JUDGMENT No. seal 22.7 GE CATCHWORDS TRADE PRACTICES - misleading and deceptive conduct - whether employees of one or more of the respondents made misleading or deceptive representations to applicant during negotiations concerning entry into lease of fruit shop at shopping centre - whether applicant relied on misleading or deceptive conduct made by employee of respondent. CORPORATIONS - corporation dominated by particular director - determination of corporate mind of corporation. Trade Practices Act 1974 (Cth); 5.52. Ricochet Pty Ltd v Equity Trustees Executors and Agency Company Ltd (1993) 41 FCR 229, applied. ELITEGOLD PTY LIMITED v r A PPIN EN TY D MENT: LD) PTY No NG 55 of 1992 HILL J SYDNEY 28 OCTOBER 1994 RECEIVED 1- NOV 1994 FEDERAL COURT OF AUSTRALIA PRINCIPAL REGISTRY IN THE FEDERAL COURT OF AUSTRALIA STR TRY ) No NG55 of 1992 ) ) LITEGOLD P Applicant AND: AUSTRALIA FAIR SHOPPING CENTRES PTY LIMITED Second Respondent DINGS PTY LTD Fourth Respondent Cc VELOPMENTS LD) PT Fifth Respondent First Respondent (proceedings discontinued) Third Respondent (proceedings discontinued) Sixth Respondent (application dismissed by consent ) Seventh Respondent -— (application dismissed by consent) 3 HILL J PLACE: SYDNEY DATED 28 OCTOBER 1994 NUTES OF 0 THE_COURT ORDERS THAT: 1. Application dismissed. 2. Stand over proceedings to a date to be fixed for argument on the question of costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. TO US TRA: s REGISTRY ) No NG55 of 1992 ) ) BETWEEN: ELITEGOLD PTY LIMITED Applicant A IA F SH PTY LIMITED Second Respondent CM HOLDINGS PTY LTD Fourth Respondent E Cc VELOPMENTS LD TY Fifth Respondent First Respondent (proceedings discontinued) Third Respondent (proceedings discontinued) Sixth Respondent (application dismissed by consent ) Seventh Respondent — (application dismissed by consent) HILL J SYDNEY 28 OCTOBER 1994 SO) OR GMENT Elitegold Pty Limited ("Elite"), the applicant in the present proceedings, is a company the shares in which are held by Mr and Mrs Nizic. At relevant times its directors were Mr and Mrs Nizic and a Mr Peter George ("Mr George"). Mr Nizic is a business man of some considerable experience. In 1978 he started a company with a partner which became a "42 million business" and which was subsequently sold in 1983 to Mayne Nickless for several million dollars. He thereafter started another company with offices in various parts of the world, carrying on an international courier business, which he again sold to Mayne Nickless, retaining that part of the business which was carried on in the United States. In the period with which the present case is concerned, he resided largely in the United States although he travelled to and from Australia from time to time. Eagle Resources Pty Limited ("Eagle Resources") is another of Mr Nizic's companies which he formed to develop and own real estate and as a medium for investment in other businesses. The present proceedings seek damages, pursuant to 8.82 of the Trade Practices Act 1974 (Cth) ("the Act") in respect of conduct of the respondents, said to be misleading and deceptive, in breach of s.52 of that Act. As a result of various amendments to the application and statement of claim, there were ultimately seven respondents. Prior to the hearing, however, the proceedings were discontinued against BPTC Limited, the first respondent, and Properties (Qld) Pty Limited, the third respondent. Shortly after the hearing had commenced, settlement was reached with the sixth and seventh respondents and by consent the proceedings were dismissed against them. That left remaining the second, fourth and fifth respondents to contest the applicant's claim. These three companies are related companies. CM Holdings Pty Limited ("Holdings") holds all the issued shares in Australia Fair Shopping Centres Pty Limited, the second respondent ("AFSC") and CM Developments (Qld) Pty Limited ("Developments"), the fifth respondent. Some one or more of AFSC, Holdings or Developments was or were involved in the development of a shopping centre complex, now known as Australia Fair, which opened at the end of April to early May, of 1990. Elite, by virtue of a lease executed between it and Burns Philp Trustee Company Limited ("BPTC") (now BPTC Limited, the former first respondent) became the lessee of an area of 540 square metres known as "Food Hall 1" (or "FH1") for use as a fruit shop. Elite claims that it entered into that lease relying upon certain representations said to have been made by a Mr Duncalfe and a Mr Farrell who, at relevant times, were employees of Holdings. It is alleged that the representations were made on behalf of, inter alia, AFSC, Holdings or Developments. The statement of claim says that Elite is unable to assert with knowledge which of the three remaining respondents is liable and has therefore joined all of them to the proceedings. The respondents concede that Holdings is a proper respondent to the proceedings but deny any involvement of AFSC or Developments. Fruit shops in the Gold Coast region Prior to the opening of Australia Fair at Southport on the Gold Coast, there were at least nineteen fruit shops trading in the general area stretching from Paradise Point in the north to Tugun in the south and going west to Nerang. The closest shopping centre to what was originally the Scarborough Fair Centre and was ultimately renamed Australia Fair was a fruit market in the Sundale Shopping Centre (hereafter referred to as "Sundale") in Brighton Parade, Southport. That fruit market was conducted by a Mr Richman under the name Sundale Markets in the period from September 1987 to April 1991. A fruit market is still operating in that centre. Having regard to its location and its age, Sundale was, at the end of 1989, ripe for redevelopment. It was extensively advertised in newspapers, circulating in the Gold Coast area, interstate and overseas. A promotional video for the sale of the centre stressed its potential for residential or hotel redevelopment. Although it was unlikely that a potential purchaser would purchase the site for redevelopment as a shopping centre, such a possibility no doubt existed. The developers of Australia Fair were able to entice Woolworths, which had a store in Sundale (and was thus the 'anchor tenant' of that shopping centre), to relocate to Australia Fair when it opened. The owners of Sundale also negotiated with tenants of that centre to convert their leases from fixed terms to monthly tenancies, thereby enabling them, if required, to give vacant possession to a purchaser of the centre. Mr Richman was paid a sum of money to surrender his lease in favour of a periodical tenancy. He covenanted as part of the arrangement, for a period of two years, not to compete within a radius of five kilometres around Sundale. These matters were known to both Mr Duncalfe and Mr Farrell. According to Mr Richman's cash book, his gross takings per week from his fruit shop at Sundale in the period 7 January 1990 to 1 April 1991 fluctuated between $51,445.44 for the week ending 25 March 1990 and $78,302.07 for the week ended 14 January 1990. His sales took an initial dive after Woolworths moved from Sundale, falling to a low of $27,638.04 for the week ending 5 August 1990. They then rebounded to levels in excess of $60,000.00 per week and greater for the months of December 1990, January, February and March 1991, dropping slightly at the end of March 1991 to $55,629.63. Other fruit shops in the general Gold Coast area included a fruit market at Tugun, which is 25 kilometres from Southport, a "super" fruit market at the Pines Shopping Centre at Currumbin which is 24 kilometres from Southport, the Ashmore City Fruit Centre at Ashmore which is 9 kilometres from Southport and a number of shops in Nerang which is 11 kilometres from Southport. The alleged misleading and deceptive conduct The statement of claim particularises the misleading and deceptive conduct said to have been engaged in, to 8.52, in the following terms: ""(a) (b) (c) (d) (e) (f) Mr. Nizic was advised by Mr. Duncalfe and Mr. Farrell that the nearby established and potentially competitive fruit shop in the Sundale Shopping Centre was to close when in truth and in fact there was no reasonable basis so to believe at that time. Mr. Nizic was advised that on the basis of the assumption that the Sundale competitor would close the business, the business in the Australia Fair Centre would be profitable and would turn-over $60,000.00 per week. Mr. Nizic was advised that the rent for shop FHI could fairly be calculated on the basis of an anticipated return of $60,000.00 per week, The respondents did not disclose the facts known to it that the Richman Family remained entitled to conduct the business and that the owners of the Sundale Centre intended to maintain their operation. In truth and in fact the established business at Sundale did not close but remained trading competitively with the applicant's business with the result that the applicant's business could not trade profitably especially with a rental liability calculated against gross takings it had no prospect of achieving. Mr Farrell stated to Mr Nizic words to the effect: 'we have undertaken a market survey and based upon the closure of Sundale that survey contrary indicates a turnover of $60,000.00 per week for the fruit shop' when in truth and in fact there were no market surveys so indicating in existence." The respondents deny that representations as s0 particularised were made but concede that no disclosure of the matter referred to in para.(d) of the particulars was made and concede also that the fruit market at Sundale did not close but remained trading in competition, inter alia, with the business of Elite conducted at Australia Fair under the name "Fields of Fruit". The respondents' defence puts in issue as well the reliance which Elite claims it placed upon these alleged representations in investing in the fruit market business and calls into question the amount of loss which Elite claims to have suffered. Cc Ww. izi nd M Farrel Mr Nizic's interest in opening a fruit shop at Australia Fair arose out of a conversation he had with a Mr Peter Georges ("Mr Georges"), not to be confused with Mr Peter George, an acquaintance of some years' standing. Mr Nizic's original interest was in opening a "spaghetti bar". It was in this context that Mr Nizic first met Mr Farrell. That contact was brief and came to nothing. The idea of leasing space for a fruit shop arose later when Mr Georges introduced Mr Nizic to Mr George, whom Mr Nizic had met shortly once before in a social context. Mr George had been in the fruit business, retail and wholesale, most of his life. He had run at least eight retail shops but at the time he was introduced to Mr Nizic was out of work. Understandably Mr George was enthusiastic at the possibility of managing a fruit shop. To use his own words he was: ",.. delighted because it was a chance for me. I was pushing Mr Nizic into the Situation. I wanted to get the _ shop because it was a chance for me." There is a conflict in the evidence as to the sequence of events thereafter and also as to the relevant dates on which conversations took place. According to Mr Nizic the topic of opening a fruit shop was first raised in January 1990 in the conversation with Mr George and Mr Georges. Mr Georges' proposal was for a three-way deal. By reference to his diary Mr Nizic placed this conversation with Mr Georges and Mr George as taking place on 19 January 1990. Mr Nizic's evidence was that shortly after this initial conversation, Mr Georges, Mr George and he met with Mr Farrell at Mr Farrell's office. I accept that this initial meeting at Mr Farrell's office took place on the afternoon of 19 January 1994. Although Mr Nizic recollected that Mr Duncalfe had been present at the meeting between himself, Mr Georges, Mr George and Mr Farrell, this was denied by Mr Duncalfe and Mr Farrell and is not in accordance with Mr George''s evidence. Mr Georges did not give evidence. I accept Mr Duncalfe's evidence, not seriously challenged, that he was not present at the initial meeting with Mr Nizic, Mr George and Mr Georges as deposed to by Mr Nizic. Mr Nizic's account of this meeting with Mr Farrell, as set out in an affidavit filed in the proceedings, was as follows: "I said to Mr. Farrell 'Apparently there is a prospect of a fruit shop here.' He said 'Yes, are you interested.' I said 'Tell me about it.' He said 'We have undertaken a market survey and based upon the closure of Sundale that survey indicates a turnover of $60,000.00 per week for this fruit shop.' I said 'What is Sundale?' He said 'It's a shopping centre next to us being demolished. It's going to be redeveloped as condominiums. There is a Woolworths there and its [sic] going to move across here. It is about to complete it's [sic] fit out. The Richman Family (who have operated the fruit market at Sundale) have been paid out of their lease. They got 1.3 million and will be out by 30th June. That means there will be only one fruit business for the area and all the customers will come to our shop. Our Survey shows that the Sundale Fruit Market is doing in excess of $60,000.00 per week so our estimates are conservative.' I said 'What rent and terms can I have on the Shop.' Mr Duncalfe said 'Well we are calling for offers and you will have to submit a written offer. As a guide line you will have to structure that rent on the basis of 6% of turnover. We have' estimated that turnover to be not less and [sic] $60,000.00 per week. so the base to work from is 6% of $60,000.00 per week turnover. We would want your rent tied to turnover in the event you're [sic] turnover is more than $60,000.00 per week.'" According to Mr Nizic, prior to that meeting he had not been aware how far away from the Australia Fair shopping centre the nearest competitor fruit business was. Mr George's version of this meeting with Mr Farrell differs somewhat from that of Mr Nizic. In an affidavit filed in the proceedings Mr George deposed to the conversation in the following terms: "Mr Farrell said: 'We have two or three people interested in opening a fruit shop. What are you proposing to do?' I then outlined the plan that I believed would work at the shopping centre. Mr Farrell then said: 'We have done a feasibility study and traffic and we estimate some 40,000 to 60,000 cars per week will come to Australia Fair. The Sundale Markets are doing between Forty thousand dollars ($40,000) and Sixty thousand Dollars ($60,000) per week and on our estimates the turn over that could be expected after Sundale closes will be Sixty thousand dollars ($60,000) per week for the shop.'" Mr George has Mr Farrell repeating: "You should take Sixty thousand dollars ($60,000.00) with the competition gone. By the time we are operating Sundale will be closed, Woolworths are already moving over here now and Sundale is closing." Mr Farrell was the senior leasing executive responsible for negotiating lease conditions with prospective food and beverage retail tenants for the Australia Fair shopping centre. As such he was responsible to Mr Duncalfe who was the Leasing Manager of the Centre. He recalled the initial conversation with Mr Nizic concerning an Italian fast food shop and meeting Mr Nizic again a week or so later in the company of Mr George and Mr Georges. After a discussion on the backgrounds of Mr George and Mr Nizic, he says that Mr Nizic asked what was happening to Sundale and that he (Mr Farrell) replied: "It's closing. Woolworths is moving in here, and its [sic] going up for international tender." Mr Farrell says the meeting with Mr Nizic, Mr George and Mr Georges was short, that he handed Mr Nizic' some documents, a plan of the food hall and fruit shop, a blank letter of offer and a marketing brochure and perhaps a traffic count marketing document. He denies making any reference to a survey and said that he had no knowledge of any such survey having been in existence. Mr Farrell denies discussing the matter of rent at all at this first meeting. According to Mr Farrell more details were discussed in later meetings, especially a meeting that he places around 30 January 1990 at which Mr Nizic and Mr George were, he says, present. At this meeting, in response to an invitation by Mr Nizic to discuss rent, Mr Farrell deposes in an affidavit that he said: "We are looking at a likely turnover for this shop of $60,000 per _ week. A reasonable rent/turnover ratio for this sort of business would be around 6% of turnover. What do you think about that? We are talking to other people in relation to this particular shop along roughly the same lines. If you are interested on that basis, we will prepare a letter of offer which we will send out to you as we have done with the others. The procedure 1s that you must sign the letter of offer and pay a deposit for us to consider the position. The deposit is usually a sum equal to the first month's rent, and this is deducted from the first month's rent if you're successful." Mr Farrell says that in one or other of the conversations he had with Messrs Nizic and George there was discussion of the fact that Woolworths would be retailing fruit and vegetables as well and that there were, in addition, other fruit and vegetable shops in Australia Fair East and Australia Fair West. According to Mr Farrell, Mr George was unconcerned about competition except from Woolworths and expressed the view that he had some ideas on how to compete with Woolworths. A contemporaneous note made by Mr Holmes, who was Mr Nizic's accountant, of a conversation with Mr Nizic places the initial meeting between Mr Farrell, Mr Nizic, Mr George and Mr Georges as being prior to 22 January, because it was on that day that Mr Nizic gave Mr Holmes instructions about the proposal for a joint venture at Australia Fair. The notes of that meeting, which have another significance beyond placing the date of the original conversation, make it abundantly clear that the matter of rent had, by that date, been discussed, at least in an initial way. Evidence given by Mr Farrell that the initial discussion wath Mr Nizic was short and contained no reference to rent and that it was only at a later meeting which Mr Farrell placed around 30 January that rent was discussed, can not be accepted for two reasons. First, it is inherently improbable that a discussion would take place, even in a tentative fashion, about the leasing of space in the centre without there being some discussion of rent. Second, Mr Holmes' contemporaneous note makes it clear that he had been advised by Mr Nizic of details of the proposed rent by 22 January. It is clear that there was, between the initial meeting and the final signing of the lease, a number of meetings that took place between Mr Nizic and Mr Farrell. Mr Nizic's diary shows an appointment with Mr Farrell on Monday, 29 January at 4.00 pm and there seems little doubt that a meeting took place on that day following which Mr Farrell prepared and sent out to Mr Nizic a formal letter of offer for the leasing of the space known as FH1. That letter of offer showed the area to be leased as 540 square metres, subject to survey, and provided for a base rental as a minimum rental of $180,000 subject to which the rent was to be calculated as a percentage of turnover being calculated at the rate of 6% of gross sales up to $3 million with varying percentages for annual gross turnover thereafter. In addition the lessee was to pay a proportionate amount of outgoings. It will be noted that the gross turnover of $3 million represents approximately a weekly turnover of $60,000 per week and on the assumption that the base rent of $180,000 was paid, this, together with outgoings, amounted to $4,109 per week, a figure somewhat similar to that which appears on the note made by Mr Holmes after the meeting of 19 January ("Rent $4,000 pw"). Mr Holmes' note refers to a partnership through a limited liability company, but names only Mr George and not Mr Georges. More significantly the note contains the comment "Feasibility: $60,000 1/3rd G.P.". There is also the word "Competition" in a circle. The reference to ""1/3rd G.P." appears to have related to the mark-up on purchases which was intended to be approximately one-third. Mr Holmes had no independent recollection of the conversation and was unable to throw light on the meaning of the other significant words shown on the note. At some time after the initial meeting on 19 January, Mr Georges withdrew from the arrangement which will be recalled was originally a tripartite one. Mr Nizic was of the view that this occurred 2-3 weeks after the initial meeting with Mr Farrell on 19 January. By reference to his diary Mr Nizic put the meeting at which this was decided as being on 1 February. That date appears to conflict with the inference to be drawn from Mr Holmes' note of 22 January which suggests a 51%:49% partnership and names only Mr George. It thus seems likely that Mr Georges disappeared from the arrangement at a meeting held some time between 19 and 22 January, after a meeting with Mr Farrell on 19 January. involveme From some time in early August 1989 there had been negotiations for a lease of FH1 to a Mr Malouf, the proprietor of a fruit barn in Tugun. These negotiations had been conducted by a Mr Anderson who was, at the relevant time, a property consultant at Wimberley Anderson Nash ("WAN"), a firm of property consultants operating in the Brisbane and Gold Coast areas. WAN had been engaged by Holdings to be one of - 16 - the leasing agents for the Australia Fair centre. Mr Anderson was impressed both with Mr Malouf and the business which Mr Malouf conducted. He was, in Mr Anderson's view, the preferred tenant of the space. Mr Anderson, on 22 November 1989, wrote to Mr Malouf confirming an expression of interest on Mr Malouf's part to lease FH1. Mr Malouf appears not to have been prepared to accept a minimum rent based upon 6% of a $3 million turnover and sought to negotiate a lower base rental. The detail of these negotiations is not relevant to the present proceedings but negotiations were still proceeding when Mr Farrell gave Mr Nizic the blank letter of offer dated 1 February 1990. Mr Farrell, upon receiving from Mr Nizic an executed copy of the letter of 1 February 1990, advised Mr Nizic that the fruit shop lease would be given to Mr Malouf who was the preferred tenant. Some time later Mr George arranged an appointment with Mr Farrell at his office and attended that meeting with Mr Malouf. Mr Malouf advised Mr Farrell that he would like Mr George to have another chance at managing a fruit shop and would therefore relinquish the possibility of a lease in favour of the George/Nizic combination. In the result an arrangement was made for a further meeting between Mr Nizic, Mr George, Mr Farrell and Mr Duncalfe. How the rental figure was determined The development which was to transform the old Scarborough Fair Shopping Centre into Australia Fair took some years both in planning and development. A market assessment of the proposed extension to Scarborough Fair Shopping Centre was prepared on 4 September 1986 by Retail Surveys Australia Pty Limited ("Retail Surveys") and estimated, by way of computer simulation, that a redeveloped Pacific Fair Shopping Centre (at that time the dominant regional shopping centre for the area) would, in 1985, have had an annual turnover of $70.6 million. In 1988 the CM Group of companies commissioned Retail Surveys to undertake a comprehensive study of the Gold Coast retail market and assess the likely performance of the redeveloped Australia Fair in its first scheduled year of operation, 1990. That study estimated total retail turnover of $169 million. In November 1988 Hogan Macintosh Associates Pty Limited prepared a report for Aushima Australia Property Fund, apparently the owners of the realty, projecting turnover and rental for the new centre. That survey took into account forecast retail rentals prepared by the CM Group on advice from WAN. It appears that the hoped for retail rental for the first year of operation of Australia Fair had been fixed at $15.1 million; this translated to a "required" aggregate rental turnover for the centre of $183 million, a figure somewhat in excess of the forecast turnover calculated by Retail Surveys of $169 million. The Hogan Macintosh report considered sources of potential additional turnover and calculated the theoretical turnover required for each shop in the proposed centre to enable it to sustain its assigned rent contribution. Mr Anderson, who was qualified with a Certified Shopping Centre Manager Australia Accreditation, had been asked by the CM Group during 1989 for advice on the target rents that could be achieved for the individual retail outlets in the new centre. Throughout the period 1989 and early 1990 these target rents were constantly being adjusted, as was the configuration of floor space of particular areas. By way of example, as at 14 August 1989 the target rental for the proposed fruit market FH1 was $225,000 for an area then estimated as 492 square metres. The budgeted rent or target rent of a particular area was ultimately determined by the owner's desire to obtain the anticipated gross rental for the entire centre which it needed to produce an appropriate return on its investment. But as Mr Cant, an employee of WAN, deposed it would be for the market to determine the rental actually payable for a particular space. If the budgeted rental for FH1 was $225,000 then, according to Mr Anderson, the turnover for a fruit marketer - 19 - selling in the volume discount market would have been about $3.750 million and if the tenant had been a boutique fruit marketer the turnover would have been required to be $2.5 million. In early 1989 Mr Anderson was of the view that both rent and turnover figures set by the developers and owners in respect of FH1 were "ambitious". He saw, he said however, no point in advising the owners and developers that their rent targets were unrealistic or over inflated until the market had in fact been tested. It was, so Mr Anderson said, as a result of his negotiations with Mr Malouf that he formed the view that a turnover between $3 million and $5 million for FH1 was attainable. There is a conflict of testimony between Mr Anderson and Mr Farrell as to what passed between them on the question of prospective turnover and rent for FH1. According to Mr Farrell two conversations, at least, occurred between Mr Farrell and Mr Anderson in 1989 on this topic. In the first of these conversations Mr Farrell says that Mr Anderson said words to the following effect: "I've had several years in retail leasing, and I've been involved in leasing fruit shops for a fair number of shopping centres. From the conversations I've had - 20 - with Tony Malouf, I think a good fruit shop operator (and I reckon he's the best on the Gold Coast) should be able to do a turnover of $3 million a year." In a later conversation Mr Anderson 1s said to have said: "I've estimated that the average turnover for the fruit shop over the lease term of 12 years will be around $60,000 per week." On this basis Mr Farrell says that, in using the figure of $3 million for turnover he was relying on what he refers to as "the wisdom and experience of Gordon Anderson". Mr Anderson's evidence, as given in an initial affidavit filed on behalf of the respondents when his company was not a party to the litigation, was framed in terms that he was experienced in dealing with retail tenancies, was aware of the turnover of fruit and vegetable shops in the Gold Coast area, that he believed Mr Malouf when Mr Malouf expressed confidence that he could achieve a turnover of $3 million and believed it reasonable to expect that FH1 would be capable of generating a turnover of at least $3 million per year. He said that he had had one conversation which he placed in January or early February 1990 with Mr Farrell in which he had said: "The shop should easily be able to get $3 million turnover. That ought to be reflected into the base rent figure." So stated, that testimony is consistent with the second of the two conversations deposed to by Mr Farrell, albeit expressed slightly differently. After Mr Anderson's companies had been added as parties to the litigation, however, another affidavit was filed. In that affidavit Mr Anderson says that his opinion about turnover was the result of his discussions with Mr Malouf and that the conversation said to have taken place in January/February 1990 had not been put by him in context. The impression he sought to convey in the second affidavit was that it was only Mr Malouf whom he believed could achieve a turnover of $3 million per annum, a belief which derived from his negotiations with Mr Malouf. Referring to Mr Farrell's affidavit, Mr Anderson denied having made an estimate of turnover to Mr Farrell saying rather that what he had said was that Mr Malouf would probably do about $3 million in the first year or around $60,000 per week. He denied ever saying that the tenancy or shop would be capable of turning over $3 million per year. Rather he said: "My references to tenancy turning over $3 million a year were references to the proposed tenant Anthony Malouf (not the tenancy) as an operator of business acumen and operational nous and necessary experience turning over $3 million a year in that tenancy. It was the tenant rather than the tenancy or shop to whom I referred." Not surprisingly Mr Anderson was the subject of rigorous cross—examination. It was put to him that in effect once he had become personally involved in the proceeding by force of the adding of his company as respondents, he had changed his testimony to suit the situation. He was not an impressive witness and, at least, where his testimony conflicts with that of Mr Farrell I would prefer Mr Farrell's version of the conversations. In summary, therefore, 1t may be said that the setting of a target rental for FH1 and a projected turnover related to that rental came about as a result of initial turnover projections for the total shopping centre complex being revised upwards to produce a target rental for the total complex which was then split up among the various areas which were to be leased by the owners of the centre in conjunction with the CM Group as manager. The base rent of $180,000, computed by reference to a minimum projected turnover of $3 million or $60,000 per week came about, not as a result of any survey conducted as to the likely turnover of a fruit shop, but as a result of Mr Anderson's assessment of Mr Malouf's capacity to achieve that turnover. There is one matter in this context which causes me some concern. It is obvious on the evidence that Mr Malouf was not prepared himself to accept a lease on terms that the minimum rent he was to pay would depend upon his shop achieving a minimum turnover of $3 million. He had counter- proposed an alternative basis of rent on the assumption that the turnover might be less than $3 million. In the absence of Mr Malouf it can readily be inferred that he did not have a personal confidence in the achievability of a $3 million turnover. No explanation was given by the respondents for failing to call Mr Malouf and, in accordance with the usual principles expounded by the High Court in Jones v Dunkel (1958-59) 101 CLR 298, it may be inferred that Mr Malouf's evidence would not have assisted the respondents' case. ieic's | os Mr Nizic had no contact with Mr Malouf until well after Elite had commenced trading at Australia Fair. He did, however, visit other fruit shops in the Gold Coast area prior to entering into the lease arrangements. On 6 February 1990 he visited Nerang Fresh Fruit and Vegetable in Nerang and looked at some turnover figures from that shop. He visited, as well, the Karara Fruit Market, Harris Farms in Ashmore, as well as some shops in or on the way to Brisbane. His interest appears to have been in matters such as average customer purchases and cash flow. The manager of Harris Farms at Ashmore went into some detail in his discussions with Mr Nizic. Indeed, it seems that Mr Nizic had visited Karara Fruit Market and Harris Farms at Ashmore as well as the Sundale Fruit Market before the meeting with Mr Farrell on 29 January. Mr George had also, at least by the middle of February, spoken to Mr Richman and communicated the result of his inquiries to Mr Nizic. According to Mr George he had met Mr Richman "a few months" before the store had opened at Australia Fair. It was, so he said, before the first conversation with Mr Farrell. Mr George, in cross— examination, said that he asked Mr Richman what was happening to Sundale and Mr Richman told him that Sundale was closing and that Mr Richman had been "paid out". He inquired also, from Mr Richman, about the gross takings of his Sundale business and was told, so Mr George said, that Mr Richman took around $80,000 per week there. Mr Georges' assessment was that at least 15% of the business from Sundale would move to Australia Fair with the closure of Sundale. It may be noted in parenthesis that Mr Richman's trading figures were not as high as $80,000 per week, so there is some doubt as to the accuracy of Mr George's account of the conversation, at least in matters of detail. ~ 25 - When asked whether he had told Mr Nizic of the conversation with Mr Richman and the $80,000 per week turnover, Mr George replied that Mr Nizic had done his own investigation prior to that and knew more than he did. He was not aware whether Mr Richman had spoken to Mr Nizic but believed that Mr Nizic "would have known what was going on in the area". Later Mr George accepted that prior to the meeting with Mr Farrell he had told Mr Nizic of the conversation with Mr Richman and of the $80,000 per week turnover. Mr George denied saying to Mr Nizic that he believed he would attain $60,000 per week turnover easily, but rather thought he had said: "If I can get it up to $45,000 I'll be more than happy." In that conversation, according to Mr George, Mr Nizic had continued: "Mr Farrell said you would take 60." To this Mr George replied: "Well, if we take 60 it's a bonus." In re-examination Mr George said that his discussions with Mr Richman about the Sundale Fruit Market turnover had not occurred in the two or three week period between the first discussions between Mr Nizic and Mr George and the conversation with Mr Farrell in which Mr Farrell had said something about feasibility studies. Mr George said that he went to Sundale and watched the operation there for a few hours each day. This evidence in re-examination was, of - 26 - course, quite in conflict with his evidence in cross-— examination. fe] e s Bank New South Wa On 2 March 1990 an application was made on behalf of Eagle Resources for finance, inter alia, to open and operate the Australia Fair fruit shop. The application was made by Capdev Business Finance Pty Limited. Accompanying' the application was a letter from Holmes and Partners, the accountants of Mr Nizic, together with a document prepared by that firm expressed to be a projected cash flow statement of the fruit and vegetable market at Australia Fair. Mr Holmes' letter set out details of the experience of Mr Nizic and Mr George and, under the heading "Cash Flow Projection", read as follows: "we enclose a Cash Flow Projection for the first 12 trading months. The figures contained in the enclosed projection are based on a _ conservative level of sales for similar sized establishment in a Shopping Complex environment. Costs have been determined at levels relevant to the type of business after adjusting for known factors and local trends." The cash flow projection showed gross takings at $2,860,000 and the cost of goods sold as $1,887,600, - 27 - projecting a gross profit of $972,400 before expenses, leaving a projected net profit of $336,500. An accountant's report attached to the projected cash flow statement said that the statement had been prepared: "from information and instructions furnished to us by our client". Mr Nizic denied that the figure of $2,860,000 had been derived from inquiries which Mr Nizic had made in the meantime from other shopping centres. Information regarding expenses came, he said, ultimately from Mr George. The conclusion sought to be drawn and which was denied by Mr Nizic was that the application for finance and the cash flow forecast demonstrated that Mr Nizic had carried out his own inquiries and had not relied upon anything Mr Farrell said to him as to gross takings. Mr George denied ever having communicated with Mr Holmes. In contrast, to the best of Mr Nizic's knowledge, Mr Nizic, Mr George and Mr Holmes had discussed the preparation of the Holmes and Partners' letter together. Mr Holmes' evidence was that on or around 7 February he had met both Mr Nizic and Mr George and gone through with them a number of matters in relation to the proposed business. He said that he attempted at that meeting to extract some details of projected income and projected expenses and obtained details, inter alia, of the background of Mr George. Notes of that conversation were produced by Mr Holmes. Those notes add little to an understanding of what happened but show that Mr Holmes was instructed to prepare the cash flow statement for the purposes of the State Bank Finance application on 7 February 1990. The notes contain the words and symbol "Sundale $60,900 +", which suggests that there had been some discussion of Sundale Fruit Market producing a turnover in excess of $60,000. Mr Holmes was able to recollect some aspects of the conversation but was not able to say whether Mr George or Mr Nizic had caused him to write this. Ultimately the evidence throws no light on how the figure for projected gross sales of $2,860,000 was derived. Mathematically it equates to $55,000 per week and may amount to no more than the allowance of a conservative discount of $5,000 per week from the sum of $60,000 per week referred to by Mr Farrell. The agreement for lease On 2 May 1990 Elite executed an agreement for the lease of FH1 with the owner BPTC. The rent was guaranteed by Mr and Mrs Nizic and Mr George. Shortly thereafter Elite commenced trading at Australia Fair. It seems that no minutes of any meetings of directors of Elite resolving to enter into the lease were kept. Indeed so far as it appears no meetings were held. - 29 - Mr Nizic (and Mrs Nizic and Mr George) signed the agreement for lease after it had been explained to Mr Nizic by his solicitor. At the same time the solicitor explained to Mr Nizic another document being a deed of acknowledgment between Elite and the lessor. This document contained an acknowledgment on the part of Mr Nizic in his own handwriting that there had been no representation of any kind which he had taken into account or relied upon in entering into the agreement for lease. Mr Nizic says that he knew when he signed this document that it was incorrect. According to Mr Nizic's evidence thereafter, it was apparent, at the latest by the end of August 1990, that the fruit shop business was not likely to gross $60,000 a week. It is Mr Nizic's case that the business ran at a loss. By the middle of 1991 Mr Nizic had formed the view that the business was "hopeless", would continue to lose money and should, if possible, be sold by Elite. Ultimately the business was sold on 2 September 1991 to a company called Chadori Pty Limited for $100,000. Elite is said to have received from the sale $92,509.15 after payment of costs. The total amount claimed by Elite is, excluding interest, $672,993.80. I shall return later to some aspects of the financial records upon which Mr Nizic's calculation is based. - 30 - Findings on credit It will be apparent that the questions of whether representations were made by Mr Farrell, as alleged in the statement of claim, and whether Elite relied upon those representations in entering into the lease of FH1, depend substantially upon which version of the evidence is accepted. Not surprisingly, counsel for the respondents attacked Mr Nizic on a number of fronts. He referred to: * the conflict in testimony between Mr George and Mr Nizic concerning the closure of Sundale * complaints about Mr George * acts of dishonesty on Mr Nizic's part in making cash payments to employees * the signing by Mr Nizic of the deed of acknowledgment knowing it to be false, and * the supply to the State Bank of profit and loss figures known to be wrong. I shall deal briefly with each of these matters. wi George Mr Nizic At various places in his evidence Mr George appeared to accept not only that he knew Sundale was closing but that he discussed this and the trading figures gleaned from Mr Richman with Mr Nizic before the conversation with Mr Farrell, presumably either the conversation on 19 January 1990 or on 29 January 1990. Mr Nizic's evidence, on the other hand, was that he first learned about the closure of Sundale from Mr Farrell. Mr Nizic denies that Mr George told him about Sundale closing. I have little doubt that Mr George did find out that Sundale was to close and did discuss that with Mr Nizic. Indeed it is hard to imagine to the contrary. The only difficulty I have is in concluding that the discussion with Mr Nizic occurred after the discussion with Mr Farrell. Mr George appeared to have considerable difficulty in understanding questions which were put to him. It would seem that English is not his native language, a matter for which he can, of course, not be criticised. He also appeared to have great difficulties placing events within a time sequence. By contrast, Mr Nizic was a confident witness with generally good recall. Since it is inconceivable that Mr George would not have told Mr Nizic everything that he had found out about Sundale as soon as he found it out, it is tempting to discount the testimony of Mr Nizic. However, I think that there is another explanation, namely, that Mr George had not made inquiries about Sundale at the time of the initial meeting with Mr Farrell on 19 January, it being clear that the matter could not have been the subject of any discussion until that time. This would suggest that Mr George learned thereafter of the Sundale details and before the meeting of 29 January. While this on its face appears inconsistent with Mr Nizic's evidence, it seems that Mr Nizic too had some problems with the time frame as witnessed by the fact that Mr Holmes' notes put the detailed conversations back into the middle of January rather than the end of January. In any event I do not think that Mr Nizic's denial of Mr George's evidence of itself would be sufficient to destroy his credit. I conclude, however, that Mr George did not advise Mr Nizic that Sundale was to close prior to the initial meeting with Mr Farrell. ents ees As part of its case on damages, Elite produced profit and loss accounts for the relevant period. These were prepared in accordance with the usual practice from a cash book as the medium of prime entry, subject to balance date adjustments as would need to be made for debtors, creditors, stock on hand, petty cash and the like. So far as sales are concerned, as fruit retailing is a cash business, sales entries in the cash book were derived from banking records. Thus the accuracy of the cash book and ultimately the profit and loss account depended upon whether all sales were in fact banked. The person in charge of maintaining internal records for Mr Nizic was a Ms Vicki Penwarn, no longer employed by Mr Nizic or any of his companies, whose evidence was taken by video link from Queensland. She was not an impressive witness and gave the appearance of having something to hide. What that was emerged clearly enough in the course of her evidence. Ms Penwarn prepared, on a regular basis (she initially denied it), figures which, at least while Mr Nizic was in the United States, were sent to him by facsimile transmission. Complete copies of what passed between Ms Penwarn and Mr Nizic covering the whole period of operation of Elite's fruit business were not available. It may be inferred that on most occasions there was forwarded a header page, a document showing banking for the week, a document entitled "Fields of Fruit Estimated Profit and Loss", a page showing stocktake and a further handwritten form setting out the name of each employee, the hours they worked, the rate they worked, their gross salary, the tax deducted, the net figure with a column headed "Comments". Beside the name of various employees under the heading "Comments" appeared figures which represented amounts taken out of the cash takings and paid to the employee in the employee's pay packet. These amounts rounded up the net salary of an employee after tax so, for example, a "M Hechtl" received a gross salary of $335.20 from which $56.20 tax was deducted (a net of $279) and the amount after tax was then rounded up by a further cash amount of $221 so that that employee received $500 per week cash in hand. MThe documents "Fields of Fruit Banking" showed, in addition to amounts actually banked, a heading "Drawings", which listed the amounts of cash not banked, part of which amounts included the cash payments to employees. From the document itself it would impossible to say where the remainder of cash drawings went to. Ms Penwarn denied that any document existed which explained where the totality of drawings went. She offered as one explanation that cash was used to purchase cash stock. No documents were produced in the form of invoices or otherwise which substantiated this explanation. I would not go so far as to find that cash purchases were not made, but if any were made they were few and far between. She denied that any moneys went to Mr Nizic but said that wherever moneys in cash were taken from the till they were always used for the purpose of the business. Most of the extant documents contained no header page. Where there was a header page, however, it often at least contained a dissection of drawings explaining where the cash amounts had gone to. From her evidence it appears that amounts of cash were paid by way of what appeared to be a secret commission to a buyer attached to a hotel. Another document shown to Ms Penwarn showed in a particular week that Mr Nizic received an amount of $200 cash. Ms Penwarn could not recall what the entry was for. For the respondents it was submitted that the making of cash payments to employees was clearly dishonest, that Mr Nizic knew of the payments and knew that the procedure had been adopted to evade tax. Mr Nizic did say that he was unaware whether group tax was being paid upon the cash payments, but this evidence is hard to accept. It is hardly commendable to embark upon what appears to be a conscious policy of paying employees a cash supplement from which income tax has not been deducted. It no doubt means that I should and will scrutinise Mr Nizic's evidence carefully in other areas before accepting it, although it does not logically follow that because Mr Nizic was aware of cash amounts being paid to employees he was not telling the truth in critical respects in the present case. The supply of misleading figures to the State Bank Finance had been provided by the State Bank to Elite and Eagle Resources. The precise detail of these banking arrangements was not in evidence. It seems, however, that it was Eagle Resources which entered into the arrangement with the State Bank and onlent moneys to Elite. Elite, in its -~ 36 - turn, paid interest to Eagle Resources, a matter the subject of contention in the computation of damages. The Bank required trading figures to be produced from time to time. Pursuant, one may infer, to such a request, Mr Nizic forwarded, on 21 February 1991, to the Bank what he described as "accounts for EliteGold as requested completed by the accountants". The document forwarded contained a letter from Holmes & Partners to the Secretary of Elite, enclosing what was said to be a Statement of Trading and Profit and Loss in respect of the period 1 November 1990 to 31 January 1991, prepared from the books of account, records and other information supplied, presumably by Mr Nizic. The letter said, in its last paragraph: "Various expenses such as finance charges, depreciation etc. which are directly attributable to the manner in which you have operated and financed the business, have been adjusted." The Statement of fTrading and Profit and Loss contained no expense item for interest or for management fees, although these fees were said to be properly payable between Elite and Eagle Resources. It was submitted that the accounts were accordingly clearly misleading and showed a distorted net profit figure. Mr Holmes, whose evidence I accept without hesitation, made it clear that he regarded the profit and loss statement for the three months enclosed with his firm's letter as satisfactory, provided it was read in conjunction with the letter which made it clear that finance charges had been adjusted. Mr Holmes denied having been instructed to produce a false document. But even if Mr Holmes had been specifically instructed so to do, given that the Bank was financing Eagle Resources, it was quite understandable why intercompany transactions could sensibly be excluded to see the real profitability of the Elite business. This part of the attack on Mr Nizic's credit, in my view, fails. a orge as manager of the sho Mr Nizic denied a suggestion, put to him by counsel for the respondent, that there was an ongoing problem in the relationship between Mr George and himself, particularly concerning stock purchases and wholesale sales. One thing is of course clear and uncontroversial, namely, that the relationship did ultimately break up and Mr George was replaced in the position of manager by a Mr Wayne Hoey. Mr Hoey, in a facsimile transmission to Mr Nizic of 20 March 1991, wrote that he had stressed to Mr George that: "... his buying was not the best he could do, and we agreed to discuss the next day's buying in the afternoon before-hand. This I hope will stop him from buying the - 38 - extra quantities he occasionally gets carried away with." It is obvious, on the face of the correspondence and not disagreed with by Mr Nizic, that there was a difficult working relationship between Mr George and Mr Hoey. However, Mr Nizic denied being concerned at the way Mr George was conducting himself. Ultimately Mr Nizic relieved Mr George of management of the shop. It is also true that it appears that Mr George took a sum of money in cash which was not banked over a weekend and used it for his own purposes. Mr Nizic said that the amount was thereafter repaid, although no record of that could be traced. These matters, to a limited extent, cast doubt upon Mr Nizic's answer denying an ongoing problem with Mr George. On their own they would not impugn Mr Nizic's credit. Mr Farrell's credit The attack on Mr Farrell's credit was levied at the way in which it was said he had dealt with the "collision" between what he said Mr Anderson told him and what he said he told Mr Nizic at the meeting which took place either on 19 January or 29 January 1990. It is clear that the initial evidence filed by Mr Nizic and Mr Anderson was consistent, a consistency which, as I have earlier observed, ceased to exist once Mr Anderson's companies were made a party to the litigation as respondents. I have already indicated that in the event of a conflict I would prefer the evidence of Mr Farrell to that of Mr Anderson. Another matter to which comment was directed was Mr Farrell's assertion in his initial affidavit denying knowledge of there being any survey in existence in relation to Australia Fair. However, in cross-examination it was obvious that Mr Farrell had seen a number of the surveys that were tendered. Mr Farrell sought to overcome the problem by denying knowledge of the existence of a survey of the kind referred to by Mr Nizic, namely, a survey which referred to turnover of $60,000 per week in the fruit market. In s0 doing, Mr Farrell was not convincing. Ultimately I prefer Mr Nizic's evidence to that of Mr Farrell where they are in conflict. This is to a large extent because in one important respect Mr Nizic's evidence is corroborated by external evidence brought into existence contemporaneously in the form of Mr Holmes' diary notes. Mr Nizic's evidence is, in the most critical respect, also corroborated by Mr George who appears to have no reason to give false evidence in favour of Mr Nizic. While it may be said that Mr Farrell had no financial interest in the outcome, a matter I take into account, his professional standing was clearly at stake in a case where the allegation is that he has been guilty of misleading and deceptive conduct. Findings on representations Representation (a) There is no dispute between the parties that Mr Farrell advised Mr Nizic that Sundale was to close. Having regard to the evidence which I have outlined above it is clear that there was a reasonable basis to believe that this was the case and in the result the first representation involves no question of misleading or deceptive conduct. Representation (b) The applicant's own evidence does not support a finding that Mr Farrell represented that in the event of the closing of Sundale the business at Australia Fair would be profitable. I find that Mr Farrell did represent to the effect that the likely turnover or estimated turnover, after the closure of Sundale, would be $60,000 per week. Even Mr Farrell concedes that he referred to a likely turnover of $60,000 per week. But that representation was unrelated to profitability. Representation (¢) Again, the evidence of Mr Nizic, or for that matter Mr George, did not support a finding that a representation was made in the terms referred to in the statement of claim. I find that Mr Farrell did not say words to the effect that the rent for the shop FHi could fairly be calculated on the basis of an anticipated return of $60,000 per week. Rather, what Mr Farrell said was to the effect that the rent would be tied to turnover and that it was estimated that the turnover would be likely to be $60,000 per week. Mr Farrell then referred to a reasonable rent to turnover ratio for the business being around 6% of turnover, but that is very different from saying that the rent could "fairly be calculated" on the basis of a $60,000 per week return. Representation (d) It is clear that there was no discussion about whether or not the Richman family were entitled to continue to conduct the business at Sundale or whether the owners of Sundale intended to maintain their operations. No submissions were put to me on the basis that the failure to disclose these matters involved misleading and deceptive conduct. No question of duty to disclose arose nor could the case be said to be one where inadequate disclosure rendered some other representation misleading. In my view Mr Nizic has not succeeded in showing, in respect of the failure to refer to these matters, that the respondents, or any of them, engaged in misleading and deceptive conduct. Representation (e) No conduct by the respondents, or any of them, is identified in this particular capable of being misleading or deceptive. Representation (f) I find it is more probable than not that Mr Farrell did say words to the effect that there had been undertaken a market survey and that based upon the closure of Sundale that survey indicated a turnover of $60,000 per week for the fruit shop. That representation was false and indeed it is conceded that there was no document capable of being described as a market survey which indicated that the shop FH1 was likely to have a turnover of $60,000 per week operated as a fruit shop. Reliance Counsel for the respondents concentrated his oral submissions, supplementing extensive written submissions, upon the element of reliance. In so doing he correctly identified the crucial issue in the case. It was pointed out that Mr Nizic was an extremely experienced businessman and Mr George an experienced fruiterer. Reference was made to the information obtained from Mr George in relation to Mr Richman's takings, Mr George's experience in the trade and the inquiries which Mr Nizic himself admitted he had carried out. It was submitted also that if Mr Nizic had relied upon Mr Farrell's representation of the existence of a survey, it would have been likely that he would have made reference to this in the submissions made to the State Bank seeking finance for the establishment of the business. There is no doubt that prior to the lease being entered into Mr Nizic had made his own inquiries and was aware of the probable closure of Sundale, of the takings of Mr Richman and, in a general way at least, of the turnover of other shops in the area. If the issue were whether the representation made by Mr Farrell was the sole matter relied upon by Mr Nizic, the answer would be clearly that it was not. It was accepted by the respondents as settled that a representation need not be the sole inducement. As Wilson J said in Gould v Vaggelas (1983-85) 157 CLR 215 at 236: "It is sufficient so long as it plays some part even if only a minor part in contributing to the formation of the contract." There is little doubt that the representation I have found to be made was capable of being material. The fact that Mr Nizic and Mr George had made inquiries which confirmed the likelihood of the $60,000 being correct, does not necessarily negate the possibility that the representation that a market - 44 - survey existed induced Elite to enter into the agreement for lease. The real issue is whether it did. Where more than one factor may act as an inducement to enter into a contract, it will be essentially a question of fact whether one of those factors operated to induce the entry into of the contract. As the Full Court of this Court pointed out in Ricochet Pty Ltd v i Trustees Ex Company Ltd (1993) 41 FCR 229, it would not, of itself, be enough for an applicant to show that the misrepresentation might have induced the conduct which gives rise to the loss. This is so because such a finding would not establish as a matter of probabilities that it did. After commenting that a non-trivial contribution to the causative process by the misrepresentation may give rise to a right of action in damages, their Honours continued (at 235): "Ultimately, the 'causative threshold' beyond which liability attaches to a misrepresentation which is one of a number of factors in inducing a decision that produces loss, will be a question of judgment." The question resolves itself into a matter of "common sense": March v E_& MH Stramare Pty Limited (1990-91) 171 CLR 506 at 518. It was submitted that the present case was complicated because the applicant was a corporation and accordingly it was necessary to determine the corporate mind of the applicant. On the facts of the present case it was submitted that particular attention should be given to the mind of Mr George as a director of Elite, particularly as it was Mr George who had the experience in the fruit industry. The relevant principle of law can be shortly stated. A corporation of necessity must act through persons: Tesco Supermarkets Ltd v Nattrass [1972] AC 153 at 170; Smorgon v Australia and New Zealand Banking Group Ltd (1976) 134 CLR 475 at 482-3 per Stephen J. In the ordinary case where decisions of directors are made at meetings of a board, it would usually be appropriate in determining the state of mind of the company to determine the state of mind of the individual directors: cf Allied Pastoral Holdings Pty Limited v Federal Commissioner of Taxation (1983) 83 ATC 4015 at 4017-8. In a particular case a company may be so dominated by a particular individual that the decision of that individual may, as a matter of fact, be taken as the decision of the company and in consequence the mind of that individual may be taken as evidence of the mind of the company; cf Securities §& Management (Nominees) Pty. Limited v Federal Commissioner of Taxation (1978) 78 ATC 4674 at 4679. The question in each case, and it is a question of fact, is to determine the guiding or "directing" mind of the company. Despite a submission to the contrary I think the present is a case where Mr Nizic was that guiding mind. He was the one putting up the money and there is little doubt, observing Mr Nizic, that as between Mr George and Mr Nizic, the latter made the decisions, even if he asked Mr George his opinion and listened to the answer. The fact that Mr George was familiar with the fruit business and Mr Nizic was not does not, in my view, alter the reality of the situation. Thus in the event that there was some conflict of minds between Mr Nizic and Mr George I would, in the present case, require to be satisfied as to Mr Nizic's mind, rather than that of Mr George. In so far as it is necessary to consider Mr George's mind in the present circumstances, it 1s clear enough that Mr George had his own reasons for wanting the arrangement to proceed. He was, after all, out of work and frankly admitted that he had done all he could to encourage Mr Nizic to proceed with the arrangement. I doubt that he was influenced to any substantial extent, at least, by the representation made by Mr Farrell. He was confident in his own mind that he could make a go of the shop and that confidence was based on his own experience, his own inquiries and his desire to return to the fruit retailing business. Ultimately I am not satisfied on the balance of probabilities that Mr Nizic either was induced to enter the lease of FH1 at Australia Fair by the representation that a survey existed indicating a turnover of $60,000 per week. Rather, I think he was induced so to do by virtue of the inquiries he made of other fruiterers and the advice and guidance he received from Mr George and the latter's enthusiasm for the project. I reach this conclusion on a number of bases. First, I regard Mr Nizic as an astute and competent business man who would ensure he researched a project himself before committing to it. Second, so far as the evidence discloses, Mr Nizic made no attempt to sight the survey, which, if significant to him, could reasonably have been expected to have been looked at by Mr Holmes and used as a basis for negotiations with his bankers. Third, his own inquiries suggested that a turnover of $60,000 per week would be possible, particularly if Sundale closed. The fact that it did not no doubt contributed to the failure of the Australia Fair venture. Fourth, I accept that Mr George probably did express the view that a turnover of $45,000 would be one with which he would be happy, meaning, no doubt, that the business would be profitable at this level and that $60,000 would represent a "bonus". Finally, there is the influence and enthusiasm of Mr George which contributed to Mr Nizic's decision. Nevertheless, I think that Mr George's observation to the effect that Mr Nizic had done his own research and knew more than Mr George did about the business (ie the financial side of the business) is a most astute observation. I would make it clear that in reaching this conclusion I do not find that Mr Nizic was deliberately untruthful in the witness box. I think it 1s more likely than not that he has rationalised the reasons for entering into the lease after the venture failed minimising unconsciously the significance of his own part in the decision-making process. It is not insignificant that, as I have already noted, as late as the middle of 1991 Mr Nizic attributed the real cause of loss to be the failure of Sundale to close, not the impossibility of achieving $60,000 per week in accordance with some survey he had never seen. Subsidi _ . Although not necessary to my decision, I would set out briefly my opinion of the respondents' submissions in relation to causation. In the ordinary case arising under s.82 of the Act a finding that a misrepresentation induced the entry into a contract would lead to the conclusion that any loss was occasioned by the misrepresentation. However, there may be levels of difficulty in the question of causation. It was submitted by the respondents that any loss to Elite arose not out of its entry into the contract, howsoever induced, but - 49 - out of other factors. It was submitted that the loss should be attributed exclusively to the following factors: * The buying and retail pricing decisions of Mr George. * The lack of capital in the business. * The fact that the business was a cash business. * That in any event, even if the business had received gross takings of $60,000 per week it could not have succeeded. * The absence of Mr Nizic overseas through much of Elite's operation. * The success of Woolworths operating a fresh food outlet and adopting an aggressive pricing policy. In my view, these submissions should be rejected. he buvi d retail pricing decisi : Mr ¢ In essence two criticisms were made. The first was that Mr George over purchased. The second was that Mr George did not maintain a profit margin of 33%4%, as was originally contemplated by him. It is difficult on the evidence to draw a conclusion one way or the other as to the contribution of bad management to such losses as were suffered by Elite. FH1 was a large and - 50 - perhaps unwieldy area. Buying in large quantities, apart from economies of scale, may have been necessary to avoid the appearance of an empty shop. Pricing at a margin under 33%% may and probably was necessary to compete against Woolworths. Mr George in his evidence in any event rejected the allegation that there had been excessive buying. He saw such an allegation as one made by a person with no experience in the business. He pointed out that if fruit was not sold within 24 hours it had to be sold quickly and that required reducing prices and therefore margins. So too, specials necessary to attract business required stock to be sold at cost. He said that on one day of trading in Australia Fair there would be no-one in the shop at all and on other days it would be busy. He said; "so you fill it up and you hope for the best." His assessment is that the business was doomed from the day it started. I accept Mr George's evidence that while he was involved in the business he purchased stock at the best prices he could and sold it to the public at the best prices he could. No evidence to the contrary was proffered. In these circumstances I do not think that there is any substance in the allegation. Lack of capital It was submitted that the only capital, by which was meant paid up capital of the company, was $100 and that Elite was totally dependent upon borrowings which placed a substantial burden on profitability. So much is true but the claim of Elite is for the loss of money suffered as a result of a misrepresentation inducing entry into the contract. There is no evidence to suggest that the reason for failure of the business lay with a lack of capital. Even if the business had received $60,000 per week it could not have succeeded Arguably, this question goes more to the issue of damages than to the question of causation. If a misrepresentation induces the representee to enter a contract, which the representee would otherwise not have entered, it 1s hard to see how the fact that, upon entering the contract, some of the loss suffered would still have been incurred (irrespective of the making of the false representation) is material. The submission was based in part on the cross-— examination of Mr Nizic where his attention was drawn to cash statements for November and December 1990. It was suggested to him that the business could not have a achieved a "positive cash flow" on a turnover of $60,000 per week. With this proposition Mr Nizic agreed. However, there is a significant difference between cash flow on the one hand and profitability on the other, particularly where part of the business was a wholesale business where accounts were presumably paid over a period of time. Thus, as counsel for Elite submits, where wholesale sales are rising so that, while stock has to be purchased by immediate payment, revenue is received in the future, a negative cash flow may be achieved although the business may be trading profitably. The difference is ultimately one of the difference between cash accounting and accrual accounting. Although the onus remains upon the applicant to show both that its loss arose out of the misleading and deceptive conduct and the quantum of the loss, where an allegation is made that a loss arose from some other factor intervening, the tactical onus will be on the respondent to make out the effect of the intervening factor. It is not sufficient to say, as counsel for the respondent in written submissions said, that there is no evidence to suggest that Fields of Fruit would have been profitable on a turnover of $60,000 per week. Likewise, there is no evidence to suggest that the shop would have been unprofitable if there had been a turnover of $60,000 per week. - 53 - It is undoubtedly clear that the applicant was aware, at all times, of the expected presence of Woolworths at Australia Fair. That presence had been discussed in meetings between Mr Farrell, Mr Nizic and Mr George. There is some evidence to suggest that Woolworths had successfully promoted itself in the fresh food market but I am not satisfied, on the balance of probabilities, that the failure of the business arose out of the success of Woolworths. Having regard to my finding on the issue of reliance, no question of damages arises. However, I would comment briefly on the submissions made. The present claim by Elite is one for consequential loss. It is no answer to the claim to say, as the respondents in their written submissions said, that entering into a lease should be treated in the same way as entering into a contract for the purchase of an asset. Gould v Vaggelas, by analogy, provides the answer to that submission. The respondents' attack on the issue of damages essentially relied on two propositions. The first was that no credence can be given to any financial records of the applicant. The second was that Elite knew almost straight - 54 - away, so it is said, that the business was not performing and accordingly should have acted to minimise its loss. I shall deal with each of the two arguments separately. The problem with the books There was a curious argument that because the profit and loss accounts tendered were unaudited, the Court should not be satisfied that they were a true record of the financial transactions. It is true that I am not satisfied that the profit and loss accounts tendered are a true record of the financial transactions of Elite, but that has nothing to do with their status of being audited. It has to do with the admission by Mr Nizic of transactions and the evidence of those transactions which make it clear that cash amounts were taken from the till. The critical question would be whether I _ was satisfied on the balance of probabilities that amounts paid out in cash by Elite were used in the business of the company. If so, then the fact that the profit and loss account prepared by Mr Holmes was not accurate would be a matter of no consequence. Although I was unimpressed by the way Ms Penwarn gave evidence, one thing was clear to me. The accounting system involved in her reporting to Mr Nizic had _ been carefully set up to ensure that every cent of takings was accounted for. This is obvious enough in noting the cash payments to employees. These were clearly business expenses and while they understated the gross sales they did not ultimately affect the question of profit or loss. The fact that a secret commission may have been paid (otherwise an expense of the business) hardly affects the matter either. The only matter actually brought out in the evidence dealing with accounting matters that causes me some concern is the question of how much money was paid to Mr Nizic. There was evidence of one amount of $200 in cash paid to him. But most of the records which might have shown similar payments no longer exist. Mr Nizic denied payments were made to him as did Ms Penwarn. I would not accept Ms Penwarn's evidence on this. The possibility remains that other amounts were paid to him. The onus lies on Mr Nizic to show this was not so on the balance of probabilities. Another accounting matter raised was the issue of management fees that were apparently paid between Elite and Eagle Resources. The evidence about these management fees was fairly scant. Mr Nizic set the amount and directed that it be paid. Mr Nizic's evidence makes it clear that some of the amount related to Ms Penwarn who was an employee of Eagle Resources until early 1991 when she was transferred to the Elite payroll. Further, Mr Nizic's evidence makes it clear that the fee was not charged by reference to expenses, it was set in advance based on Mr Nizic's own estimate of what might be involved. The fee, throughout the period Elite was carrying on business, was apparently $700 per week and this, notwithstanding that Ms Penwarn, in at least some of the period, was directly employed by Elite so that her salary was presumably paid by that company. Were there a need to assess an appropriate quantum of damages I would be unable on the evidence to determine how much of the management fee may have been a proper charge against the income of Elite although clearly some part of it was. Failure to mitigate loss It was submitted on behalf of the respondents that Elite should not, if it suffered damage by reason of a breach of s.52 of the Act, be awarded damages for the entirety of its loss. It was said that it was clear from an early date that the business was not performing to expectations. Mr George, in his evidence, expressed the view that the business was doomed from the day it started. Mr Nizic conceded that he was aware fairly early that the business was not performing. He said that he was becoming worried by the beginning of July and that it was extremely apparent to him by the end of August. Mr Nizic's evidence was that he stayed on in the business in the belief that Sundale would close and indeed in the middle of 1991 had written a document suggesting that the real cause of the loss, in his opinion, was that Sundale had not closed with the result that Australia Fair attracted patronage from a percentage of Sundale customers. Ultimately Elite extricated itself from its loss making situation by the sale of the business which, however, did not occur until 2 September 1991. On the assumption that, at the latest by August 1990, Mr Nizic was aware that the business could not have reached a turnover of $60,000 per week, some 13 months ensued thereafter before the business was in fact sold. No doubt some time would be needed to sell the business but the amount of time in question here seems somewhat great. There can be little doubt that the onus of proving lack of mitigation falls upon a respondents: Watts v Rake (1960) 108 CLR 158. That does not, however, mean as is suggested by counsel for the applicant that absent evidence that a reasonable applicant would have ceased to trade at a point of time earlier than Mr Nizic did, the argument should be decided in favour of the applicant. There are some significant matters to be considered. As counsel for Elite observed, Elite was locked into a 12 year lease and so could not simply cease trading at any time. The courses available to it were to seek to make its business profitable by - 58 - expanding its wholesale activity, or taking steps to sell the business. I believe that a reasonable period to sell would have been in the order of six months. After the evidence had closed, counsel for Elite sought to amend the statement of claim to add, in the alternative, what amounted to a new allegation of misleading and deceptive conduct, namely, that there had been a representation made by Mr Farrell to the effect that a likely turnover for FH1 would be $60,000 per week. It was submitted that no possible prejudice could flow from the amendment it seeks. The amendment was hotly contested by the respondents and the submission that no prejudice could accrue was disputed. I would reject the amendment for two reasons. First, it came at a point too late in the proceedings. If it added anything to the allegations originally pleaded, a fortiori, a possibility of prejudice arose. Second, even if the amendment were allowed and on the evidence as it stood no different result would follow. In the result I would dismiss the application. Although the respondents have been successful overall, considerable time was spent at the trial on evidence which - 59 - went to the issue whether the respondents had contravened s.52 of the Act, an issue upon which Elite has succeeded. I will accordingly stand over the application to a date to be fixed to hear such submissions as the parties may wish to make on the question of costs. I certify that this and the preceding fifty-eight (58) pages are a true copy of the Reasons for Judgment herein of his Honour Mr Justice Hill. Associate: Date: 28 October 1994 Counsel and Solicitors SJ Motbey and MW Young for Applicant: instructed by Vaughan Barnes Counsel and Solicitors JS Wheelhouse instructed by for Second, Fourth and Mallesons Stephen Jaques Fifth Respondents: Dates of Hearing: 15 - 19, 22 - 26 August 1994 Date Judgment Delivered: 28 October 1994