and began to make enquiries with a view to purchasing a small business. Asa result of consulting the classified advertisements published in the "Sydney Morning Herald" newspaper on 23 July 1983, he and his wife went to see Mr Miller. The first meeting with Mr Miller, which took place on 26 July 1983, was concerned with a business other than that the subject of this proceeding. Instructions to sell Prior to Dr and Mrs Mahmut seeing Mr Miller on 26 July 1983, Mr Miller had received instructions from Mr Kovari to put the business on the market. There is a dispute as to when those instructions were given. There is 5. also a dispute as to what information concerning the business was given to Mr Miller by Mr Kovari. Mr Miller, whose evidence was taken some time before the commencement of the main hearing, gave evidence that he received those instructions about 17 May 1983. He had no independent recollection of the date and relied heavily on a document (Exhibit 1) bearing that date which he completed setting out some of the details of the business. It may be noted that a formal agency agreement authorising Mr Miller to sell the business was signed by Mr Miller and Mr Kovari on 1 August 1983 but that circumstance throws no light on the question when Mr Miller first received instructions to put the business on the market. Mr Kovari said that he had previously signed an agency agreement authorising Mr Miller to sell the business but that document is not in evidence. It was suggested to Mr Miller in cross-examination that the conversation which he had with Mr Kovari took place some time earlier - as early as February or March 1983. It was put to him that the conversation had taken place ata time when food shops in a new complex in the vicinity known as the Hunter Connection were commencing to open and that that was earlier than May 1983. However, when Mr and Mrs Kovari gave evidence, they denied that any conversation giving instructions to sell the business took place until some time in July 1983. They both said that there had been a conversation with Mr Miller in June 1982 but that they had 6. not spoken to Mr Miller again until July 1983. The version of events which was subsequently given by Mr and Mrs Kovari was not put to Mr Miller in cross-examination. In the light of Mr and Mrs Kovari's evidence that the meeting with Mr Miller took place in July 1983, counsel for the respondents, in his final submissions, drew attention to the information recorded on the document that the lease of the premises had "Approximately three anda half years to go". It was said, and correctly, that in May 1983 the unexpired term of the lease was three years and ten months. The question was asked: What reason could there be, if the document was prepared in May 1983, for recording the unexpired term of the lease as less than it, in fact, was? Did not the language used suggest that the document was prepared at a much later date? The evidence does not enable a finding to be made whether Mr Kovari, in giving information to Mr Miller, used the precise words recorded as to the unexpired term of the lease or whether Mr Miller made an approximation from what he had been told. The entry is but one of the curious features of this matter. If one were postulating complete accuracy, one would have to conclude that the document was prepared much closer to 30 September 1983, the date upon which it would have been true to say that the unexpired term of the lease was three and a half years. But so to conclude makes it almost impossible to fix a timetable for the making 7. of the alterations and additions to the document to which I will refer. There is no doubt that some of the details originally recorded on the document dated 17 May 1983 were subsequently varied. Some additional information was added. Mr Miller said that this was in accordance with the practice which he followed. As avendor informed him of changed circumstances or provided additional information about a business, he made further notations on the sheet recording the original particulars. He said that he had kept in touch with Mr Kovari over the course of some months and had been given additional material concerning the business from time to time. The document dated 17 May 1983 records the asking price of $120,000, the address and nature of the business and the owner's name and telephone number. Although there are some inconsistencies in Mr Miller's evidence, I am satisfied that, when originally completed, the document also recorded the following details: Rent : $1,000 per month, approximately $250 per week Lease : Approximately three and a half years to go Turnover : $4,500 - 5,000+ Profit : $2,000 Trial : Yes Wages and staff : $1,000 Trading hours : Monday - Friday 6.00 a.m. - 5.00 p.m. 8. Mr Miller said that, at or shortly after the details were first given to him, he made certain calculations, in the nature of a crude profit and loss statement, on the reverse side of the document. The original calculation was as follows: Turnover $4,500 Rent $ 250 Wages 1,000 Purchases 1,300 Expenses 150 approx. 2,700 $1,800 There is also a notation "Vendor says $2,000 nett". The following additions or alterations to the document were subsequently made. On the front of the document the figure shown against the item "Wages and staff" was altered to read "Approx. $900". A notation was made which shows the turnover of the business for the week ending 1 July 1983 as $5,285. A further notation "Vendor 4 yrs" was made. Mr Miller thought the latter notation meant that the vendor had been in the business for approximately that period of time. The figures on the back of the document were also altered. The turnover figure was increased to $5,000, the wages were reduced to $900 and the purchases increased to $1,500. Total expenses were then shown as $2,800 and the resulting profit figure shown, not mathematically accurately, as $1,800 - $2,000. Mr Miller said that the amended figures for wages and staff and for purchases were given to him by Mr Kovari. 9. Mr Kovari, in his evidence, denied having given Mr Miller the details recorded on Exhibit 1. According to Mr Kovari, he had become acquainted with Mr Miller when Mr Miller sold a business in which he had been interested some time earlier. He said he talked to Mr Miller in June 1982 about selling Judy's Food Bar. He did not again speak to Mr Miller until July 1983 when he had a conversation with him in Little Hunter Street outside the shop. Mr Miller asked whether he was interested in selling the business. Mr Kovari said he had not considered selling but would sell if the price were right. Mr Miller asked him what was the turnover of the business. Mr Kovari replied that the turnover was $4,500 to $4,600. In response to other questions Mr Kovari said the rent was $230 per week and that the lease had three years eight months to run. At the end of the conversation Mr Kovari told Mr Miller to put the business on the market. In his evidence in chief, Mr Kovari said that he had a second conversation with Mr Miller a few days later. In that conversation, in response to questions from Mr Miller, Mr Kovari said that the wages were $760 - $960, and electricity, telephone and other expenses $170. Mr Kovari also said he told Mr Miller that he had not calculated what was the cost of the raw materials used in the business. He said he had agreed with Mr Miller's suggestion that the cost of raw materials in a sandwich bar business was about 40 per centum of turnover. He said that it was Mr Miller who 10. mentioned the figure of $120,000 as the amount he would get for the business. In cross-examination, Mr Kovari said that, immediately following this discussion with Mr Miller, he noted certain figures on a piece of paper. It is of interest to note that, in disclosing the existence of the paper to the solicitors for the applicants, the solicitors for the respondents ina letter dated 3 February 1986 described the paper as "notes made by Mr George Kovari at a meeting with Mr Phillip Miller on ECsic] late May/early June 1983". The document includes the following notations: Rent $ 230 Turnover $4,500 Wages 760 - 960 Other expenses 170 Materials 1,800 - 1,900 Each of those figures was said to be an estimate. Mr Kovari agreed that he had given to Mr Miller the figures for rent, wages, other expenses and turnover. He denied that he had given to Mr Miller a figure for materials. He said the figure of $1,800 for materials was determined by Mr Miller as being 40 per centum of the estimated turnover. On the document, a figure of $2,960 appears under the figure $1,800 as representing the total of the expenses but it is not clear when the items were totalled or when the figure $2,960 was written on the document. The document also contains, under the turnover figure, the following notation: "Prf 1200 - 1400". Mr ll. Kovari agreed that "Prf" was an abbreviation for profit. He said that Mr Miller worked out a profit figure of $1,400 - $1,500 based on the figures already discussed but that he, Mr Kovari, wrote down $1,200 - $1,400 as being more realistic. He denied that he had ever quoted to Mr Miller a figure for profit. The document also contains a notation showing turnover $4,800 - $5,200 followed by a Hungarian word said by Mr Kovari to mean "under" and the figure 5000. Mr Kovari said he had made those notations following a telephone conversation with Mr Miller towards the end of September 1983. Mr Miller agreed that he had discussions with Mr Kovari at the shop premises concerning the figures relating to the business and that on more than one occasion Mr Kovari gave him up to date information. He could not recall any occasion on which Mr Kovari made notes of the figures discussed. He did not agree that Mr Kovari had told him that wages varied between $760 and $960 per week. He said he could recall that the reason given for the decrease of the figure for wages on his document (Exhibit 1) from §1,000 to $900 was that one of the staff had left to go on holidays and Mr Kovari was doubtful whether he would replace her. Mr Miller did not agree that Mr Kovari had told him that the cost of purchases was between $1,800 and $1,900 a week. He did not recall being told that the net profit was $1,200 to $1,400 per week. Mr Miller said he did not remember any 12. occasion on which he and Mr Kovari worked out together figures for the weekly net profit of the business. It was put to Mr Miller in cross-examination that he said to Mr Kovari, at what Mr Kovari had described as the second meeting with him in July 1983, that the usual figure for purchases as a percentage of turnover was 40 per centum. Mr Miller did not recall any such conversation. He said that, in any event, he would not have referred to a percentage as high as 40. He said the correct figure at that time for a sandwich bar business was about one third. Mr Miller said he recalled discussing with Mr Kovari the effect which the opening of food shops in the Hunter Connection complex would have by way of decreasing the turnover of his business. He thought Mr Kovari had told him that the turnover did decrease following the opening of those shops. Mr Kovari's evidence was that the turnover decreased in March 1983 due to the opening of food shops in that complex. He also said that the turnover had "returned to normal" in about June 1983. I am satisfied that the details which I have found were recorded on the document when it was originally prepared were given to Mr Miller by Mr Kovari_ on or about the date the document bears. I do not accept Mr Kovari's evidence that no information about the business was given to Mr Miller prior to July 1983. The notation on the document recording the turnover of the business for the week ending 1 13. July 1983, a notation which was clearly made some time after the document was originally prepared, makes acceptance of Mr Kovari's version of events improbable. There is no doubt on the evidence that Mr Miller had had other prospective buyers interested in the business, their involvement probably extending, according to the evidence, over a period of a couple of months. That circumstance also makes Mr Kovari's version improbable. In so far as there 1s a conflict between what Mr Miller says he was told by Mr Kovari and Mr Kovari''s evidence in that regard, I prefer the evidence of Mr Miller. The negotiations and the purchase According to Dr Mahmut, he and his wife again saw Mr Miller at his office on a date between 8 and 11 August 1983 and had a conversation with him concerning the business. Mr Miller told him that the takings of the business were $4,500 - $5,000 per week, the net profit was $1,800 per week, wages $900 per week, purchases $1,500 per week, miscellaneous items $150 per week and that the vendor guaranteed a turnover during a proposed trial week of $4,500. Mr Miller also said, reading from a book, that the rent was $1,000 per month and that the lease was for three and ahalf years plus three years' option. However, Mr Miller was, Dr Mahmut said, uncertain at that stage whether the business was available for sale as another purchaser was interested. Mrs Mahmut's evidence as to what Mr Miller said concerning the business was to the same effect. 14. In cross-examination i1t was put to Dr Mahmut that Mr Miller had told him that the business "was doing between $1,500 and $1,800 profit". Dr Mahmut denied that any statement to that effect had been made by Mr Miller at that stage but added that the figure of $1,500 was mentioned at a meeting attended by Mr Miller and Mr and Mrs Kovari at the beginning of September 1983. Reference will be made to this meeting later in these reasons. Mr Miller's recollection was that, in a conversation in his office prior to the first meeting between Dr and Mrs Mahmut and Mr and Mrs Kovari, he would have told Dr Mahmut what had been recorded initially on Exhibit 1 with this qualification that he would not have quoted the figure for profit there recorded, namely $2,000, because "the business had depleted somewhat by reason of opposition having opened in the area". He said he quoted $1,500 - $1,800 profit. In cross-examination he agreed that what had led him to revise the figures downwards with Mr Kovari was the expectation that food shops would commence trading in the Hunter Connection complex with consequent adverse effect on the business. In cross-examination Mr Miller agreed that he could have said to Dr Mahmut that the profit had been as high as $2,000 though he did not think he had mentioned that figure to him. He added that the profits were down to $1,500 to $1,800 because the turnover had dropped a little. 15. Mr Miller was asked whether he had told Dr Mahmut that the net profit of the business was $1,300 to $1,500 per week. He said he had not done so. He agreed that, ata later date (probably some time in October 1984), he informed Dr Mahmut's solicitor that he had quoted those figures to Dr Mahmut. Mr Miller said that this occurred because he had confused Judy's Food Bar with another business. It was also suggested to Mr Miller that he mentioned those figures ina conversation in April 1985 with the respondents' solicitors. Mr Miller was unable to confirm or deny that suggestion. Dr Mahmut said that a further conversation took place between himself and Mr Miller on 15 August 1983 when Mr Miller said that, as he had not been able to contact the other intending purchaser, he regarded the business as being available for purchase. According to Dr Mahmut, Mr Miller again quoted the figures for takings, profit, wages, purchases, miscellaneous expenses and rent which had been quoted at the meeting between 8 and 11 August 1983 and stated that the lease was for three and a half years with an option for a further three years. He also said that the business hours were from 6.00 a.m. to 5.00 p.m. Monday to Friday. In cross-examination Dr Mahmut said that, during the meeting on 15 August 1983, Mr Miller told him that the business was making $1,800 profit, the purchases were $1,500 and the takings $4,500 to $5,000. He said that he asked Mr Miller why the food cost expressed as a percentage of 16. takings was as low as 30 per centum. According to Dr Mahmut, Mr Miller replied that 30 -35 per centum was normal for take-away shops, the percentage for coffee lounges being 20 - 25 per centum. He said that Mr Miller added: "But you can ask the owners about it". Mr Miller said that, based on information conveyed to him by Mr Kovari, he informed Dr and Mrs Mahmut that the building "was under some preservation order and would not be able to be pulled down". He also said that he informed Dr Mahmut that there was an existing lease of the premises and that Mr Kovari had said that he, or the purchaser of the business, "could get a longer lease but the rent would go up". According to Mr Miller, Mr Kovari had also said that he did not know by how much the rent would increase. Mr Miller did not identify when these statements were made and in this regard the comment should be made that Mr Miller was quite indefinite in his recollection of the dates on which specific events occurred. At the meeting on 15 August 1983 arrangements were made for Dr and Mrs Mahmut to inspect the business' the following day at 3.30 p.m. Dr Mahmut said that he and Mrs Mahmut accompanied Mr Miller to the premises on 16 August 1983. Mr Miller agreed that this occurred but was unable to recollect the date. According to both Dr and Mrs Mahmut, Mr Miller introduced Mr and Mrs Kovari but no conversation concerning 17. the business took place on that occasion. Mr and Mrs Kovar1 agreed that the meeting took place and that the business was not then discussed. Dr Mahmut said that on more than one occasion prior to a converation which took place on 23 or 26 August 1983 with Mr and Mrs Kovari he went to Australia Square and from the mezzanine floor of the building on that site observed the number of people frequenting the shop. He said that he was alone on those occasions. According to Mrs Mahmut there was an occasion on which she and the children accompanied Dr Mahmut on such a visit. According to Mr and Mrs Kovari, Dr and Mrs Mahmut came to the shop a couple of days after 16 August 1983 with their two children. A discussion took place about family and other general topics. There was, again, no discussion of the business. In the course of conversation, Dr Mahmut said that he had had some experience in operating a small business, in England. Dr Mahmut in his evidence did not mention this visit to the shop. According to him, a conversation concerning his business experience in England took place at a later meeting and, again, during the trial period. Mrs Mahmut referred in her evidence to a visit to the shop by Dr Mahmut and herself and the children but was unclear as to when it took place. According to Dr Mahmut, Mr Miller telephoned him some days after 16 August 1983 to confirm that the business 18. was avallable for sale and to inquire whether he was interested in purchasing it. Dr Mahmut said he expressed interest. Dr Mahmut said that, on the following day (which was either 23 or 26 August 1983), he and his wife returned to the premises with Mr Miller and saw Mr and Mrs Kovari. Dr Mahmut asked what was the net profit of the business. Mr Kovari replied: "Net profit to husband and wife is $1,800 per week". He also said, according to Dr Mahmut, that the takings of the business were $5,000 average per week, that the rent was $1,000 per month and that he had a three and a half year lease plus a_ three years' option. Mr Kovari also said that they had six casual employees and they paid $900 per week wages. In response to a question from Dr Mahmut, Mr Kovari said: "We open 6 o'clock in the morning and we close 5 o'clock in the afternoon". Mrs Mahmut asked: "How much business you do early morning and late afternoon?" Mrs Kovari replied: "We come early to do the preparations and to avoid the traffic because we come by car and in the afternoon we do not rush to go home. We do the cleaning. Therefore, we leave the shop open but we only take between $10 and $20 after half past three". Mr Kovari also said that the building was classified by the National Trust and could not be demolished. Dr Mahmut asked if he could have the business accounts as he would need to arrange a small loan from his bank. Mr Kovari said he would talk to his accountant and obtain a copy. 19. In cross-examination as to what conversation took place on this occasion, Dr Mahmut denied that Mr Miller asked Mr and Mrs Kovari if they would introduce Dr Mahmut to the landlord. He also denied that on that occasion he said that he wished to open the business at 7.00 a.m. and close it at 3.00 p.m. He said he did not ask Mr Kovari about the building being an old building. He also denied that either he or Mr Miller said that the lease was very short. Asked whether Mr Kovari had said that he could go to the landlord and ask for an extension of the lease for three years, Dr Mahmut replied that that had not been said in his hearing. He said there was no discussion about including something in the contract for the sale of the business to make it subject to the extension for three years being granted. Mrs Mahmut's evidence as to what conversation occurred at the meeting on 23 or 26 August 1983 was substantially in accord with what Dr Mahmut had said. There were, however, some differences. In addition to the information which Dr Mahmut had said Mr Kovari gave at the meeting, Mrs Mahmut said that Mr Kovari had said that the purchases were $1,500 per week. She also said that, in response to a request, Mrs Kovari gave Dr Mahmut a piece of paper on which he wrote the name of the bank where the first respondent had its business account. Both Mr and Mrs Kovari denied that any conversation such as deposed to by Dr and Mrs Mahmut took place except that Mrs Kovari agreed that there had been a request by Dr 20. Mahmut to be informed of the bank where the business account was kept. Mrs Kovari said, however, that that request was made some time in September 1983. In particular, Mr Kovari denied that on that occasion he had given Dr Mahmut any figures for net profit of the business, or for turnover, wages, mumber of staff, purchases or rent or as to the period remaining of the term of the lease or as_ to the building being protected from demolition. He said a conversation as to the hours of business took place ona later occasion when Dr Mahmut said that he would like to open at 7.00 a.m. and close at 3.00 p.m. In relation to Mrs Kovari's participation in any business conversation, he said: "My wife presents her own conversation and never ever business conversation - not ever Mr Mahmut: not ever Mr Miller. I have a conversation with them.... My wife never ever have a conversation in business matter whatsoever". According to Mr Kovari, Dr and Mrs Mahmut came to the shop with Mr Miller some days after the initial meeting but still in August 1983. This, he said, was in the afternoon after 3 o'clock. Mr Kovari said that the following conversation took place. Mr Miller stated that Dr and Mrs Mahmut wished to buy the business. Mr Miller or Dr Mahmut said that the building was very old to which Mr Kovari replied that some renovations had been made and that the building was registered under the National Trust. Dr Mahmut referred to the lease as being very short. Mr Kovari said that three years eight months remained. Mr Miller said 21. that the lease was still very short to which Mr Kovari replied: "I know the manager, Mr Harry Sly, in the Club and I can go up andask for three years' extension for my lease". Mr Kovari asked Mr Miller to send a draft contract to his solicitor. Mr Miller said the draft would include a provision that, 1f the three years' extension was not granted, the deal would not proceed. Mrs Kovari's evidence as to what took place was substantially to the same effect. Mr Kovari said that, in late August, after the above conversation, he saw Mr Webster of the New South Wales Sports Club Limited, Mr Sly having retired. Mr Kovari asked for a three years' extension of his lease at the same rental as was payable under the existing lease. According to Mr Kovari, Mr Webster said he would put the request to the house committee of the Club which met every four weeks and, if the house committee approved, the matter would go to the board of directors. Mr Webster asked that the request be put in writing. It was not, however, until 6 September 1983 that Mr Kovari wrote to the Club. The letter refers to the grant of an option for renewal and reads as follows: "We refer to the lease dated 2nd May, 1972 between the club and Vlahos which was subsequently assigned to us. The lease expires on 3ist March, 1987 and we would like to now obtain from the club an option to renew the lease for a further three years to 3lst March, 1990. We would be most appreciative 1f you would give this request your favourable consideration and let us have your decision as soon as possible." 22. Mr Kovari also said that, a few days after the meeting with Mr Webster in late August 1983, he again saw Dr Mahmut who was alone. Dr Mahmut asked what was' the turnover. Mr Kovari said it was $4,000 - $4,500 and added that Dr Mahmut would see what it was in the trial period. Mrs Kovari also gave evidence of this conversation. She said that Dr Mahmut asked what were the takings and her husband replied: "I guarantee $4,500 for the trial and you will see how much we take". On 1 September 1983 Dr and Mrs Mahmut paid §5,000 by way of part deposit to Mr Miller at his office. Dr Mahmut said that Mr Miller read to him the salient provisions of a draft contract which he, Mr Miller, had prepared for another prospective purchaser of the business. The draft included a provision placing a value of $10,000 on the equipment anda figure of $110,000 for goodwill. Dr Mahmut objected to this and Mr Miller said he would value the equipment and amend the draft contract to include the equipment at its current value. Dr Mahmut said, in cross~-examination, that he did not have any conversation with Mr Miller to the effect that the contract should be expressed to be conditional upon the granting of an option for a further lease. Mr Miller made an appointment with Mr Morck of Messrs Morck & Hill, Solicitors, for the following day. On that day he introduced Dr Mahmut to Mr Morck and Dr Mahmut instructed the solicitors to ack for him in connection with the purchase. Mr Hill of that firm subsequently acted for Dr Mahmut. 23. Dr Mahmut said that early in September 1983 he received the 1981 and 1982 accounts of the business. In his evidence in chief he said he obtained the documents from Mr Miller but in cross-examination he said he was not sure who gave him the documents. The documents which Dr Mahmut said he received were not tendered in evidence. They were also mot disclosed in the affidavits of discovery sworn by Dr Mahmut. Dr Mahmut said that at about the time he received the 1981 and 1982 accounts he asked Mr Miller whether he could obtain the 1983 accounts. According to Dr Mahmut he subsequently went to the shop with Mrs Mahmut and Mr Miller and asked Mr and Mrs Kovari whether he could have the 1983 accounts. Mr Kovari said that the 1983 accounts were not ready and added: "Since 30 June 1982 we are making our actual $1,800 per week". Dr Mahmut commented that the 1981 and 1982 accounts did not show $1,800 per week profit and Mr Kovari replied: "Nobody in this business shows their actual takings, otherwise we pay too much tax". Dr Mahmut also commented that according to Mr Kovari's estimation the purchases were only 30 per cent. but on the accounts they were very high. Mrs Kovari said: "We take some home as well. We do not make separate shopping. This is why they are high". In cross-examination, Dr Mahmut expanded somewhat on what was said concerning the weekly net profit of the business. He said: 24. "Mr Miller first told me $1800 profit and when we went and saw Mr and Mrs' Kovari at the shop in early September and when Mrs Kovari told me, 'The minimum profit per week is $1500 but we averaged $1800 per week and the profit is between $1500 and $2000 per week', then Mr Miller told me that 1s $1500 minimum, $1800 average per week." Mrs Mahmut also gave evidence of this conversation. She confirmed the conversation as recounted by Dr Mahmut. She also said that she had said: "How can you be sure you are making $1,800 net profit to husband and wife?" to which Mrs Kovari replied: "Oh, this is a nice shop. You will see when you buy the shop. It is really good. We are making net profit to husband and wife $1,800". Mrs Mahmut said that Mrs Kovari also stated that the minimum net profit was $1,500. Mr and Mrs Kovari both denied that any such conversation took place. In particular, they denied that there was any discussion about the takings or the net profit and they denied that any request had been made for the business accounts. Mr Miller prepared a draft form of contract and sent copies thereof to the solicitors for the respective parties. This was done between 1 and 5 September 1983. Dr Mahmut's evidence was that, during the first half of September - it was suggested to Dr Mahmut it was 5 September 1983 but he thought it more likely to have been 10 September 1983 - Mr Hill explained to him the terms of the 25. draft contract which had been prepared by Mr Miller. In that draft, clause 28 read as follows: "28. This agreement 1s made conditional on the Lessor granting the Purchaser an option to take a further lease of the premises of not less than 3 years following the expiration of the present lease." Dr Mahmut said that Mr Hill suggested that it be amended by the addition of the following: "The rental in each year of such further lease to be that agreed upon by the Lessor to Csicl the Purchaser and failing agreement market rent determined by the Valuer appointed by the President of the Real Estate Institute of New South Wales or his Deputy the determined rent not to be less than the rent in the year immediately preceding. Should the Lessor fail to agree to grant such an option or any option in other terms acceptable to the Purchaser within twenty one (21) days of the date of this agreement either party may terminate this agreement by notice in writing to the other in which event all monies paid will be refunded without deduction." Mr Hill said he would negotiate the amendment with the vendor's solicitors and this he apparently did. Dr Mahmut said that subsequently, he thought about 15 September 1983, he had the terms of the existing lease explained to him by Mr Hill. He said he then became aware for the first time that the lease did not contain an option for renewal. He said he was not concerned, however, because of the assurance given to Mr Miller by Mr Kovari that there was no doubt that he (Mr Kovari) could obtain the three years' option. That information had been given to him, so 26. Dr Mahmut said, in a telephone conversation he had with Mr Miller. Mr Miller had said that he had been informed by Mr Kovari that he was certain he could get the three years' option and that the matter had gone to the house committee of the Club for formal approval. There 15 in evidence a note, apparently prepared by Mr Morck, Solicitor, on 6 September 1983 recording that instructions had been received to act for Dr and Mrs Mahmut on 5 September 1983. The document also records that Mr Morck interviewed Dr and Mrs Mahmut on that date following which he spoke to the vendor's solicitor concerning amendments to the draft contract including a requirement that there be an addition to clause 28. The note also records that Mr Morck explained the lease to Dr and Mrs Mahmut . According to Mr Kovari, Dr and Mrs Mahmut and Mr Miller came to the shop on approximately 20 September 1983. Mr Miller asked whether Mr Kovari had seen the manager of the Club. Mr Kovari said he had seen Mr Webster. He gave the substance of the conversation he had had with Mr Webster and which is referred to above. According to Mr Kovari, Mr Miller said that Mr Kovari could sign the contract because it would contain a provision that the deal was off if the extension of the lease were not granted. Mr Kovari said he again went to see Mr Webster some time before 27 September 1983. A Mr Cobley was present. Mr 27. Kovari said he was told it was unlikely an extension of the lease at the existing rental would be granted but that a lease for seven years might be granted at a market rental. On 23 September 1983 contract documents for the sale of the business were exchanged. The consideration was shown as $120,000 plus stock at valuation. This contract was subsequently replaced by a contract dated 12 October 1983 for a smaller consideration. According to Dr Mahmut, Mr Kovari introduced him to Mr Webster on 27 September 1983. Mr Kovari, he said, left immediately after the introduction. There is no evidence as to what was said at that conversation. If Dr Mahmut's evidence is accepted, the meeting took place before a decision had been made by the board of directors of the Club upon Mr Kovari's request dated 6 September 1983. Mr Kovari's evidence was that 1t was not until 6 October 1983 that he introduced Dr Mahmut to Mr Webster. On 28 September 1983 Dr and Mrs Mahmut paid to Mr Miller the sum of $7,000, being the balance of the deposit payable under the contract made on 23 September 1983. Dr Mahmut's evidence was that on 28 September 1983, Mr Miller telephoned him and informed him that Mr Kovari had told him (Mr Miller) that the three years' option had not been granted but that a new "three by three year lease" had been offered by the landlord. Dr Mahmut told Mr Miller that 28. they would wait until the new lease had been granted before purchasing the business and they would adjust the contract price accordingly. There was, Dr Mahmut said, no conversation about the amount of the rent under the suggested new lease. Counsel did not ask Mr Miller any questions concerning the information said to have been given to him by Mr Kovari. Dr Mahmut said that on the same day Mr Miller told him that Mr and Mrs Kovari wished to have a discussion about the purchase of the business. According to Dr Mahmut, a meeting was arranged for the following day at the shop. Dr Mahmut said that at the meeting, attended by Mrs Mahmut and himself, Mr and Mrs Kovari and Mr Miller, the following conversation took place: "Mr Kovari told us that the owners offered a new three by three lease with their higher rent but he said we can take up the new lease any time we want. I replied, 'We would like you to take the new lease and we will deduct the difference between the new rent, and then we will huy the business'. Mr Kovari said, 'The owners asked Raine and Horne to give a value of the premises and until they give a value of the premises and a new lease is drawn, it will take some time. They Csicl] want to sell the shop as soon as possible'. Mr Kovari said, 'Because I am not very well, I got a_ knee trouble, my knee is swollen, I would like to go overseas for treatment'. My wife said, 'I am sorry to hear you got an illness but we will be better off to have the new lease and this way we will know how much rent we will be paying and it will cost us less to buy the shop'. Mr Kovari replied, 'You should not have any problem of getting the lease any time you want and why should you not pay the lower rent for another three and a half years before you can take up the new lease?' I said to him, 'We are not intending staying in this business for the three and a half years period'....Mr Kovari1 said that the owners are the best owners he had during 29. his 26 years business time and we should not have any difficulty of getting the new rent and since the building is protected as well, we will be better off to buy the shop with the existing lease." Mrs Mahmut confirmed the substance of Dr Mahmut's evidence of this conversation. Mr and Mrs Kovari both denied that any such conversation took place. Dr Mahmut said that on 30 September 1983 he again called on Mr Webster. According to his evidence, Mr Webster said that "a new four by four lease is being offered to Mr and Mrs Kovari" and that he (Dr Mahmut) would have to wait until the new lease was granted before he could purchase the business and be accepted as the new tenant. Mr Webster had said that Raine and Horne were to value the shop for the Purposes of the new lease to Mr and Mrs Kovari. In cross-examination, he denied that Mr Webster had said that a similar lease was being offered in respect of an adjoining shop but said that Mr Kovari had so informed him. He said that it was not until July or August 1984 that Mr Webster had told him that anew lease had in September 1983 been granted to the adjoining shop. He denied that Mr Webster told him that he (Dr Mahmut) could, after purchasing the business, get a new lease at market rent if he applied for one. Dr Mahmut said that, after his conversation with Mr Webster, he had a conversation with Mr Kovari. At Mr Kovari's suggestion they returned to Mr Webster's office and 30. nad a conversation with Mr Webster concerning the proposed new lease. According to Dr Mahmut, Mr Kovari stated that he wished to sell the business with the existing lease. Mr Webster said that a new lease was being offered to which Mr Kovari responded that he had talked to his solicitor who unformed him that he could sell the business with the existing lease and Dr Mahmut could take up the new lease any time he wanted. Mr Webster said he would have to consult the Club's solicitors. According to Mr Kovari, no such conversation took Place. What is more, according to Mr Kovari, no such meeting took place between himself, Dr Mahmut and Mr Webster. He said that the only time the three were together was on 6 October 1983 when he introduced Dr Mahmut to Mr Webster and then left. According to Dr Mahmut, Mr Miller telephoned him and told him that Mr Kovari had informed him that the Club's Manager had agreed that Dr and Mrs Mahmut could take the present lease and get a new lease any time they wished. Dr Mahmut said he asked Mr Miller to arrange another meeting with Mr and Mrs Kovari. Dr Mahmut said that that meeting took place on Tuesday, 4 October 1983. He said that Mr Kovar1 confirmed that Mr Webster had agreed that Dr and Mrs Mahmut could take up the existing lease and get a new lease any time they wished. There was some discussion as to why Mr and Mrs 31. Kovar1 would not take up the new lease before the sale took Place. Mr Kovari said that they did not wish to take up the new lease because they were not sure that Dr and Mrs Mahmut were going to buy the business. Mr and Mrs Kovari denied that any such meeting or conversation took place. In particular, Mr Kovari denied that he had ever told Dr Mahmut that Mr Webster had agreed that Dr and Mrs Mahmut could take up a new lease at any time they wanted. Dr Mahmut said that on the following day, 5 October 1983, he had a conversation with Mr Miller discussing, in particular, what the increase in the rent would be likely to be under the proposed new lease. Mr Miller said, according to Dr Mahmut, that the rent would probably increase to $350 per week. Dr Mahmut said that he would want to reduce the purchase price by between $18,000 and $20,000 if the new lease were to be taken up. According to Dr Mahmut, Mr Miller said he did not think Mr and Mrs Kovari would agree to such a large reduction in the sale price. Dr Mahmut said that later that evening he telephoned Mr Miller and told him to offer Mr and Mrs Kovari $100,000 for the shop. According to Dr Mahmut, he decided on 6 October 1983 to go ahead with the purchase of the business. He did not explain whether at that time the consideration of $104,000 shown in the contract subsequently entered into had 32. been agreed or, if so, by what steps agreement had been reached. According to Mr Kovari, the events which took place were quite different. According to his evidence, he saw Mr Webster on 28 September 1983 and was informed that the extension of the lease would not be granted. Mr Kovari said he telephoned Mr Miller and informed him of what Mr Webster had said. Mr Miller said that, in those circumstances, he did not think Dr Mahmut would be interested in purchasing the business but he would find out. Mr Miller telephoned a short time later and confirmed that Dr Mahmut was not interested. Mr Kovari said that, on Friday, 30 September 1983, Dr Mahmut came to the shop alone at about 4.00 p.m. and said: "I offer you $104,000 for the business but not one cent more". Mr Kovari said he would need to speak to his wife and to Mr Miller about the offer. Mr Kovari said he telephoned Mr Miller the same day. He said Mr Miller told him he knew nothing of the offer but said he would speak to Dr Mahmut. Mr Miller telephoned later to say Dr Mahmut wanted to take over the business as soon as possible. Mr Kovari said he told Mr Miller be was prepared to sell at that price. Arrangements were made for a new draft contract to be sent to Mr Kovari''s solicitor. Mr Kovari said that it was on Thursday, 6 October 1983 that Dr Mahmut came to the shop before lunch and asked 33. to be introduced to the manager of the Club. Mr Kovari said he did this but that, having introduced Dr Mahmut to Mr Webster, he left Mr Webster's office and returned to the shop. Mr Webster, the Secretary/Manager of New South Wales Sports Club Limited, was called as a witness by the applicants. He did not have a very clear recollection of what had occurred. Taking his evidence as a whole, his recollection was that Mr Kovari came to see him in September 1983 and used words to the effect that he had come to ask for a favour, namely an extension of three years on his lease at the current rental. In his evidence in chief, Mr Webster said that he told Mr Kovari that the request would have to be referred to the board of directors of the Club. In cross-examination, he agreed that he would have said to Mr Kovari something to the effect that the house committee was meeting on the following Tuesday, that he would put the request to that committee and that Mr Kovari should put his request in writing. According to Mr Webster, the house committee met once a month usually on the third Monday of the month. The third Monday in September 1983 was the nineteenth. As the request was subsequently made in writing by a latter dated 6 September 1983, Mr Webster's evidence that it was to go to the house committee on the Tuesday following his meeting with Mr Kovari cannot be correct. The evidence does not, I think, establish that the matter ever went before the house committee. It was, however, put toa meeting of the board of directors of the Club on 27 34. September 1983. I have already set out the text of the letter dated 6 September 1983. That letter did not request an extension of the term of the lease but requested the grant of an option to renew the lease for a period of three years from 31 March 1987. Mr Webster said that he had a further meeting with Mr Kovari at which Mr Cobley, a director of the Club, was present but he had no clear recollection of what was said. This meeting, Mr Webster thought, took place between 19 and 27 September 1983. The only relevant record in the minutes of the meeting of the board of directors on 27 September 1983 reads as follows: "Re: Lease Mr and Mrs G. Kovari: Subsequent to much discussion the following was moved. Motion: That advice be sought from the Club's Legal Advisers regarding the lease and furthermore request Raine and Horne for a rental valuation. Proposed - N. Cobley Seconded - I. Boyce Carried." Mr Webster said that he was present at the board meeting. He said that the board was not prepared to agree to the lease being extended at the same rent. He said that there was a discussion whether the Club could insist upon Mr and Mrs Kovari taking a new lease at an increased rental to be determined by Raine and Horne. He said that the board 35. instructed him to consult the Club's. solicitor on this proposal. Mr Webster denied that the board had decided that they would grant a new lease to Mr and Mrs Kovari 1f that could legally be done. What the board required was legal advice on the question before making a decision. In the event, the advice given to the board was that the board could not insist on Mr and Mrs Kovari taking a new lease at an increased rent. Mr Webster said that after the board meeting he spoke to Mr Kovari and told him what had happened. He said he told Mr Kovari that the board was seeking legal advice. In his evidence in chief, he said that he told Mr Kovari that the terms of the lease would have to continue as they were until April 1987 and that under no circumstances would the lease be changed. In cross-examination he said he did not think he had told Mr Kovari that the board had decided not to extend the lease at the existing rental. Mr Webster agreed that Mr Kovari had brought Dr Mahmut to his office and introduced him. In his evidence in chief, Mr Webster said that Dr Mahmut accompanied Mr Kovari when Mr Kovari made the request for an extension of the lease. In cross-examination he said that he thought Mr Kovar1 had introduced Dr Mahmut to him some time in October 1983, certainly after the board meeting on 27 September 1983, and that that was the first occasion on which he had met Dr Mahmut. 36. On 12 October 1983 a new contract was entered into for the purchase of the business, the consideration being shown as $104,000 plus stock at valuation. There was no provision in that contract corresponding to clause 28 of the contract dated 23 September 1983. Dr and Mrs Mahmut attended the shop during the period 10 to 14 October 1983, a period described as the trial week. Five cash tills were operating. Each morning Mr and Mrs Kovari placed change totalling $50 in each of two cash registers and $30 in each of the other three. Neither Dr Mahmut nor his wife counted the change put into the cash registers. At the end of each day Dr Mahmut and Mr Kovari counted the money in three cash registers while Mrs Mahmut and Mrs Kovaril counted the remaining two. Agreement was reached as to how much was in the tills at the end of the day less the amount introduced in the morning for change and Dr Mahmut and Mr Kovari signed a paper recording the takings for each day. The total of the amounts so recorded was $4,902 for the week. At the end of that week settlement under the contract took place and Dr and Mrs Mahmut commenced to run the business from 17 October 1986, Mr and Mrs Kovari staying on for one week to assist. The takings of the first week of the business under the new management were $4,406. According to Mr Kovari, at the end of the first week after Dr and Mrs Mahmut took over the business, he asked Dr Mahmut how were the takings to which Dr Mahmut replied: "It is 37. very good, George". Dr Mahmut did not agree that any such conversation took place. The main witnesses Dr Mahmut was an impressive witness. He displayed obvious care in considering each question asked of him and in formulating his answer. For the most part, his answers were responsive to what he had been asked and were expressed with an economy of words. I have no doubt that he was sincere in giving his best recollection of the events as they occurred and of the conversations he had with Mr Miller, Mr and Mrs Kovari and Mr Webster. There are, however, some inconsistencies in, and some unsatisfactory features of, his evidence. There are also inconsistencies between his evidence and that of other witnesses. I am satisfied that, in some respects, his recollection is at fault. While, therefore, I accept him as basically a witness of truth, I am unable to accept his evidence in its entirety. In marked contrast to the demeanour of Dr Mahmut was the demeanour of Mr Kovari. Even allowing for difficulties in communication, Mr Kovari was an unsatisfactory witness. Far too frequently his answers were unresponsive to the questions put to him, even those put by his own counsel. I have grave reservations about accepting much of his evidence. 38. Mrs Mahmut and Mrs Kovari for the most part mirrored the evidence given by Dr Mahmut and Mr Kovari respectively. There are, however, some differences between the evidence given by husband and wife concerning the same events. I did not find Mrs Mahmut's evidence of much assistance as her recollection of events was selective. She recalled those aspects of the conversations with Mr Miller and with Mr and Mrs Kovari that were essential to the applicant's case but she had little or no recollection of other events. Equally, I did not find Mrs Kovari's evidence of much assistance in endeavouring to determine where the truth lay. The first representation The first of the representations, as pleaded, is that the first respondent, by its agent Phillip Charles Miller, orally represented to the applicants that' the business was making a profit of $1,500 to $1,800 per week to a husband and wife both working in the business. Mr Miller's evidence, if accepted, supports a finding that he made a representation in the above terms. Counsel for the respondents submitted that I should reject his evidence as unconvincing on the ground that he had no Clear recollection of the details of the conversations he had with Dr and Mrs Mahmut and on the further ground that he had, in October 1984 to the applicants' solicitor and in April 1985 to the respondents' solicitor, said that his recollection then was that what he had told Dr and Mrs 39. Mahmut was that the business had earned a net profit of $1,300 to $1,500 a week. It must be accepted, I think, that Mr Miller did make such a statement to the applicants' solicitor though he insisted that, when he received a statement in written form of what he had said, he realised he had made an error and corrected it to read $1,500 to $1,800. So far as his conversation with the respondents' solicitor is concerned, he was not prepared to deny that he had made the statement attributed to him though I think it is fair to say he had no real recollection of it. A difficulty arises because both Dr and Mrs Mahmut do not agree that, at the initial meetings with Mr Miller when the representation 1s said to have been made, he quoted to them a range of net profit figures. Both Dr and Mrs Mahmut did say in evidence that Mr Miller, during the course of a conversation in September 1983 at which Mr and Mrs Kovari were present, did comment upon a net profit figure of $1,500 mentioned by Mrs Kovari. However, they were both adamant that, during the conversations with Mr Miller prior to the first visit to the shop, Mr Miller had quoted $1,800, neither more nor less. Some assistance can, I think, be gained from the document (Exhibit 1) which Mr Miller prepared, as I have found, at or about the time that figures relating to the business were given to him by Mr Kovari. Mr Miller's 40. evidence was that he relied on what was recorded on that document when speaking to Dr and Mrs Mahmut. Dr Mahmut 's evidence was that Mr Miller read the figures he quoted from a book. Mrs Mahmut referred to a file. I have no doubt that it was from Exhibit 1 that Mr Miller was reading. That document clearly supports the view that Mr Miller quoted $1,800 as the figure for net profit. The document does not refer to $1,500 and no combination of the figures recorded produces that result. Counsel for the respondents relied upon the answers given by Mr Miller to certain questions put to him in cross-examination suggesting that the correct profit figure derived from Exhibit 1 after the alterations had been made to the figures for wages and purchases was $1,700 and that he, Mr Miller, would not have quoted to Dr Mahmut any figure for profit in excess of that. The final question on this aspect and Mr Miller's response were: "Q. So may we take it that you would not have said to Mr Mahmut that the true profitability of the business exceeded that figure of $1,700 a week? A. No. I would not have done that." I am unable to say whether that answer reflects some misunderstanding of the question being put to him _but, whatever the explanation, the answer is entirely inconsistent with the rest of Mr Miller's evidence that he informed Dr Mahmut that the profit was $1,500 to $1,800 per 41. week. He reiterated that statement almost immediately after his answer that he would not have told Dr Mahmut a figure in excess of $1,700 per week. In the light of the whole of Mr Miller's evidence, the answer as to $1,700 cannot, I think, be given any weight. Taking into account the whole of the evidence, I am satisfied, and I so find, that Mr Miller represented to the applicants that the business was making a net profit of $1,800 per week to a husband and wife both working in the business. I am also satisfied, and I so find, that Mr Miller made that representation on the basis of figures supplied to him by Mr Kovari for the very purpose of informing prospective purchasers of the business of its financial position. Mr Miller, in passing on that material to Dr and Mrs Mahmut was acting on behalf of the first respondent. The second representation I turn now to the second of the representations as pleaded, namely that each of the second respondents orally represented to the applicants that the business was making a profit of $1,500 to $1,800 per week to a husband and wife both working in the business. It would probably be a more accurate way of stating the matter to attribute the representation to the first respondent, it being alleged that it was made by each of the second respondents on behalf of the first respondent. 42. In relation to this representation, there is, again, an inconsistency between the representation as pleaded and the evidence given by the applicants. There 1s also a conflict of evidence between Dr and Mrs Mahmut on the one hand and Mr and Mrs Kovari on the other. Dr and Mrs Mahmut's evidence supports a finding that at the meeting on 23 or 26 August 1983 Mr Kovar1 represented that the business was returning a net profit of $1,800 per week to husband and wife. Neither Dr Mahmut nor Mrs Mahmut, in recounting what was said at that meeting, referred to any statement to the effect that the net profit was $1,500 to $1,800 per week. Mr Kovari 1s said to have again quoted the figure of $1,800 in a conversation in September 1983. Mrs Mahmut's evidence was that Mrs Kovari had referred to the net profit as being $1,800 with a minimum of $1,500. In cross-examination, Dr Mahmut attributed to Mrs Kovari statements to the effect that the minimum profit per week was $1,500 that the net profit was between $1,500 and $2,000, the average being $1,800. Counsel for the respondents submitted that, in the light of the inconsistencies in the evidence given on behalf of the applicants, I could not be satisfied that any representation as to the net profit of the business was made by Mr or Mrs Kovari. He also drew attention to the evidence of Mr and Mrs Kovari denying the conversations alleged by Dr and Mrs Mahmut to have taken place in relation to the financial history of the business. In this regard, it is to 43. be noted that, according to Mr and Mrs Kovari, the only question asked of them by Dr or Mrs Mahmut in relation to the financial position of the business was a request to be told the turnover - a request said to have been made in late August or early September 1983. According to Mr Kovari, he then told Dr Mahmut the turnover was $4,000 - $4,500 per week. According to Mrs Kovari, Dr Mahmut was only told that the figure of $4,500 was guaranteed for the trial week. Counsel for the respondents, in submitting that the evidence of Dr and Mrs Mahmut' should be rejected, referred to the evidence given by them that they had received the basic information concerning the business from Mr Miller. Counsel asked, rhetorically, why would they ask questions of Mr and Mrs Kovari designed to elicit the same information without saying what they had been told by Mr Miller. He also referred to the evidence given by Dr and Mrs Mahmut that they had been told both by Mr Miller and by Mr Kovari that the lease of the premises contained an option fora further three year term, evidence which was not supported by Mr Miller and was denied by Mr Kovari. It was also submitted that Dr Mahmut's evidence concerning the request for the accounts of the business and the subsequent provision of the accounts for 1981 and 1982 was not to be believed because of the contrary evidence given by Mr and Mrs Kovari and the circumstance that the documents which Dr Mahmut said he received were not produced either on discovery or during the hearing. 44. I observed Dr Mahmut over the period of the hearing both in and out of the witness box. He 1s clearly a careful and cautious man and Ido not find it surprising that he should approach Mr and Mrs Kovari concerning the financial details of the business even though he had already been given details by Mr Miller. Clearly there are difficulties in accepting the whole of the evidence of Dr and Mrs Mahmut but I am confronted with a situation in which I can only regard the alternative version of what took place, that given by Mr and Mrs Kovari, as highly improbable. It is not a case where there are differences in emphasis or differences which can be explained simply by deficiencies in recollection. To accept the version of events deposed to by Mr and Mrs Kovari requires the conclusion that Dr and Mrs Mahmut determined to purchase the business virtually on the basis of the details given to them by Mr Miller, details which, incidentally, differ, according to Mr Kovari, from the figures which he quoted to Mr Miller, and from casual observations which Dr Mahmut made ona few occasions from Australia Square of the number of persons frequenting the premises. To accept that Dr Mahmut acted in that way would be completely out of character. It would deny the careful and cautious approach which he exhibited during the hearing. In the melange of assertion, counter-assertion and denial with which the Court is faced, the truth is not easy to discover. One would have hoped that the evidence of the only independent witness to the conversations, Mr Miller, would have been of considerable assistance in resolving the 45. conflict. Mr Miller's evidence was, however, of no assistance as to what was said at any of the conversations between Dr and Mrs Mahmut and Mr and Mrs' Kovari which may have taken place after the initial meeting between them on 16 August 1983. He did say, as I have already mentioned, that Mr Kovari informed him that a purchaser of the business could get a longer lease but the context in which that was said 1s not clear from his evidence. He could recall no conversation between Dr Mahmut and Mr Kovari concerning the accounts of the business. Acknowledging that the matter is not clear cut, I prefer the evidence of Dr and Mrs Mahmut. [I find that Mr and Mrs Kovari, acting on behalf of the first respondent, did represent to the applicants that the business was making anet profit of $1,800 per week to a husband and wife both working in the business. The third representation The third representation relied upon is a representation that Mr Kovari orally represented to the applicants that the lessor of the premises had stated that it would provide the applicants with a new lease upon application. Dr and Mrs Mahmut say that they were told by Mr Miller that the existing lease was for three and a half years with an option for a further three years. Mr Miller was not asked specifically whether he had used words to that 46. effect but the evidence given concerning subsequent events, the circumstance that the lease contained no option clause and the fact that the document prepared by Mr Miller and dated 17 May 1983 (Exhibit 1) contains no reference to an option lead me to think that he did not in the initial conversations with Dr and Mrs Mahmut refer to an option for three years or for any other term. It is of particular significance that, when Mr Miller prepared the draft contract early in September 1983, he included a provision (clause 28) making the contract conditional upon the lessor granting to the applicants "an option to take a further lease of the premises of not less than 3 years following the expiration of the present lease". Iam satisfied that Dr and Mrs Mahmut are mistaken in attributing to Mr Miller a statement that the lease contained an option clause. Dr and Mrs Mahmut attribute a similar statement to Mr Kovari at the meeting on 23 or 26 August 1983. Mr and Mrs Kovari say that, at a meeting which they say occurred in August 1983 but some days after the initial meeting on 16 August 1983, there was a discussion about the lease. According to their evidence, Dr Mahmut and Mr Miller both expressed the view that the unexpired term was. short. According to Mr and Mrs Kovari, Mr Kovari said he would approach the landlord "and ask for three years' extension of my lease". Dr Mahmut does not agree that a conversation in these terms took place. 47. There is a good deal of confusion in the evidence whether what was spoken of was an extension of the term of the existing lease, presumably at the same low rent, or the granting of an option permitting the tenant to extend the term. Mr Kovari says he requested of Mr Webster an extension of the term of the lease yet the letter dated 6 September 1983 refers to the grant of an option. Presumably what was sought was an option at the rent reserved in the lease, not at a market rental, though, curiously, that was not made clear. It was also not made clear in the draft of clause 28 of the contract prepared by Mr Miller. There is no doubt that, at some time prior to 23 September 1983 when the first contract was signed, Dr Mahmut became aware that the lease contained no option clause. He insisted that it was not until about the middle of September 1983 that he became aware of that fact. However, in this he is, inmy view, also mistaken. Mr Morck's note dated 6 September 1983 makes it clear that the lease was explained to Dr and Mrs Mahmut on the preceding day. Although there is no direct evidence on the point, one cannot imagine that the absence of an option clause would not have been discussed. There is also no doubt that security of tenure for a period longer than three and a half years was a matter of concern to Dr Mahmut in whatever terms that topic was discussed. Dr Mahmut said in evidence that he was particularly concerned about getting a longer lease because 48. he only intended to operate the business until he could obtain employment as a geologist and it would be difficult to sell the business if it only had a short term lease. It can also be accepted that Mr Kovari1 made an approach to the landlord for a variation of the lease, either to extend the term or to grant an option for renewal, and that the Club, as landlord, was not prepared to extend the lease at the same low rental. It was however, according to Mr Webster, concerned to seek legal advice on the question whether, as a condition of agreeing to an assignment of the lease from Mr and Mrs Kovari to Dr and Mrs Mahmut, 1t could insist on an increase in the rental. Mr Webster's evidence as to the conversations he had with Mr Kovari is not entirely satisfactory. I have already referred to his evidence and to the conflicting evidence of Dr Mahmut and Mr Kovari in relation to this aspect of the matter. Taking the whole of that evidence into account, I am not satisfied that Mr Kovari made a representation in the terms alleged or that, if he did so, Dr Mahmut relied upon it. Although Mr Webster denied that the board of directors of the Club had decided that they were prepared to grant a new lease to Mr and Mrs' Kovari, 1t may be accepted that a surrender of the existing lease and the grant of a new lease at a market rental would have achieved the Club's objective. In these circumstances one may accept Mr Kovari1's evidence that Mr Webster had said that a new lease would be granted. 49. Indeed Dr Mahmut's evidence is to the effect that he was told by Mr Webster that such an offer, though in different terms to those mentioned by Mr Kovari, had been offered. I have no doubt that there was a discussion between Mr Kovari and Dr Mahmut about a new lease but I am not satisfied that Mr Kovari used words which are to be read as an assurance that the Club had committed itself to granting a new lease which could be taken up by Dr and Mrs Mahmut at any time. The fourth representation The fourth representation as pleaded is that Mr Kovari orally represented to the applicants that the leased premises were part of a building subject to a preservation order and, therefore, could not be developed. In the result, the applicants did not rely upon this representation and I need say nothing further about it. Liability I have found that the first respondent, by its agent Mr Miller, orally represented to the applicants that the business was making a net profit of $1,800 per week toa husband and wife both working in the business and that that representation was based on figures supplied by Mr Kovari. I have also found that the first respondent, through the agency of both Mr and Mrs Kovari, made a representation to the applicants to the same effect. 50. There is no dispute between the parties that a representation in those terms was false. It clearly stated a figure substantially in excess of the net profit which the business had returned. The conduct of the first respondent in making the representation was, therefore, conduct which was misleading or deceptive or likely to mislead or deceive and so im contravention of s.52 of the Act. Mr and Mrs Kovari were clearly involved in the sense mentioned in s.75B of the Act in the contravention by the first respondent of s.52 in that they, as directors of the first respondent made, and were parties to the making of, the representation in the circumstances secondly referred to. The statement of claim is, perhaps, defective in that it does not allege that Mr or Mrs Kovari were knowingly concerned in, or party to, the making of the representation by Mr Miller. On the evidence, one could not conclude that Mrs Kovari was so involved. Mr Kovari's position is by no means so clear. An application was made on the last day of the hearing to allow yet another amendment of the statement of claim to remedy the defect. I am not prepared to allow that amendment. It ceases to be of much significance in view of the conclusion which I have reached in relation to representation (b). Dr Mahmut's evidence was that he believed from what he had been told that the net profit of the business had averaged $1,800 per week during the whole of 1983. He further said that in entering into the contract to purchase 51. the business he relied on, and was influenced by, that statement. I am satisfied that one of the factors that induced the applicants to enter into the agreement dated 12 October 1983 was the representation made as to the net profit of the business. Damages Section 82(1) of the Act refers to loss or damage suffered by the conduct of another person that was done in contravention of a provision of Part V, which includes s.52. It looks to the loss or damage flowing from the offending conduct: Gates v. City Mutual Life Assurance Society Ltd. (1986) 63 A.L.R. 600. In the present case that loss or damage is to be measured by the difference between the price paid for the business ($104,000) and its true value at the date of the contract for its purchase. Evidence relevant to the method of valuation which should be adopted and the value of the property at the date of purchase was given, on behalf of the applicants, by Heinz Ludwig Mottek, a retired real estate agent and auctioneer, and Gregory George McLeay, Chartered Accountant in the employ of Deloitte Haskins and Sells and, on behalf of the respondents, by John Henry Banks, a partner of Touche Ross and Co., Management Consultants and George Lazaris, a licensed real estate agent. It should come as no surprise to the reader of these reasons that there was no consensus between these witnesses either as to the value of the 52. business at the date of purchase or even as to the correct approach to be taken in determining that value. Mr Mottek's approach was to rely simply on the vendor's net profit figures. He said that under normal circumstances he would allow a take away food business twelve months of net profit to which was to be added the written down value of plant, fittings and fixtures. Although he did say that there were other factors, such as the terms of the lease, the prices being charged by the vendor for goods sold in the business and the profit margin on which the vendor was operating, he did not indicate what, if any, allowance he would make in that regard when valuing the business in question. Mr Mottek was, in truth, advocating a generalised rule-of-thumb approach which is hardly an appropriate way for the Court to assess the damages. None of the other witnesses agreed that his approach was appropriate. The comments made by Mr Banks in this regard both in his report and in his oral evidence are, I think, well founded. I am not prepared to accept Mr Mottek's approach. Mr McLeay prepared a lengthy report dated 28 January 1986 (Exhibit 11) analysing the earnings of the business from 31 August 1979 to 30 June 1985 including an analysis of gross sales, cost of goods sold, gross profit, net profit and owner's earnings. As a result of this analysis Mr McLeay concluded this report in these terms: 53. "With respect to the value of the business at the time of purchase, on the basis that the lease had only three and one half (3-1/2) years left to run, and that 1t would not be renewed, we are of the opinion that the earnings of the business were insufficient to give rise to any goodwill and that the maximum a prospective purchaser would be prepared to pay would have been dependent upon his valuation of existing plant, equipment and stock. In summary, we consider the maximum an informed purchaser would pay for the business would have been his valuation of stock and fixed assets of the business." I cannot accept that conclusion. It is contrary to the conclusions reached by each of the other witnesses as to value. For the purpose of reaching his conclusion Mr McLeay assumed that the lease of the premises would not be renewed when the existing term expired on 31 March 1987. There is no evidence before me to support that assumption as at the date of purchase. Mr Lazaris expressed the opinion that a fair price for the business as at October 1983 would have been $120,000. He was, however, unable to articulate how he had arrived at that figure. It is fair to say, I think, that it was no more than an intuitive figure derived from his experience. In the absence of some evidence to support the figure I am not prepared to accept it. Mr Banks prepared a report dated 7 May 1986 (Exhibit K). He followed the earning capacity or income capitalization method as to which his report said: 54. "The earning capacity method is applied in many different ways. For substantial businesses it is usual to determine after tax earnings by examination of historical results to establish future maintainable profits. A capitalisation vate or multiplier is applied to the future Maintainable profits to calculate the value of the business. Similar approaches are used in small businesses using turnover, net profit or other measures of earnings to determine the base for valuation." The report continued: "In all business valuations the establishment of the capitalisation rate or multiplier is usually based on the subjective judgment of the valuer. Because of the high number of similar businesses being sold we have been able to utilise procedures that are scientifically based, thereby eliminating the main areas of judgment used in Many valuations. We have developed a multiplier using a linear regression model that is derived from advertised sales of similar businesses." Mr Banks adopted, as the appropriate measure of earnings for the type and size of business being valued, the weekly turnover of the business and he set out the factors which led him to that' conclusion. He extracted data regarding sales of 116 businesses which were thought to be similar from advertisements in the Saturday issue of the "Sydney Morning Herald" newspaper during the eight weeks prior to 14 October 1983 and the four weeks following that date. Using a computer based mathematical model, he concluded that, in the case of those businesses, there was a linear relationship between the asking price and the turnover as advertised. The report continues: 55. "The linear regression produced a correlation co-efficient of 0.89 which strongly indicates that price 1s dependent on the' turnover. (A correlation co-efficient of zero indicates no linear relationship and 1.0 andicates a_ total linear relationship). The standard error of estimate in the regression was $15,231. This sum represents the expected values either side of the regression line of one standard deviation for a normal distribution. Using the formula produced by the regression model the predicted price for Judy's Food Bar using the turnover of $4,902, as tested by the Purchaser, produces a predicted price of $86,031. The predicted range within one standard deviation is $70,800 - §101,262. We have reviewed the turnover for the previous year andon the information examined consider that the trial week's turnover of $4,902 fairly represented the turnover of the business. An indication of this is that the average weekly turnover for ten weeks prior to the sale date was $4,915 and that ten week period includes one public holiday. of the business reviewed seven were city businesses. The relative price of the city businesses were [CEsicl on average higher than other similar businesses. One of the main factors that allow city food bars to demand a marginally higher price is that the city businesses generally operate ona five day basis which demands a premium over six and seven day working weeks. Based on the above data we are of the opinion that the fair value of Judy's Food Bar is marginally in excess of the predicted price of $86,031. Accordingly we have valued the business at $90,000." The comment can, of course, be made that the method adopted uses advertised or asking prices not the figures at which the businesses were, in fact, sold. Mr Banks sought to justify this approach on the basis that comparable sales figures are not available and on the basis that, in his experience, it is common for vendors to inflate the asking price by a percentage to provide a margin for negotiation 56. and to quote the most favourable figure for turnover or net profit. He did not consider that adopting the advertised figures for turnover and price would significantly distort the result. It is, however, a factor to be borne in mind. I am of opinion that Mr Banks' approach provides guidance as to the value of the business at the date of purchase but, of course, one must bear steadily in mind that it would be unwise to approach the task on the basis of a merely mechanical adherence to calculations. In this regard it is of significance that the range of values is very wide - a difference between the maximum and minimum of the range of $30,462 in relation to the mean of $86,031. This, perhaps, merely relfects that a statistical tool has been used with all its imperfections. I am also of opinion that it would be appropriate to make the prediction as to value not froma weekly turnover of $64,902 per week but on a somewhat smaller figure. Mr Banks chose that figure as the figure for the week of the trial when the takings were verified by Dr and Mrs Mahmut. It may be noted that the takings for the next week when Mr and Mrs Kovari were still in attendance had dropped to $4,406. He also referred to the average for the fifteen weeks from 1 July to 14 October 1983 though he seems to have slightly overstated that figure. The correct figure seems to be $4,887. That is a comparatively short period and an examination of the books of the first respondent suggests that the figures seem generally higher in the 57. period from July to October than for other fifteen week periods. One cannot, of course, generalise too much for there were individual weeks in May and June 1982 when the recorded figures exceeded $4,900. The average weekly figure during the financial year ended 30 June 1986 was $4,319. To take a figure closer to $4,500 would, I think, have been more appropriate. This would reduce the relevant range of figures by a significant amount. It was pressed upon me that, if I adopted Mr Banks' approach as a guideline, I should not adopt his' median figure of $86,031 (adjusted by subjective factors to $90,000) but I should find that the true value was a figure closer to the maximum of the range to which he referred. I think there is some merit in this approach and, doing the best I can with the material before me and on a turnover of $4,500 per week, I find that the true value of the business at the date of purchase was $94,000. There will, therefore, be judgment for the applicants against the respondents in the sum of $10,000. The respondents must pay the applicants' costs. I certify that this and the preceding 56 pages are a true copy of the Reasons for Judgment herein of the Honourable Mr Justice Neaves. Associate Dated: 10 July 1987 58. Counsel for the applicants : Mr P. Menzies and Mr K. Eassie Solicitors for the applicants : Raves, Marsh, Morck & Hill Counsel for the respondents Mr P. Taylor Solicitors for the respondents Priddle Gosling Dates of hearing : 12, 13, 14 May, 4, 5, 6, 7, 8 August and 13, 14, 15 October