wat JUDGMENT No. wou O23. 20 eveCcesoneee CATCHWORDS TRADE PRACTICES - misleading and deceptive conduct - predictions as to future takings - entry into lease of business premises - principles and calculation of damage Trade Practices Act 1974 (Cth) ss 52, 82 Bourke v_ Butterfield and Lewis Ltd [1926] 38 CLR 354 Wardley Wardley Australia Limited and anor v Western Australia [1992] 175 CLR 514 Milner & Ors v Delita Pty Ltd [1985] 9 FCR 299 Elna Australia Ltd v International Computers (Aust) Pty Ltd [1987] 14 FCR 461 Jobbins v Capel Court Corporation Ltd [1989] 25 FCR 226 Argy v Blunts & Lane Cove Real Estate [1990] 26 FCR 112 Magman International Pty Ltd and ors v Westpac Banking Corporation [1991] 32 FCR 1 Sutton v_ A J Thompson Pty Ltd (In lig) [1987] ALR 233 Emanuele & Ors v The Chamber of Commerce §& Industry SA Incorporated [1994] ATPR 46-121 U.B.A.F. Ltd v European American Banking Corporation; The Pacific Colocotronis [1984] QB 713 RITA ANTONIOU & MICHAEL ANTONIOU v KAREDIS ENTERPRISES PTY LIMITED &_ANOR No. G 861 of 1992 EINFELD J FEDERAL COURT OF SYDNEY AUSTRALIA PRINCIPAL 15 DECEMBER 1994 REGISTRY IN THE FEDERAL COURT OF AUSTRALIA ) NEW_SOUTH WALES DISTRICT REGISTRY ) No. G 861 of 1992 GENERAL DIVISION ) BETWEEN: RITA ANTONIOU & MICHAEL ANTONIOU Applicants AND: KAREDIS ENTERPRISES PTY LIMITED ACN 000 501 673 First Respondent GREENFRIARS PTY LIMITED ACN 002 031 450 Second Respondent MINUTES OF ORDER The Court orders that: 1. there be judgment for the applicants on the application for $270,000 2. there be judgment for the cross applicants on the cross- application for $120,000 3. the xespondents pay the applicants $150,000 Note: Settlement and entry of orders are dealt with in accordance with Order 36 of the Federal Court Rules. EINFELD SYDNEY 15 DECEMBER 1994 IN_ THE FEDERAL COURT OF AUSTRALIA ) NEW SOUTH WALES DISTRICT REGISTRY ) No. G 861 of 1992 GENERAL DIVISION ) BETWEEN: RITA ANTONIOU & MICHAET, ANTONIOU Applicants/Cross Respondents AND: KAREDIS ENTERPRISES PTY LIMITED ACN 000 501 673 First Respondent/Cross Applicant GREENFRIARS PTY LIMITED ACN 002 031 450 Second Respondent /Cross Applicant REASONS _FOR_ JUDGMENT EINFELD J SYDNEY 15 DECEMBER _ 1994 On 14 October 1988 the applicants signed a lease with the respondent companies for a shop in an arcade at Neutral Bay owned by the respondents (the arcade). In December 1988 they commenced to operate a coffee lounge in the shop called Palace Cafe (the business). Two years later, by which time the business had failed and the applicants were well behind in their rental and other financial obligations, the respondents re-entered the shop and terminated the lease. The applicants thereafter sued the respondents at common law and under the Trade Practices Act 1974 (the Act) for damages incurred in the failure of their business. The essence of their claim is that certain oral representations by the principal of the respondents, Theo Karedis, and his real estate -2- agent John Hargreaves, on the basis of which the applicants entered the lease and commenced and continued trading, were false or misleading and therefore in breach of section 52 of the Act. Various other orders are also sought, including a declaration that the lease be-declared void or rescinded. ~The -respondents cross- claimed for arrears of rent of $68,902 and damages for lost rent for the remainder of the term of the lease following termination of $102,679. The facts THE APPLICANTS The first applicant Rita Antoniou, born in Greece and now aged 35, married the second applicant Michael, born in Australia of Greek parents and now aged 36, in 1981. Mrs Antoniou had gained some experience in the retail food trade when she left school in 1975 to work with her father in his take-away food shop for two years, evidently working from 5am to 9pm each day. In 1981 she was employed by Summit Restaurants Pty Limited, working as a bar waitress for a year, then as a food waitress for two or three years when she was made a cashier. In 1987 she was promoted to a management position where, it seems, she acquired a dangerously small amount of knowledge. Mr Antoniou had no such experience, working as a bus conductor and driver with the State Transit Authority from 1980 to 1988. Since the failure of the business he has returned to work as a bus -3- driver. It was clear from his evidence that Mr Antoniou has limited understanding of financial affairs, leaving most such decisions to his mother until he was married, and then to his wife (affidavit Michael Antoniou 18 March 1993 p 2). THE BUSINESS The evidence was that in early 1988 the applicants decided to start a business of their own. They evidently looked at a variety of different enterprises, and it appears that several businesses were considered including hairdressing. They contacted Mr Hargreaves in relation to the arcade after seeing it advertised in the Sydney Morning Herald in July 1988. The arcade was still under construction by the respondents at the time and was to be known as Theo's Arcadia. The advertised site in which they expressed interest was shop 4. At a meeting with Mr Hargreaves at the site, they inspected the position and were told the rent. There was some indication in the evidence that Messrs Hargreaves and Karedis had a smaller shop in mind for a coffee shop but, at the request of Mrs Antoniou, a larger, higher rent, position was chosen (affidavit Mrs Antoniou p 4). At the end of the meeting, Mrs Antoniou recorded (affidavit p 5): I had doubts about going ahead at the end of the meeting. I was reluctant to start up a new business from scratch. Notwithstanding any such doubts, on 12 September 1988 the applicants faxed an executed offer of lease, statement of assets and liabilities, and a proposed menu to Mr Hargreaves. The offer ~4- to lease included the rental figure of $96,400 per annum, plus 13.88% of the actual or assessed outgoings of the arcade. The rent was to go up by 10% a year with a rent review every 2 years. Mr Hargreaves thereafter telephoned the applicants and told them that Mr' Karedis' was still considering other potential tenants for the site, but that he would meet the Antonious. THE INITIAL REPRESENTATIONS According to the applicants, on 13 or 14 September Mrs Antoniou met Mr Karedis at his liquor store next to the arcade, still under construction. Events at this meeting form the bulk of the disputed evidence in the proceedings. In the course of a discussion of the nature of the proposed business, the two walked to the offices of Mr Karedis' architect, Rowan Gietz, where a meeting was held. Present there were Messrs Karedis, Gietz and Hargreaves and Mrs Antoniou (affidavit Karedis p 3). Mrs Antoniou recounted the following exchange (affidavit p 9): I said: The only thing is the rent - how did you work that out? Karedis: We've estimated that the shop should take 14,000 to $15,000 per week. Me: That's a lot for a business that isn't there. Karedis: I know Neutral Bay; I know what the people of Neutral Bay are like - I've been in the area for 30 years. I came to Australia with nothing when I was eighteen and I started in Neutral Bay with a deli. I've been here ever since, and I know the area and the people. $14,000 to $15,000 is not unreasonable. - 5 - Me: With those takings it would more than justify the rent. I've never been to Neutral Bay, and I don't know the area. Karedis: It won't be a problem, it's the best location in Neutral Bay. We'll get people coming from the main road to the car park; the arcade opening is right at the traffic lights. You will be the-only one with outside seating. The result of this conversation was, according to Mrs Antoniou (affidavit p 10): when I left the meeting I had no reservations about the high rent or the fact that the business was non-existing. The applicants alleged that the representations by Mr Karedis in this conversation concerning the expected takings in the light of the excellence of the site (the representations) induced them to enter into the lease. ENTRY INTO THE LEASE In late September Mrs Antoniou and her accountant George Barbouttis visited a city branch of Westpac and applied to the manager Alan Powers for a loan to finance the fitout of the Cafe. In response to Westpac's request for financial details, they prepared a cash flow chart showing projected takings and costs over a one year Period. The suggested takings varied from month to month, averaging at $13,800 a week. Where these figures came from is a matter of some importance to which I will return later. The loan was approved by Westpac before the end of September in the form of an overdraft. It was replaced by an equipment lease on 2 March -6- 1989. On 14 October a four year lease of the shop was executed by the parties to this action, and the applicants thereafter commenced fitting out the Cafe. The fitout cost close to $140,000 (affidavit Mrs Antoniou p 13, p 18). The applicants also leased a car from AGC to use with'the business. In order to secure a bank guarantee of $24,000, required by the lease to secure rental payments, and the overdraft facility initially of $16,000, Mrs Antoniou and her parents, Dimos and Hariklia Valahas, gave a mortgage to Westpac dated 3 November 1988 over a house in which they each held a third interest. The mortgage was expressed to cover all advances or loans to the applicants. The terms of the lease of the Cafe reflected those in the offer of lease. Rent was set at $96,400 pa plus 13.88% of the outgoings of the arcade assessed at $103,211, coming in total to $9,227 a month (annexure M to affidavit of Mrs Antoniou) or $2,130 a week (affidavit Harry Paul Le-May 25 March 1993 p 5). Maintenance costs would also be levied as required for the escalator and other equipment. The applicants were also evidently told that a one off Project Promotion Contribution Levy of $4,800 would be levied from each tenant to help promote the arcade. In early November Mrs Antoniou had a conversation with Mr Hargreaves regarding the promotion levy in which she alleged that Mr Hargreaves said: - 7 - We'll have a grand opening. We'll have a photographer, and we'll -organise some fashion parades with the boutiques that will be opening in the centre. The applicants paid this levy on 23 November 1988. Later in November another meeting took place between Messrs Karedis and Gietz and Mrs Antoniou at which Mrs Antoniou alleged that they discussed the possibility of putting chairs outside the Cafe on the balcony of the arcade. Mrs Antoniou recalled the following conversation (affidavit p 16): Karedis: You know you can have tables outside. You won't have much trouble with wind unless there is a southerly. Gietz: Yes, that's right. You don't often get a southerly. Karedis: Later on we could go halves on enclosing the area. We'll see how the business goes. Me: That would be great. Then we could use the balcony in any kind of weather. Karedis: You'll be the only tenants with tables and chairs outside your shop. I'11 get one of my sponsors to get some umbrellas for you. It'll be good advertising. Karedis: ...You know you've got the best location in Neutral Bay. Me: It would have to be with the money we're spending. Karedis: Oh yes, you should easily be taking $14,000 a week here. Gietz: Yes. The Palace Cafe opened on 12 December 1988. - 8 - TRADING HISTORY OF THE BUSINESS The business initially employed three part time casual waitresses, a kitchen hand, a full time chef and a part time chef. The applicants worked long hours themselves: Mr Antoniou from 8.30am to midnight, and Mrs Antoniou from 10am until about lam. Initially, the evidence suggests, the Cafe traded well, encouraging the applicants to believe that they would be successful. However, although takings rose quite quickly to around $8,000 a week, they did not continue to rise. Financial problems quickly began to appear primarily arising from the level of takings, the high costs especially rent, and the high debt level. For the entire period of the tenancy, weekly takings varied mostly between $7,000 and $9,000, with an occasional week as high as $10,000. After several months trading the applicants' debt 'had accumulated to the point where their overdraft stood at $50,000 (affidavit Mrs Antoniou p 21). As a result of concerns at the direction the business was taking, the applicants retained a firm of accountants to give them financial advice. As the earlier assistance of Mr Barbouttis was apparently limited to preparation of forecasts based on figures for takings which the applicants themselves supplied, this was evidently the first time the applicants sought or obtained explicit professional assistance with their financial planning. The accountants' analysis (annexure S to the affidavit of Mrs Antoniou) revealed average weekly takings over three weeks to 14 May of $7,633 with average weekly expenses of $5,323, leaving -9 - $2,310 for overhead costs including rent, lease of equipment and other minor costs averaging $3,510 a week. When $800 a week for drawings and an allowance for tax was included, the accountants concluded that every week the shop was losing $2,310. Accordingly, on 6 June 1989, the accountants gave the Antonious the following advice (annexure R to affidavit of Mrs Antoniou): Unfortunately this information was not brought to your attention when you made plans to start your restaurant. We advise that you should consider approaching the dandlord for a substantial rent review and further revise your salary staff requirements. After receiving this advice the applicants revised their labour and food costs and the accountants thereafter provided another analysis, based on two weeks takings in June of $8,567, that $4,693 would be available for overhead recovery. They concluded that on drawings of only $600 the business would be making a profit of $63 per week. Their advice was accordingly modified: The current improvement in trading and in your operating costs means that you can just cover a loan program. You Should seek a short term rent review from your landlord to cover the Winter-Autumn period. Given this support you could make a Committment [sic] to trading out. Your figures will require regular monthly review to see that you remain viable. No rent relief was organised with the landlord, but the applicants traded on nevertheless. There was no evidence that the figures were reviewed again. The rental of June was not paid, prompting a letter from Mr Hargreaves dated 27 June 1989 (annexure T to - 10 - affidavit of Mrs Antoniou) affirming the obligation to pay the rent originally agreed to, and pointing out that arrears of rent would attract the quite exorbitant interest rate of 24%. FURTHER REPRESENTATIONS Following this communication the applicants met with Mr Hargreaves and had a conversation which they allege included the following exchange (affidavit Mrs Antoniou p 22): Me: The rent is too high ~- can you do anything about bringing it down? Hargreaves: Mr Karedis has obligations as well, and Payments to meet. You're aware of the owner's expectations of how much the place should be taking? Me: What, the $14,000 per week? We've never reached it. Hargreaves: You must be doing something wrong. [It's the best location in Neutral Bay. Why aren't you doing some advertising? Me: We've already got the cinema ad going. What about the $4,800 promotional fund we paid? When is Mr Karedis going to promote the centre? Hargreaves: Mr Karedis is going to use that when he is ready. They then arranged that in future the rent would be paid weekly rather than monthly, but no reduction was offered. The applicants recounted that in the second half of 1989 they had a conversation with Mr Karedis regarding their increasing failure - 11 - to meet rental obligations. They said that it included the following (affidavit Mrs Antoniou p 23): Karedis: You should be taking $14,000 to $15,000 per week. Me: Not in the first year. Don't forget there was nothing there before us. Karedis: But you've got the best location. What are you doing wrong?" Me: Nothing. People like our food. They like our coffee. We're not getting what you said we would. At the end of 1989 a further conversation with Mr Hargreaves took place in which, according to Mrs Antoniou, Mr Hargreaves suggested that they raise their prices. The following exchange is said to have taken place (affidavit p 24): Me: --- The rent is too high though. Hargreaves: Mazy's rent is $2,000 [per week] and they seem to be meeting their rent. Me: Mazy's is a prime location, it's on the Main road. It's an established business, and it's been there for years doing 24 hour trading. The only time they do business is at nights. Hargreaves: You've got a better location. You should be busier. You know the owner's expectation of what you should be taking. Me: We've never reached $14,000 to $15,000 per week. Hargreaves: What are you doing wrong? Me: We haven't got frontage; we haven't got a main road position, and we haven't been here for five or six years. -12- In February or March 1990 a similar conversation between the applicants and Mr Hargreaves occurred, in the course of which Mr Hargreaves is said to have repeated the earlier expectation that takings would be $14-$15,000 a week, told them that the promotion money would be used when Mr Karedis felt it ought to be, and advised them to try and sell. Mr Hargreaves recalled several conversations over the period (affidavit pp 13-15), a possibility conceded by the applicants (affidavit Mrs Antoniou 7 September 1993 p 12), but denied making any statements concerning the expected takings. FAILURE OF THE BUSINESS The history of the Palace Cafe from the middle of 1989 is one of continuous decline and increasing indebtedness. In July 1989 $15,000 was borrowed from Mr Antoniou's father Emilio Antoniou for arrears of rent to the respondents and lease payments to Westpac. Emilio Antoniou lent the applicants a further $10,000 in late 1989 to pay arrears of rent which by that time amounted to $12,776.40. The applicants' overdraft, by that stage well in excess of $50,000, was converted into a term loan. At the same time the equipment lease with Westpac was not being serviced. On 18 January 1990, Mrs Antoniou's father gave the applicants $5,000 towards this debt, and the bank agreed to extend the lease period to bring down the payments. In July 1990 the applicants borrowed a further $14,000 from Emilio Antoniou to bring the lease payments to Westpac up to date. - 13 - At the beginning of 1990, the applicants tried to alleviate their problems by raising prices in the Cafe. However, after adverse customer reaction, prices were returned to their previous level after about a month. Trading did not really pick up, and by February 1990 the arrears of rent were $29,380, prompting the 'first suggestion by the respondents that the lease would be terminated (annexure W to affidavit of Mrs Antoniou). By April 5 1990, arrears were $43,119.30, and the applicants were trying to sell the business. Tension now dominated the parties' relationship. From the middle of 1990 the applicants ceased to keep proper records and were unable to find a buyer given the unattractive ratio of takings to rent. It would also appear that since March 1989, when the applicants ceased to employ the services of Mr Barbouttis, they lost track of group tax payments. They continued in arrears until, in September 1991, despite some payments in the interim, the applicants' tax debt exceeded $12,000. It has since been further inflated by interest and penalties. A notice to quit was served on the applicants in September 1990, but it appears that the parties reached an agreement whereby pending sale of the business it would be allowed to continue trading. At this time Mr Hargreaves communicated to the applicants an offer to buy the business for $120,000. This offer was refused, and on 14 December a letter from the applicants' new solicitors to the respondents asked for a reduction in the rent to permit a higher price to be obtained for the business. It also set out the claim the applicants are currently pursuing. By Christmas 1990 the - 14 - applicants were in default to the respondents for rent by approximately $75,000 (annexure HH to affidavit of Mrs Antoniou). A further $9,000 was borrowed from Emilio Antoniou for legal and other fees. A second notice to quit, -dated 4 January 1991, was served on the applicants. Following the failure or abandonment of final attempts to refinance the loans to Westpac, and arrange reductions in the rent, the applicants ceased trading after two years and three months on Sunday 17 February 1991. The respondents re-entered the premises on 20 February 1991 and Westpac repossessed the equipment soon afterwards. At that stage the rent was $90,793.38 in arrears (annexure PP to affidavit of Mrs Antoniou). The premises were subsequently re-let to someone else at a lower rental. Westpac served on Mrs Antoniou and her parents a notice of demand to pay $232,671.45 under the mortgage. After a summons filed by Westpac in the Supreme Court of New South Wales on 22 October 1992 was served on the applicants and Mrs Antoniou's parents, the present action was commenced. On 7 December 1992 the Supreme Court proceedings were resolved by a consent judgment for Westpac. The representations before entry into the lease Before the applicants' entry into the lease with the respondents, the significant representations were allegedly made in one statement to Mrs Antoniou by Mr Karedis on 13-14 September, confirmed by Messrs Karedis and Hargreaves more than once after the -15- business had commenced. These representations, in the conversation referred to earlier, are alleged to have consisted of assurances regarding the proposed takings and the attractiveness or suitability of the site for the business. However, the witnesses for the respondents remembered the initial meeting differently to Mrs Antoniou. TIMING OF THE MEETING The first issue upon which the parties disagreed was the timing of the meeting. Between the date the applicants suggested the meeting occurred, 13 or 14 September 1988, and that favoured by the respondents' witnesses Messrs Karedis and Gietz, 12 October 1988, the applicants took several steps which suggested that they made the decision to enter the lease in that period. Chief amongst these was that before the end of September Mrs Antoniou and Mr Barbouttis prepared a cash flow projection for the business (annexure D to affidavit of Mrs Antoniou) showing projected takings for some months as $55,200 and for other months as $69,000. The total takings projected for the year were $717,600, which represented an average of $13,800 per week. It was the applicants' case that these figures were derived in reliance on the representations, although no explanation was offered to suggest how the precise figures and monthly variations were arrived at. On the respondents' case the cash flow was prepared before any meeting between Mr Karedis and Mrs Antoniou took place, and therefore could not possibly have been affected by any representations of Mr Karedis. If such a document existed before the meeting with Mr - 16 - Karedis, it might assist to indicate that the applicants had already decided that they would take in the vicinity of $14,000 before the meeting occurred. The 'principal evidence for the respondents' position was the testimony of Mr Karedis, who asserted in his affidavit (p 3) and under cross examination (T174) that the meeting occurred on 12 October 1988. The respondents also pointed to other evidence to support their version of the timing. Mr Gietz's diary on 12 October 1988 included the following entry (exhibit A to his affidavit): 10.30 - Tenant meeting re Shop No 4 here J.H. & TK. Mr Hargreaves had no recollection of the meeting, which is not mentioned in his affidavit. His diary for 12 October 1988 contained the ambiguous entry: 10.30am. Theo's Mrs Antoniou On 14 September his diary carried the equally ambivalent exhortation: * Arrange meeting Antoniou + Theo The manner in which the rest of the diary was written does not allow any inference to be drawn as to whether that comment referred - 17 - to a meeting on that date, or to an intention formed or noted on that date to arrange a meeting for the future. The primary evidence for the applicants that the meeting occurred on 13 or 14 September was the testimony of Mrs Antoniou to that effect. She was quite definite that the meeting occurred before the cash flow was prepared, and the decision to enter the lease had been made. Mrs Antoniou's position in this regard was affirmed in her evidence in reply (affidavit 7 September 1993 p 2) and adhered to under cross examination. Her evidence was a credible and creditable presentation. Both sides agreed that the meeting, whenever it occurred, preceded the final decision of the parties to enter the lease. The applicants therefore pointed to certain correspondence tending to indicate that that decision was made soon after 14 September. On 14 September 1988 Mr Hargreaves sent a letter to the solicitor for the applicants, P Lofitis (annexure C affidavit of Mrs Antoniou), which made no reference at all to any meeting between the parties, as it seems to me unusually if there was a meeting that day. It does, however, include the following comment: The lessor seeks to firm up this preliminary offer and his agreement to accept, and we have been asked to place further negotiations in relation to the lease in the hands of his solicitor, Mr Richard frayer of Westgarth Baldick. Westgarth Baldick wrote to Mr Lofitis on 19 September 1988 (annexure I to affidavit of Mr Karedis) clearly indicating in tone - 18 - and content that the Antonious had been selected as, or were at least expected to be, the successful tenants for the shop. Enclosed with the letter were agreements for lease and lease documents, and the letter included the following statements: FS Would you kindly arrange for the execution and return to us of both copies of the Agreement for Lease and all copies of the draft Lease. If your client has not already done so, it will be necessary for your client upon the return of the agreement for Lease to pay the security deposit referred to in the Fourth Schedule of the Agreement for Lease. The letter also contained a request for a cheque for $3,394.10 for the costs and disbursements of the solicitors in preparation of the lease. I accept this correspondence as a clear indication that by 19 September 1988 the relationship between the parties had progressed to the stage where the commercial decision, at least on the part of the respondents, had been made. The correspondence does not, however, go directly to the date of the meeting. In deciding this issue the diary notes of Messrs Gietz and Hargreaves must be strongly persuasive. The conflicting testimony of the two principal witnesses must be assessed on the basis that their affidavits were required to identify a precise date some four to five years after the event. On the other hand, both of them agreed that they only met once, and two independent persons' diaries apparently separately and contemporaneously recorded a meeting on 12 October. In the face of what must otherwise be an extraordinary and most remarkable coincidence of the detail of the - 19 - precise date of a meeting, I am bound to conclude that Mrs Antoniou's reconstruction years later has been mistaken. It is therefore my opinion that the meeting occurred on 12 October, by which time the Westpac loan had already been undertaken. WHETHER THE REPRESENTATIONS WERE MADE The only evidence that the alleged representations were made at the meeting is the testimony of Mrs Antoniou. It was put to her that the representations were a recent invention designed to extricate her and her husband from the financial disaster they were and presumably are still in. She conceded that the first written complaint of the representations occurred in a letter of her solicitors Benjamin & Osborne dated 14 December 1990. However, she asserted that she had mentioned the representations to her husband immediately they were made, a fact that Mr Antoniou corroborated (affidavit Michael Antoniou p 3, T1136). The evidence for the respondents was once again principally confined to the testimony of Mr Karedis who denied having made the representations. Indeed he went further, and denied having any interest in the potential takings of his prospective tenants, leaving all the relevant calculations and necessary inguiries up to his agent, Mr Hargreaves. He said that he therefore would never have made any statement about takings (affidavit 6 May 1993 p 4): At no time during the above meeting was there any discussion of lease rates, terms and conditions of the lease or turnover of the shop. - 20 - Messrs Karedis and Gietz agreed that the meeting occurred at Mr Gietz's office, and that Mr Karedis had been there before and after the meeting. On their evidence nothing passed between Mrs Antoniou and Mr Karedis outside the hearing of Messrs Gietz and Hargreaves. Mr Hargreaves-had no memory of the conversation at all. Mr Gietz stated of the meeting (affidavit p 3): I do not recollect any discussion whatsoever regarding details of the lease, rental rates or any other like matters. In cross examination he admitted that it was possible that such discussion did occur but that he did not recall it (T284), although he insisted that he had not contributed to any such discussion (T285). I have placed little emphasis on the evidence of Mr Gietz in this regard, except as relates to his own part in the conversation. He was being asked to recall details of a conversation that occurred some five years before he deposed to them, on an occasion which, at the time and from his perspective, would have been unremarkable. He was there specifically for the conversation regarding the fitout and, according to his own evidence (T284), would have paid scant attention to any discussion regarding takings. Both sides attempted valiantly to bolster their version of events by inference from other facts. The applicants stated that assuming the rent of $96,400 a year was calculated at what was said to be the normal 12%-14% of expected takings, the respondents or their agent must have expected the shop to take about $14,260 a week - 21 - ($14,260 x 52 x 13%). They argued that Mr Karedis would therefore have had this figure in mind and probably have mentioned it. Furthermore, the applicants suggested that the generous terms upon which they entered the lease provided motivation for Mr Karedis to entice-them:with assurances: of high takings. It was suggested that more astute contenders for the shop, in particular a Mr Jackas, were only willing to offer a much reduced rent, and would have demanded other concessions. This may well serve to demonstrate the applicants' manifest lack of prudent financial planning, and the haphazard manner in which they undertook major financial obligations, but it is no evidence that the representations occurred. The respondents countered by claiming, with the support of other documents, that the rent was calculated with reference solely to area, and was not affected by predictions as to takings. These and other similar matters were, in the circumstances, of little assistance either way. As a result I am forced to decide this issue on the conflicting testimony of Mr Karedis and Mrs Antoniou. This is an unsatisfactory, if not uncommon, position for resolution of such a factual matter. Nevertheless, after closely considering the evidence, and giving some weight to what I concluded was the greater credibility of Mrs Antoniou, I have resolved the matter in favour of the applicants. It is therefore in my opinion probable that the meeting occurred on 12 October 1988 and that during the course of the meeting Mr Karedis voiced his prediction that the business would take between -22- $14,000-$15,000 a week, based in part upon his opinion that the position was a prime one. It is clear, and the respondents anyway conceded, that Mr Karedis could not have had a reasonable basis for making such representations, at least as regards takings, and that they were therefore misleading or deceptive: s 51A(1). I shall return to the facts underpinning this finding in the context of the little knowledge of the matter the applicants had to rely on. . RELIANCE The next question is therefore, whether the applicants relied on the representations to enter the lease. On meeting Mr Karedis, Mrs Antoniou gave the following insight (affidavit p.7): I had been brought up to look up to my elders and to trust them, and Karedis had an air of confidence and authority which made me feel I could trust him. He was also very friendly and put me at ease. She went on (p. 9): Karedis had convinced me that the business would be profitable despite the high rent. I was impressed by his experience in the area and his apparent concern to help Michael and me set up the business. I also felt he had taken us "under his wing", and would look after us. I had been brought up to accept this kind of help from an elder, and I trusted him. By the end of this meeting with Karedis, I was very enthusiastic and when I left the meeting I had no reservations about the high rent or the fact that the business was non-existing. I accept that such statements by a successful older businessman to inexperienced younger people of the same ethnic origin would most TF - 23 - likely have had such an effect on the applicants. The lease was not signed until 14 October, two days after the representations were made. It was the applicants' position that they were instrumental in the final decision to enter the lease. Several objective facts weigh upon this interpretation. By 12 October the applicants had already signed an offer to lease which, although it did not create any legal obligations or rights, demonstrated that they had moved some way to entry into a contract. They had also submitted to Westpac the revealing cash flow chart showing their projected takings at just under $14,000. They had also received Westpac's approval for the fitout loan. Therefore it is open to find that the applicants' real commercial decision had been made prior to 12 October, and that they did not particularly rely on Mr Karedis' view of $14,000-$15,000 as a basis for entering the transaction. On the other hand, it is sufficient if a misleading representation is only one of the factors upon which the claimant relied: Elna Australia Ltd v_ International Computers (Aust) Pty Ltd [1987] 14 FCR 461; Milner & Ors v Delita Pty Ltd {1985} 9 FCR 299. In assessing the probabilities regarding reliance, the nature of the representations themselves must play some part in the decision. The applicants poured all their savings and a considerable amount of their parents' assets into this business upon which they therefore gambled a large slice of the family's future. Their claim was that they entered this lease based upon. the representation of Mr Karedis about the likely takings of the business. Yet the premises had not yet been built, and the arcade ~ 24 - had not or had hardly been finished. They themselves had no idea what the takings of such a business would be. It should also have been patently obvious that Mr Karedis would also not have had the slightest notion of what the business would actually take. Nevertheless it seems to me likely that the applicants thought that he did have considerable knowledge of the matter, or -at least a better knowledge than they possessed. I believe that he had much more of an idea than they. All the evidence suggested that the applicants adopted a very unsophisticated approach to their entry into the lease of the premises. Notwithstanding that it was clearly a decision of enormous financial importance for them, no real attempt was made to rationally assess the viability of the enterprise. However, it is no defence to claims based on a breach of section 52 that the applicants failed adequately to check the representations for themselves. This was the 'bold submission' referred to in Sutton vA J Thompson Pty Ltd (In lig) {1987] ALR 233 which the Court said amounted to "You should not have believed me when I misled you". However, as Justice Hill said in Argy v Blunts & Lane Cove Real Estate [1990] 26 FCR 112 at 138: A case may perhaps be imagined where an applicant is so negligent in protecting his own interests that there will be a finding of fact that the representation complained of was not in the circumstances a real inducement to his entering into a contract. In such a case the element of causation between misrepresentation and damage will have been severed by the intervention of the negligence of the applicant. -~ 25 - .I have always been troubled by the legal principle that although damages under the Act are largely assimilated to damages in tort, one of the major elements bearing on such assessments, the defence of contributory negligence, is apparently not available in these statutory actions without amending legislation: Bourke __v Butterfield and Lewis Ltd [1926] 38 CLR 354. Contributory negligence would undoubtedly have 'affected the result here. For there can be little doubt that the decision to enter the lease was extremely unwise and commercially incompetent. The applicants completely failed to make any inquiries regarding the potential viability of the business, or its possible costs or likely takings. They did not know Neutral Bay at all. They did not make any attempt to check the competition or evaluate the market for the cafe dollar. There were in fact 14 coffee shops in the near vicinity when the applicants opened their business. They did not even calculate how many customers and sales at $6 to $10 per purchase, as their menu indicated might be an average, were necessary per day to take $14,000 per week. Yet they must have relied on something or someone other than or in addition to themselves. Wherever they derived the figures presented to Westpac -- and I am unable to even speculate on that question; it might even have been a coincidental guess -- I accept as likely that they pinned their ultimate decision on Mr Karedis who, as an older experienced person of their own ethnic group, would in their assessment have been unlikely to lead them astray when he predicted how the business would go. - 26 - I should in passing note the expert evidence of Harry Paul Le-May, a valuer called by the applicants. His opinion was that, even had a reasonable forecast of the weekly takings been $14,000 or $15,000, the rent of $2,130 per week would have been too high for viability. He said affidavit 25 March 1993 p 11): Even if the business had taken, say, $14,000 per week, the rent (inclusive of outgoings) would still have been 15% of turnover, which is still very high. As a percentage of the actual turnover (ie. between 26% and 29%) the rental was unsustainably high. He went on to depose that a more reasonable rent, if takings were to be as represented, would have been $1,500 (p 11), although in his affidavit in reply he agreed that 12%-14% of takings is a reasonable range, which on takings of $14,000 would have given a rental between $1,680 and $1,960. This evidence was at the end of the day largely irrelevant. It merely served to demonstrate that the applicants failed to protect their own interests but it did not support a conclusion that they did not rely on the representations to enter the lease. I think that the applicants were reassured by hearing Mr Karedis talk up the chances of success, and failed to understand that his prediction about the level of expectations with which they commenced trading was not directly or not only related to the rent he could extract. In selecting the Antonious over the other applicants for the shop who were unwilling to pay the high asking rent because they knew the business could not pay on such a basis, Mr Karedis placed his own immediate financial position ahead of -~27 - truth, the practicalities and the interests of the applicants. Perhaps he thought that the takings would reach $14,000 per week, perhaps not. Either way his assessment was an impossible target the very size of which induced the applicants to go on with the proposed lease and open the business. Subsequent representations The applicants contended that the conversations alleged to have taken place between Messrs Karedis and Hargreaves and themselves during the course of the tenancy contained repetitions of the representations made before the lease was signed that the position was a prime one, and that the shop should be taking $14,000-$15,000 a week. The argument of the applicants in this regard was that the respondents, through Messrs Karedis and Hargreaves, encouraged the applicants to continue trading in circumstances in which they might otherwise have abandoned the lease and cut their losses. I accept that these additional representations occurred. Apart from issues of credibility which in my view heavily favoured the applicants, the respondents' interest was for the applicants to continue trading. Messrs Karedis and Hargreaves knew that another lessee was unlikely to be obtained, certainly at the current rent. Although the representations, whether as to position or takings, were to the effect that the shop should be making a handsome profit when it manifestly was not, the respondents' best chance of collecting their rent, or at least maximising their returns, was to stick with the applicants. The applicants had not only worked in - 28 - the shop, and had had the chance to gauge its potential for themselves, they had the benefit of expert financial advice regarding its long term viability. Their and their families' financial stake in the business was as intense as could have been conceived. If anyone could have lifted the takings, and had the motive to do so, it was they. I believe that the repetition of the representations had the effect of encouraging the applicants to continue trading when wisdom and reality would have suggested that they sell to the purchaser introduced by Mr Hargreaves or close up. It is also worth noting that Mrs Antoniou had clearly identified matters such as their lack of road frontage, their opening hours and other matters to explain why they were not trading as well as other coffee lounges in the area. She also believed that the Cafe would reach its peak only after the first year, and that only then would Mr Karedis' representations be realised. It was the fact that she did not vary from her belief in the truth of the representations that caused her to continue trading. Promotional levy The respondents did not at any time during the currency of the lease spend the levy on promotions, despite representing that they would do so. In the absence of any claim that this failure constituted a breach of contract, I am left to assess the implications in terms of section 52 of the Act. Even assuming that the representation was false when it was made, in that there was no reasonable expectation that the levy would be spent on promotion, is - 29 - the applicants must fail on this aspect of the case. In my opinion this representation was not relied upon by the applicants at all. It occurred after entry into the lease, so it could not have been a factor in the decision to proceed. After the lease was entered, there was no evidence that the applicants materially altered their position, or took or failed to take any action, based on this - representation. On the contrary, the applicants themselves spent money advertising the business including leaflet drops, the selling of specially printed T-shirts, and advertising at a local cinema. They led no evidence that reliance on the respondents' promise to spend the $4,800 caused them additional loss. The fact that the failure of the respondents to promote the arcade might have prevented the applicants from enjoying the benefits of increased custom is immaterial. In any event, there was evidence that this amount was subsequently deducted from the rent of all the tenants in the arcade. In the case of the applicants it was credited to their arrears. I cannot therefore see how any further damages could be recovered on this account. Other representations Other misrepresentations were raised in the evidence. Southerly winds were a problem for the balcony seating from the very beginning, and a combination of winds and rain meant that the outside tables were often unavailable (affidavit Mrs Antoniou pp 19-20). Mr Karedis also made it clear that he had no intention of - 30 - contributing to the enclosing of the balcony (affidavit Mrs Antoniou p 21) despite some evidence that he earlier said he would. Furthermore, in mid 1989 the applicants observed some tenants in the food hall at the front of the arcade to position tables and chairs at -which coffee and' cake was -sold -and 'consumed in the arcade's main passageway contrary to Mr Karedis' assurances. None of these matters was raised in the pleadings or in submissions, and I make no finding regarding them. Limitation question It was also argued for the respondents that the claim, insofar as it relies on the Act, is out of time. Section 82(2) of the Act provides that a claim is barred unless it is commenced within three years after the date on which the cause of action accrued. The lease was executed on 14 October 1988 and the application was filed on 20 November 1992, four years and one month later. The parties, quite properly in my opinion, did not deal with this issue as a preliminary matter, and I have similarly left it until expressing my conclusions on the substantive evidence. In Jobbins v Capel Court Corporation Ltd {1989] 25 FCR 226 a Full Court of this Court decided that time began to run when the agreement obtained by the misleading conduct was entered. The Court said at 231: Whatever view be taken as to whether losses continued to flow, the applicant suffered damage immediately upon his entry into the agreement and the making of the payment thereunder, both of which occurred outside the three year - ~ 31 - period. According to the pleading, the investment lacked tthe. represented qualities; as a consequence it was from the outset less valuable than it should have been. Counsel for the applicant sought to say loss or damage was not suffered until October when the representations proved false, but it is really beyond dispute that what happened then was merely a reaping of the tares sown with the crop. That decision has received judicial attention since, both in the High Court: Wardley Australia Limited and anor v Western Australia (1992] 175 CLR 514, and in a bench of five Judges of this Court: Magman International Pty Ltd and ors v Westpac Banking Corporation [1991] 32 FCR1. These judgments did not apply the Jobbins formula to the different nature of the facts in those cases: see Emanuele & Ors v The Chamber of Commerce & Industry SA Incorporated [1994]} ATPR 46-121 at 53,571. The inquiry remains an essentially factual one: see Hill J in Magman at 26. The majority in Wardley said: When a plaintiff is induced by a misrepresentation to enter into an agreement which is, or proves to be, to his or her disadvantage, the plaintiff sustains a detriment in a general sense on entry into the agreement. That is because the agreement subjects the plaintiff to obligations and liabilities which exceed the value or worth of the rights and benefits which it confers upon the plaintiff. But, as will appear shortly, detriment in this general sense has not universally been equated with the legal concept of "loss or damage". And that is just as well. In many instances the disadvantageous character or effect of the agreement cannot be ascertained until some future date when its impact upon events as they unfold becomes known or apparent and, by then, the relevant limitation period may have expired... In U.B.A.F. Ltd vy European American Banking Corporation; The Pacific Colocotronis [1984] QB 713 at 725, Ackner L.J. said: "The mere fact that the innocent but negligent misrepresentations caused the plaintiffs to enter into a contract which they otherwise would not have entered into, does not inevitably mean that they had - 32 - suffered damage by merely entering into the contract." That is because It was not self-evident that the value of the chose in action which the plaintiff acquired, the right to repayment of a loan, was worth less than the amount paid to the borrower at the time of entry into the doan agreement. Evidence was required to establish that fact, if it were a fact. : Their Honours went on to criticise the decision in Jobbins on the basis that it could not be concluded, without evidence, that at the time of entry into the agreement, the value of the investment was worth less than the consideration provided for it. In this case it is clear that the value of the tenancy acquired by the lessees was worth much less than the rent required to be paid under the lease. But this situation did not manifest itself immediately. The applicants' claim relates to future takings that they did not contemplate, and no one could have contemplated, would be available from the first day of trading. The applicants were obliged to wait at least 12 months to see if the projections regarding takings were realised before they could show a misrepresentation upon which to base an_= action. The misrepresentation acquired its nature not from the fact that it did not come true but because, in the circumstances in which it was made, there were no reasonable grounds upon which it could have been made. Although the applicants were, from the beginning, tied into rental obligations far in excess of the value of the leasehold, and expert advice could have appraised them of that situation as soon as or before they entered the lease, it was not until some time later, I find at least one year after trading - - 33 - commenced, that trading had settled into a pattern demonstrating that they were suffering losses as a result of the representations. I conclude that the applicants' cause of action did not accrue until not earlier than December 1989, and that a claim under section 82 is therefore within time. Damages I was given scant figures with which to calculate damages in this case. The applicants claimed as their loss the money they currently owe to Westpac ($343,684.15), the savings they expended on the original fitout ($45,362.43), and a number of debts accrued in the course of the business, and still owing, for electricity, tax, accountants' fees, and to their parents. In the absence of any evidence as to how the spent money was spent, and how the debts to public utilities were affected by the representations, it is inappropriate that damages be awarded with reference to these amounts. Rather damages should be assessed with reference to the amount of money spent in commencing the business, and the accumulated trading losses from that point. TRADING LOSSES The applicants lost money throughout the operation of the business. In the two periods assessed by the accountants in 1989 they were losing $2,310 a week in the first, and making $63 a week in the second. The second set of figures was taken during a period in - 34 - which takings were higher than the average for the period of the tenancy. According to the evidence, the first set of figures is closer to the correct amount, and I therefore proceed on the basis that on average the business lost $1,800 a week from December 1988 until December 1990. In coming to this figure I -have allowed for a slight reduction in expenses following the accountants' advice as evidenced in their second analysis. I have not made allowance for the fact that the business declined in the second half of 1990, on the basis that the applicants' failure to keep records in this period makes such a decline impossible to assess, and that the decline must have been at least partially due to the applicants' own diminishing control over the business. The advice of the accountants in mid 1989 made clear that refinancing the applicants' overdraft would greatly reduce their interest costs. The fact that this did not occur until September 1989, and the failure of the applicants to lead evidence on the actual interest costs accrued, made me at first very reluctant to award interest on these amounts. However, it is clear that a business running up losses on overdraft for two years in 1989 and 1990 must incur substantial interest, and the size of the debt to Westpac indicates that this occurred here. Furthermore, the applicants fell into arrears of rent and other outgoings and thereby avoided some interest payments. With no evidence as to the actual interest accrued on trading losses, or the size of the applicants' debt after mid 1989, I have assumed an average debt of around $75,000 over the two years. About $25,000 would have been incurred in interest on that debt in that period. : - 35 - In December 1990 the applicants apparently passed up an opportunity to sell the business for $120,000. This would have put a final end to the accumulation of their losses and left them $120,000 towards their debts to that stage. I have assumed that it would also have involved a transfer to the purchaser of the applicants' obligations under the equipment lease to Westpac. Given the state of the business by that stage, it is my opinion that reasonable mitigation would have seen the applicants accept that offer. I have therefore decided that losses accrued after that time should not be allowed, and that a proportion of the foregone purchase price should be deducted from the losses earlier accrued. I am unwilling to accede to a request by the respondents for an earlier cut off date as, in my opinion, the failure of the applicants to sell the business earlier can be attributed at least partly to the refusal of the respondents to allow an incoming purchaser access to a more reasonable rental regime, which eventually they had to do. In the absence of any evidence of the precise date of the offer, I have taken 12 December, as the anniversary of the opening of the shop, as the indicative date. I have settled on a $40,000 deduction from the offer to allow for contingencies such as a delay in completion, legal costs and agents commission, whether the purchaser needed some vendor finance, and the possibility of other conditions to the applicants' financial detriment. START UP COSTS There was evidence that the fitout of the Cafe cost $140,000. This amount was financed with Westpac, eventually by lease, and the - 36 - monthly lease repayments would, according to the evidence, have left the fitout with a residual value after four years of $9,351. The repayments under this lease have already been taken into account in calculating the trading losses, and it would therefore not be appropriate to count the capital amount again. I am, however, prepared to allow the applicants an amount for the capital expenditure expended from their savings that do not appear in the trading figures. I have reduced the claimed figure to $35,000 to account for the possibility, in the absence of any evidence by the applicants, that some money was spent on expenses not directly related to the business. I have also assumed, in the absence of evidence, that the amounts drawn from the business by the applicants for themselves were roughly equivalent to what they might otherwise have earned in the period. CALCULATION I therefore calculate damages as follows: Capital expenditure (from savings) $ 35,000 Accumulated trading losses (2x52x$1,800) $187,200 Interest $ 25,000 $247,200 LESS portion of rejected purchase price $ 80,000 167,200 - 37 - The cross claim The cross claim seeks the arrears of rent and share of outgoings of $97,702 up to the time of repossession, less the bank guarantee of $24,000-which was called upon, and the credit for the promotions levy of 4,800, leaving a balance of $68,902. This must be deducted from the applicants' damages. I'am also prepared to allow the respondents the sum of $9,825 from 18 February to 1 April 1990 when there was no tenant at all in the shop. After the applicants vacated the premises, they were re-let for a much lower rent, and the cross claim also seeks $102,679 for the difference between the applicants' rental obligations and those of the new tenant. I have decided, in the absence of significant evidence or argument in its support, not to allow this claim. The original lease provided for a market review after two years. In my opinion there is a clear inference from the facts that any such market review would have substantially reduced the rent to a level close to what the respondents actually received under the new lease. Conclusion I shall therefore give judgment for the applicants on their application for $167,200 and for the cross applicants on the cross claim for $78,727. Interest on the first amount is to be calculated from 12 December 1990, and on the second from 18 February 1991. I allow interest on the applicants' claim of - 38 - $102,800.00 and on the cross claim of $41,273.00. The net amount owing to the applicants at the date of judgment is $150,000, and I shall order the respondents to pay that sum to the applicants. The parties will make written submissions on the appropriate costs orders, the applicants to file and serve their submissions by 12 noon on Friday December 23 1994, the respondents to file and serve their submissions by not later than 4pm on Friday January 13 1995. The parties may vary this timetable by consent arrangements notified by fax to my Associate on (02)221.3238 by not later than 4pm on Tuesday December 20 1994 provided that the submissions are all completed by 4pm on Friday January 27 1995. U natty that 'this and 'the Ww prsesding 'pages "ar yee ca Ui Counsel and solicitors for the applicants Counsel and solicitors for the respondents Dates of Hearing Written submissions completed Date of Judgment P.J. Hayes instructed by M. English of Paltos & Cumming B. Walker SC and J. Gleeson instructed by A.B. Thorpe 11, 12, 13 July 1994 9 November 1994 15 December 1994