thee NUDGMENT No. ' Not for distribution IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY GENERAL DIVISION BETWEEN: ANVITA PTY. LIMITED Applicant AND: SWAN PROPERTIES PTY. LTD. First Respondent AND: KARRABIN PASTORAL CO. PTY. LTD. Second Respondent AND: WILLOWBANK PASTORAL PTY. LTD. Third Respondent AND: DOUGLAS WILLIAM CROSS Fourth Respondent AND: KERRY RODERICK HALL Fifth Respondent AND: CYRIL CROSS Sixth Respondent SPENDER J. BRISBANE 3 DECEMBER, 1987. REASONS FOR JUDGMENT ) ) ) QLD. G84 of 1986 ) ) a This application concerns the sale of a knackery. The knackery forms part of a pet food business operating in the Ipswich and West Moreton districts of Queensland and is conducted in conjunction with a wholesale and-retail outlet in ones ¢ ey 2. Booval, Ipswich. The business involves the slaughter of horses for the production of pet food. The business, which traded as West Moreton Pet Foods, was advertised for sale in the "Courier Mail" on 20-April 1985. _ On 9 May 1985, the applicant, Anvita Pty.Ltd., as trustee for the- Brendan Cole Family Trust, entered into certain written contracts with the three corporate respondents, (Swan Properties Pty.Ltd., Karrabin Pastoral Co. Pty. Ltd., and Willowbank Pastoral Pty. Ltd.) to purchase the business conducted by the respondents for a total price of $215,000.00. The negotiations for the purchase of the business were primarily conducted by Brendan Cole on behalf of Anvita Pty. Limited and the fourth respondent, Douglas William Cross. The applicant conducted the business until the business and its assets were subsequently sold on 19 June 1986 to B. & J. Martin Pty. Ltd. for a total purchase price of $95,000.00, being $20,000.00 for the business and $75,000.00 for the land and improvements. The applicant alleges that the making of the representations described in paragragh 12 of the Statement of Claim is conduct which contravenes the provisions of ss.52, 53A(1)(b) and 59(2) of the Trade Practices Act 1974 ("the Act"). Alternatively, the applicant claims the making of the said representations constitutes fraud, negligent misstatement or breach of contractual warranty. The applicant seeks a declaration to this effect and an order that the respondents pay to the ve pee tegen ee en eee gee 3. applicant the amount of loss or damage suffered by the applicant as a result of the contravening conduct. The original Statement of Claim included a reference to- alleged representations in relation to the turnover and... profitability of the business. However, on the.commencement of- the hearing of the proceedings, the pleadings were amended and paragraph 12(f£) was deleted from the Amended Statement of Claim. The representation pleaded in that paragraph was:- "that the average monthly takings of the business were $26,124.55 and that the profit achievable yearly from the business as a whole was in the region of $90,000." - The consequence of this amendment is that it was no longer disputed by the applicant that the business at the time of purchase was capable of producing a yearly profit in the vicinity of $90,000.00. As such, the applicant implicitly acknowledges that it was a viable business at the time of sale and that the profitability of the business is not an issue in these proceedings. By paragraph 12 of its Amended Statement of Claim the applicant alleges against the respondents that:— "12. With intent to induce the Applicant to enter into the agreements the trading corporations, through the agency of the Fourth and Fifth Respondents, represented to the Applicant's agent, BRENDAN JOHN COLE that : (a) the business and its assets had a market value of $245,000.00; (aa) That the land with improvements was worth ° $178,000.00; " ee ee reer pe open ee rr son epee poss ier 4. (b) the boundaries of the land were securely fenced by well maintained fences in good condition; (c) the supply of horses available to the Applicant for slaughtering was unlimited; (da) the applicant would be able to buy the _._ horses for no more than 40 cents per ~ kilogram; - (e) the land was the most suitable land available in the area for pet meat - production and could support substantial numbers of grazing stock for up to two (2) ------ weeks;" os The applicant claims that each of the representations described in paragraph 12 was, at the time it was made, false to the knowledge of the trading corporations and the fourth and fifth respondents and, pursuant to the provisions of s.75B of the Act, the fourth, fifth, and sixth respondents were persons involved in the said contravention. The difference between the $245,000.00 alleged as the market value of the business and the $215,000.00 purchase price 1s explained by the circumstances that initially the parties orally agreed on a purchase price of $235,000.00, which was reduced prior to settlement by the deduction of certain items, including a motor vehicle, to $215,000.00. The primary contention of the applicant is that it was misled by the written valuation of the business prepared by Mr. Cyril Cross, who is the sixth respondent and the father of the fourth respondent. Essentially, the claim of the applicant is that the business was represented to have a greater asset backing wee T aan ce Me SIO are ee oe an 5. than in fact existed, that is, that the valuation prepared by Mr. Cyril Cross was inflated, particularly in respect of the value assigned to the land and improvements. - oe -- = The evidence given by Mr. Cole stressed the importance placed by him on finding a business with a secure asset backing.. _ Mr. Cole states in his affidavit:- - -- "The contents of the written valuation persuaded me that the asset backing of the business was such that the purchase price was a fair price and that the land and improvements would adequately secure the moneys borrowed by the Applicant to purchase the business and at least return the applicant's capital investment on resale." ' It was alleged that the written valuation prepared on or about 5th December 1984 for and at the request of the trading corporations and the fourth and fifth respondents by the sixth respondent, in addition toalleging that the business was sound with limited opposition, contained the six representations earlier referred to. Concerning the allegation that the preparation and presentation of the valuation amounts to misleading and deceptive conduct in contravention of s.52 of the Act, the applicant submits that the valuation was misleading; the business not being worth anything like $245,000.00 and the asset backing being much less than $178,000.00. It was alleged that the value of land and improvements had been arrived at by an unorthodox method of valuation, that is, the value of those items was enhanced by reason of the profitability of the business, and that the author - -- ae wre we! ' ? Sona lnaumntnimedarabhade-ah earacdnted atahame renee eee FR pee ene Hn , 6. ; T of the valuation could not have had any or any adequate | foundation for his opinion, and did not honestly hold that _ opinion. - Cyril Cross, in the method of valuation he--adopted, 7 included in the value of land and improvements an amount representing the profitability of the business. In this respect,=- . ..- he took account of the fact that the business conducted on the property in question was capable of producing an annual profit in the vicinity of $90,000.00. No separate goodwill component was \ i included in the valuation. Instead, Cross incorporated in the value assigned to the land and improvements an amount in . recognition of the fact that the business was capable of maintaining a substantial nett profit. The stated purpose of. the valuation prepared by him was to assess the value of improvements and the business and assets as a whole. In so doing, he said in evidence he had regard to the peculiar nature of a knackery business. . ! Cyril Cross was well acquainted with the difficulties experienced by his son, Douglas Cross, and that of his business wo rege partner, Kerry Hall, in obtaining local authority permission to conduct a knackery, and the stringent conditions imposed as a consequence of such approval. Douglas Cross and Kerry Hall were on a number of occasions refused permission by the Moreton Shire Council to establish a knackery in that area. Permission was subsequently obtained in 1981 for the conversion of an existing abattoir for human consumption in the Laidley' Shire to -a RO ge ar en sree en ne ae 7. knackery, but only on the condition that substantial upgrading and improvement of the buildings and equipment took place. Given the objectionable nature of a knackery and the public perception of a knackery as an offensive industry, onerous conditions are imposed in respect of drainage, fencing, visibility and public access, offensive odours and disposal of waste. An obvious reluctance is exhibited on the part of local authorities to the granting of knackery licences and, on the rare occasion that such a licence is granted, stringent conditions are imposed. It follows that an assessment of the value of the property on which the knackery is conducted should take into account that the knackery is fully approved and licensed, having met the onerous standards dictated by the local authority. Prior to the sale of the business, the respondents had succeeded in obtaining approval to export pet food interstate. While elementary, it is in my view crucial in this case to recognise that land is properly to be valued according to its highest and best use. Fricke, in Compulsory Acquisition of Land in Australia 2nd ed. states at p. 324:- "The principle of valuation for the highest and best use of land requires the valuer to determine the price which would be paid for it, assuming the most advantageous purpose for which the land is adapted and which is legally possible and economically feasible." PAE ew eer Seen gee woytNe soytcog ee te ee qa - eres ope an 8. Cyril Cross considered that the highest and best use of the property was as a knackery. The land was, in his view, ideally suited to this use. He remarked -in the impugned valuation that the property:- "(was) Considered due to the drainage, situation, access and position to be an outstanding block of" land for the operation of a killing works with more than adequate area for any further expansion". And later, "I consider this land to he one of the best I have ever inspected for use as a slaughterhouse." In addition, he noted that the slaughterhouse and yards were not clearly visible from the nearby highway, the contour of the land provided a natural drainage for waste products without any pollution or disagreeable odours to neighbouring properties, and sufficient area existed for the holding of horses and cattle for some time prior to slaughter. In an attempt to show that the valuation prepared by Mr. Cross was inflated and misleading, valuation evidence was submitted on behalf of the applicant, which valued the land and improvements at much less than $178,000.00. In particular the applicant relies on the valuation prepared by Mr. F.P. Manners, who derived a total value of $75,000,00 for the property. Mr. Manners did not value the land as a knackery. Mr. Manners said in his valuation:-— I ee ee 9. "the subject property is presently used as holding yards and knackery. However the highest and best use of the property may be for future subdivision ' in rural residential sites in close proximity to Laidley." If the knackery were not viable, then 1t would be proper to assess the property on the basis that its highest-and best use was not as a knackery. On that hypothesis, such:a-valuation exercise as undertaken by Mr. Manners would be helpful in assessing the difference between the purchase price and its value at the time of purchase, being the most material question in assessing the appropriate damages under s.82. However, the hypothesis is false, as the amendment to the Statement of Claim on the morning of the first day of the hearing to withdraw allegations of misrepresentations concerning turnover and profitability demonstrates. In my opinion, 12t was erroneous to value the land, as Mr. Manners dad, simply as rural land suitable for residential subdivision, given that the property had been approved, despite the onerous conditions imposed by the Local Council, as a site suitable for a knackery, and that it was registered with the Department of Primary Industries for the slaughter of amimals and possesses an interstate export licence, and it was an established profitable knackery. When questioned on what value he would assign to the business itself as distinct from the real property, Mr. Manners stated that his task was simply to value the real property and he had received no instructions in relation to valuing the business itself. However he stated that in any event he would allow only a slight enhancement for the fact that the land was used: for the aca oe: mero See nm we tree we eee oboe, ST eee oe 10. conduct of a knackery business and not simply as grazing or agricultural land. He stated that he would make an allowance of no more than $5,000.00 for the fact that the land was approved for use as a knackery. He also stated that'a knackery licence was not hard to come by. I do not accept the-correctness of any. of these conclusions and I regard these-=errors as quite egregious. The real explanation may, of course, be that he was asked to value the land otherwise than as a knackery, it being assumed at the time of those instructions that the non-viability of the knackery as such would be established by other evidence. Mr. Manners did not value the land at its highest and best use. The value thus derived does not reflect the profitability of that business, nor the difficulties in obtaining town planning approval from the local authority for the use of the property as a knackery site. Further valuation evidence was given on behalf of the applicant by Mr. Kroll. Mr. Kroll valued only the land, plant and improvements, and did not attempt a valuation of the business as a going concern. The total value of the property as at 17 January 1986, in his opinion, was $87,000.00. Given the poor nature of the land and erosion, Mr. Kroll commented that the land was not particularly suitable for agricultural or pastoral purposes. He said in evidence:- ",..I would believe it to be a very poor piece of > land agriculturally, and probably at its highest . i Re opens pcre pore gre fe ay ar 'Sa ean eee ii. and best use as a knackery which it is being used as at present, having previously been a slaughter~yard for local consumption. ... I think that is its highest and best use at this point in time." : Mr. Kroll did not attempt in his valuation to assign any value to the business. He, like Mr. Manners, was not asked to - value the business. He valued the land and improvements using sales of farming properties. He did accept the proposition put forward by counsel for the respondents that, in assessing the value of the business as a going concern, it is proper to include a component for goodwill as part of the value of the land and improvements. The basis of Mr. Kroll's evidence, like Mr. Manners', has the consequence that his valuation is of limited assistance in the resolution of the primary questions in these proceedings. Valuation evidence was given for the respondents by Mr. R. H. Pearson, who prepared a valuation as at 26 November 1986. Mr. Pearson valued the land and improvements at the knackery at $155,050.00, and the plant, machinery and livestock at the knackery, together with plant and machinery in the shop premises at Booval, at $55,660.00. Included in the value assigned to the land and improvements is an amount of $46,730.00 for the goodwill of the business. Mr. Pearson states in his valuation:- "As most of the tangible assets (e.g. buildings, plant and machinery) are highly specialised, they are virtually valueless when disassociated from the business. Consequently, I consider direct capitalisation of the nett profits is justified because the tangible and intangible assets are inseparable." aad men ~ ~~ ~ a4 us a eG a ee ee eee ' 12. Mr. Pearson's valuation of the land, together with the fixed improvements, plant, equipment and goodwill, supports the valuation prepared by Cyril Cross. fhe total valuation of $211,710.00, roughly approximates with the value assigned to the business as a whole by Mr. Cross, less the relevant deductions. 1... <-. The valuations differ significantly only with respect _-to the. method of calculating an allowance for goodwill. Mr. Pearson included a separate item for goodwill in his valuation, whereas Cyril Cross says that the profitability of the business was taken, into account in assessing the value of the land and improvements, _ but no separate amount was allocated in respect of goodwill.. Having considered the valuation evidence given by the various valuers and the written valuations prepared by each, I am not satisfied that the valuation prepared by Mr. Cross Snr. is misleading. In my opinion, a realistic valuation of the business must take into account the fact that the business is a specialised one, capable of producing a significant profit. While 1t may have been better to show a separate component representing the goodwill of the business, in my view it is not heterodox for a valuation of land and improvements to reflect the profitability of the business conducted on the land. In the ordinary course, the profit or earning capacity of land and improvements is reflected in the price paid by a prudent purchaser, so that by comparing the subject property with like properties, the market value of which are known, the value of the subject property can be ascertained. The difficulty in this case Ba Te ee renee oa em oe Se mere red wee owe 13. is an absence of sales of knackceries with which to compare the subject knackery. In the circumstances, I regard the approach by Mr. Pearson as sound. It was also submitted by the applicant that the_ presentation to Mr. Cole of Mr. Cross's valuation was misleading in that Cyril Cross could not have any, or any adequate- - foundation for his opinion, and could not honestly have held that opinion. Although the close relationship between Cyril Cross and - Douglas Cross, who negotiated the sale on behalf of the three companies involved, initially arouses suspicion as to the impartiality and genuineness of the valuation, I accept that Cyril Cross prepared the valuation at the request of his son in good faith, and honestly believed the business as a whole (including all the vehicles referred to 1n the valuation) to be worth $245,500.00 as at 5 December 1984. I do not accept the suggestion that the method adopted by Cyril Cross of enhancing the value of the land and improvements by reason of the profitability of the business was intended by him to mislead or deceive the applicant or any other prospective purchaser. In my opinion the document was prepared with a view to assigning a realistic value to the business as a whole in order to facilitate 1ts sale. That there was a sanguine view of the property and the businesses by Mr. Cross Snr., influenced no doubt by the family relationship, need not be doubted, but is not to the point. The property was inspected by Mr. Cole subsequent to the presentation of the valuation. He could, of course, -have sought-a- fy a aa poop 14. valuation from other sources. I deprecate the suggestion that a valuation prepared for a vendor and used by the vendor in selling a property, constitutes a warranty to a purchaser. It is notorious that valuers differ in opinion. A valuer is required to act competently and honestly. Beyond that he is not required to go. . _" In my opinion, the valuation prepared by Cyril Cross and the presentation of this valuation to Mr. Brendan Cole was not misleading or deceptive or likely to mislead or deceive in contravention of s.52 of the Trade Practices Act 1974. As to the other representations pleaded in the Amended Statement of Claim, claims covering the fencing and suitability of the property as a knackery were not seriously pursued at the hearing by counsel for the applicant. However, the applicant does submit 1t was mislead by the representations made as to the availability of horses for slaughter and the price per kilo for such horses. On its face, 1t seems to me highly improbable that any guarantee would have been forthcoming from the respondents in respect of the price at which horses for slaughter could be purchased, given that the respondents had no means of controlling or predicting the potential auction price for such horses. In any business context one expects price fluctuations to occur in response to the then demand and the available supply of the commodity. To represent that the market would operate otherwise would have been quite extraordinary business behaviour on the part of the respondents. It is inherently improbable that such Stee ean Saar Steen amen anaelindanate at eanetenie aebemre eee 1 se so 15. occurred in this case. I have no hesitation in accepting the evidence on behalf of the respondents that no- such representations were made. Despite Mr. Cole's evidence as to the escalation in, price for horses subsequent to his purchase 'of the business, Kerry Hall, an experienced buyer, gave evidence that horses for slaughter were readily available and could be purchased at~ auctions for no more than 45c per kilo dressed weight and that, on the occasions he had purchased horses on behalf of Mr. Cole, he had paid no more than this amount. Mr. Cole was a very inexperienced buyer, and I think it likely, as was suggested in the evidence, that the old hands took advantage of his inexperience and caused him to pay higher prices than a more experienced purchaser would have. In this case, there is a fundamental difficulty confronting the applicant. Even if the applicant had succeeded in proving that it was induced to enter into the agreement by the alleged representations, a causal link must be established between the loss suffered and the contravening conduct of the respondents. The measure of damages recoverable as a consequence of a breach of s.52 is set out in the judgment of Mason, Wilson and Dawson JJ. in Gates v. City Mutual Life Assurance Society Ltd. (1986) 63 A.L.R. 600 at p.607:- pom ea. enn ee ayers oo pene pecegne eet ees de a ew ee 16. ",..it is a question of determining how much worse off the plaintiff is as a result of entering into the transaction which the representation induced him to enter than he would have been had the transaction not taken place." The approach is similar to the assessment of damages for deceit, ° concerning which Gibbs C.J. said in Gould v. Vaggelas- (1983-85, ~: 157 C.L.R. 215 at p. 220:- . "...where the plaintiff has been induced by the fraudulent misrepresentation of the defendant to enter into a contract of purchase, the measure of damages usually applicable is the difference between the real value of the property at the time of the purchase and what the plaintiff paid for it:.." In the present case, the applicant purchased a business capable of producing an annual nett income (before principals' wages) of $90,000.00 per year for a total purchase price of $215,000.00. In my opinion, even if the representations were found to be misleading or deceptive and induced the applicant to enter anto the contracts for the purchase of the business, no damages would be recoverable. At the time of purchase, the business was capable of maintaining a significant profit and the property had specifically been adapted for the purpose of conducting the knackery business. In my opinion, such a business at the time of purchase was worth at least $215,000.00 and as such, no difference exists between the value and the price paid at the time of the purchase for which damages could be awarded, In my opinion, any loss suffered by the applicant was not caused by the respondents' conduct but resulted-from other - woo ee ie eee ee em gee eee or tera oe 17. factors. These include the fact that Mr. Colc, who ran the business on behalf of the applicant, had no experience in either the slaughtering or pet food trade and possessed no. skill in the handling or purchase of horses. Mr. Cole's:"inexperience is-- apparent from the fact that he purchased horses at what would appear to be unrealistically high prices. On occasions when Mr. -_ Cole used Mr. Hall for this task, the price paid was, according - to Mr. Hall, never more than 45c per kilo dressed weight. Additionally, subsequent to the sale of the business, the demand for horses for slaughter increased due to an increase in the competition for livestock both from Australian Chevaline Industries Pty.Ltd. and a human consumption buyer. Mr. Cole stated in his evidence that, after the purchase of the business, there was a drop in turnover. A number of factors probably caused this, including the failure on the part of Mr. Cole to give discounts to bulk purchasers and the introduction by him of substitutes for horse meat. A significant increase by Mr. Cole in the price of pet food was another factor which contributed to the drop in turnover. Mr. Cole stated 1n his affidavit that:- "The increase in the cost of horses and the decreasing supply of horses necessitated an increase in the retail price of the pet food which resulted in a fall off in custom and reduced rece1rpts." —o - ere \ wet wep ome age wee ka Ry > Lap re Sn ager eer pr tere, a 18. fhe respondents submit that the loss experienced by the applicant was due to the fact.that Brendan Cole grossly mismanaged the pet food business, alleging that -he consumed alcohol frequently in the shop, was slovenly in his appearance,* - constantly late for deliveries, and generally unreliable. .I do not accept the correctness of these allegations. I am satisfied - that the failure of the business was in part attributable-to the _~ inexperienced manner in which Mr. Cole ran the business. Additionally, I believe the applicant's failure in the_business... owes something to the fact that Mr. Cole was financially over-—committed. Mr. Cole had to borrow heavily for. the purchase of the business and, given pre-existing financial commitments, was left with little working capital for the running of the business. Mr. Wegert, Bank Manager, A.N.Z. Bank, Ipswich, said that it would have been better had Mr. Cole not been so committed. It is clear that Mr. Cole had borrowed substantially, not only for the purchase of the business but also for a home in the area and had received on the sale of his previous home at Capalaba a figure substantially less than was anticipated. That Mr. Cole ultimately sold the business at a loss to B. & J. Martin Pty. Ltd. for a total purchase price of $95,000.00 was not in my opinion due to any misrepresentations made by the respondents as to the value of the tangible assets of the business nor the availability or price of horses for slaughter. Mr.- Cole had purchased a fairly successful business which possessed a significant goodwill factor. His inexperience in managing the business and the other factors referred to earlier led to a drop-off in trade and, as a serious consequence, a ' wm oey ? rn Se ne tie gee meee a ne ocean tee lon . a -- pon me age 5 Dae .- } 19. reduction in the profits of the business and the price which could be achieved on resale. It was those factors which account for the failure of the applicant to achieve a return of_ the capital outlayed for the purchase of the property rather-than any cee IO misrepresentations made by the respondents. . . .- ooo. . The findings I have made in relation to the opinions | expressed by Mr. Cross Snr. in his valuation are sufficient to - dispose also of the alternative causes of action-of negligent misstatement and deceit. . . i, The applicant's claim is dismissed, with costs, including reserved costs. | certify that this and the 1% preceding =-G45 cro a true copy of the reascns for as) juc'gmont herein cf His Honour c Mr Justice Spender T Me DS 3/iz/87 * Associate Counsel for the Applicant: Mr. R.V. Hanson Q.C.;/"with Mr. T. Carmody, instructed by Wheldon & Tierney Counsel for the Respondents: Mr. R.I. Myers instructed by Dale & Fallu Dates of Hearing: 25, 26,27 March, 24 April, and 13 May 1987 Place: Brisbane meee pe