District Court New South Wales Medium Neutral Citation: Enterprise and Management Pty Limited v Tomasevich [2014] NSWDC 335 Hearing dates: 8 and 9 April 2014 Date of orders: 10 April 2014 Decision date: 10 April 2014 Jurisdiction: Civil Before: P Taylor SC DCJ Decision: (1) Judgment for the plaintiff against the defendant in the sum of $112,013. (2) The defendant to pay the plaintiff's costs. Catchwords: BREACH OF CONTRACT – sale of business – truth of financial records warranted – business underperforming – record, false – calculation of damages – goodwill – trading losses - costs Legislation Cited: Uniform Civil Procedure Rules 2005, r 36.16 Cases Cited: Clark v Macourt [2013] HCA 56 European Bank Ltd v Robb Evans of Robb Evans & Associates [2010] HCA 6; (2010) 240 CLR 432 Hadley v Baxendale (1854) 156 ER 145 Category: Principal judgment Parties: Enterprise and Management Pty Limited (ABN 30 075 709 876) (plaintiff) Mattie Tomasevich (defendant) Representation: Counsel: Mr B Camilleri (plaintiff) Solicitors: Emil Ford Lawyers (plaintiff) File Number(s): 2012/260000 Publication restriction: None Judgment 1. The plaintiff ("Enterprise") purchased a gift shop business from the defendant, Mattie Tomasevich, pursuant to a written agreement. Enterprise alleges that Ms Tomasevich breached the agreement and made misleading representations, and sues for damages. 2. Ms Tomasevich did not appear at the hearing. On 4 April 2014 Ms Tomasevich's then lawyers, Clamenz Evans Ellis Lawyers, wrote to Enterprise's lawyers in the following terms: "We advise that we no longer act for the Defendant as she has terminated our retainer. Please find enclosed a copy of the Notice of Removal of Solicitor which was filed in the District Court of New South Wales today. In respect to the hearing listed for Tuesday 8 April 2014, we suggest you contact Ms Tomasevich directly as we have not been advised whether she has engaged in further legal representation. We note that we have been instructed that Ms Tomasevich currently lives offshore in India. However, we have not been provided with her current address as our primary form of communication has been via telephone. We have also provided her last known address in the Notice of Removal of Solicitor. If you have any questions, please contact the writer." 1. Enterprise elected to proceed with the hearing ex parte after being informed of the impact of r 36.16 of the Uniform Civil Procedure Rules 2005 on a judgment given in the absence of parties. During the course of the hearing, after inquiries, Ms Tomasevich's previous lawyer provided her email address to Enterprise's lawyers and an email about the proceedings was sent to that address. It elicited no response. The contract 1. The relevant terms of the written contract are as follows: "9.1 Accuracy. (a) The vendor represents and warrants to the purchaser each of the warranties is true and accurate and not misleading at the date of this agreement, and as at completion… 9.3 Warranties. The vendor warrants and represents to the purchaser at the date of this agreement, and again as at completion, that: (a) Accurate information. All information which has been given by or on behalf of the vendor to the purchaser in respect of the purchase of the business, assets and the stock is true and accurate in all respects. … (i) Financial Performance. The financial performance of the business disclosed in the information given by the vendor to the purchaser was not affected by the waning, unusual or non-recurring items. … (ii) All financial and other information provided to the purchaser by the vendor relating to the business assets and the stock is accurate and true. … (k) All relevant information. (i) All information known to the vendor relating to the business which is material to a purchaser for value has been disclosed to the purchaser. …" 1. In her defence, Ms Tomasevich admitted that she gave these warranties and made these representations. She also admitted that Enterprise relied on the warranties in entering the agreement, but inconsistently denied that Enterprise relied on the representations (in the terms of the warranties) in entering the agreement. The managing director of Enterprise, Gary Shute, gave evidence of reliance, and I accept that evidence. 2. Enterprise submitted that its evidence on damages was framed to establish a breach of warranty case rather than a misleading conduct case. It appeared that although Enterprise might have paid more for the business than it was worth, that loss may have been offset by profits made from trading undertaken by the business. In any event, Enterprise did not continue to press its misleading conduct claim. 3. Accordingly, the matters that needed to be established by Enterprise were: 1. (a) breach of contract; and 2. (b) damages. Breach 1. Mr Shute was provided with certain accounts prior to the purchase of the business, including profit and loss statements for the three financial years 2009, 2010 and 2011, and also draft unsigned tax returns for Ms Tomasevich for 2010 and 2011. Those draft tax returns were consistent with the figures provided in the profit and loss statements. The accounts and returns showed sales and net profit in the three financial years prior to the purchase to be as follows: Year Sales Net Profit 2009 $ 397,307 $ 84,338 2010 $ 457,958 $ 112,194 2011 $ 475,406 $ 126,909 1. After the purchase Mr Shute found on the business' computer other records which indicated a lower level of sales and profit. This lower level of sales and profit was consistent with, and was supported by, the signed taxation returns of Ms Tomasevich (although the evidence did not contain the execution page for the 2011 return). The tax returns and the other records indicated sales and income to the following effect: Year Sales Income 2009 $ 313,515 -$ 16,797 2010 $ 358,619 -$ 36,865 2011 $ 398,744 $ 57,395 1. Thus, taking the most recent financial year as an example, Ms Tomasevich's tax return indicates that sales of $398,744 were $76,662 lower, and profit was $69,514 lower, than the sales and profit figures that were provided to Enterprise by Ms Tomasevich prior to the purchase. There was no evidence to explain this difference. It might be explicable on a number of bases, including that the tax returns were not accurate. However, in the absence of any competing evidence I conclude on the balance of probabilities that the accounts and the draft tax returns of Ms Tomasevich provided to Enterprise prior to execution of the contract were false. In that event, there has been a breach of cl 9.3(a) of the agreement. Information given to Enterprise in respect of the business was not true and correct in all respects, as had been warranted. The obligation in cl 9.3(i)(ii) is substantially to the same effect as that in cl 9.3(a) and is also breached by the false financial documents and draft tax returns provided. 2. The other warranties were not at the forefront of the case advanced by Enterprise. No time was spent on the impact of unusual and non-recurring items (9.3(i)), and the non-disclosure of matters in breach of 9.3(k)(i) raised damages issues equivalent to a misleading conduct case, which was not pressed. Thus, a breach of the warranty that the figures on the financial accounts provided were true is established. The remaining question is the damages that result from that breach. Law on contractual damages 1. The classic test for breach of contract is found in Hadley v Baxendale (1854) 156 ER 145 at 151 [354]: "Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e., according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it." See also European Bank Ltd v Robb Evans of Robb Evans & Associates [2010] HCA 6; (2010) 240 CLR 432 at [13]. In Clark v Macourt [2013] HCA 56 at [106] and [109] Keane J, with whom Hayne, Crennan and Bell JJ agreed, stated: "[106] The principle according to which damages for breach of contract are awarded is that the damages should put the promisee in the same situation with respect to damages, so far as money can do it, as it would have been in had the broken promise been performed…This court said in Tabcorp Holdings Ltd v Bowen Investments Pty Ltd: The 'ruling principle', confirmed in this Court on numerous occasions, with respect to damages at common law for breach of contract is that stated by Parke B in Robinson v Harman: The rule of the common law is, that where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed. … [109] The value to be paid in accordance with the ruling principle is assessed at the date of breach of contract, not as a matter of discretion, but as an integral aspect of the principle, which is concerned to give the purchaser the economic value of the performance of the contract at the time that performance was promised. In this way, the measure of damages captures for the purchaser the benefit of the bargain and so compensates the purchaser for the loss of that benefit." 1. In the present case, both Enterprise and Ms Tomasevich engaged accountants to prepare expert reports in respect to the damage. Enterprise tendered reports from both experts as part of its case. Paul Meldrum, the expert retained by Enterprise, in his initial report gave an opinion that damages were $587,833 comprising the following items: Difference in value of goodwill at time of purchase $ 33,428.00 Reduction in value of goodwill as at 30 June 2013 $ 111,483.00 Reduced Trading Profits to 30 June 2013 $ 111,483.00 Reduced Trading Profits to end of Lease (item 31) $ 325,159.00 Transaction expenses (not including stamp duty) $ 6,280.00 Total Loss & Damage $ 587,833.00 1. Although the calculation of the various items of loss is set out, the basis for including those various items is not made clear in the report. Appendix 4 to his report showing his "Calculation of [Loss &] Damages" omits calculations for the two larger components of damages. 2. The report of Mr Santillana identifies a number of necessary adjustments to the accounts, and I accept the adjustments he has recommended. I was also provided with a further written report of Mr Meldrum prepared on the first day of the hearing. It was not served on Ms Tomasevich nor prepared in accordance with the previous directions of the Court. However, it does not change the methodology Mr Meldrum earlier adopted and as I have accepted some of the adjustments identified by Mr Santillana, I decided to admit it as evidence. Where the reports conflicted, I would prefer the report of Mr Santillana. 3. The principal difficulty is to identify the losses resulting from a breach of a promise as to the level of sales and profits before purchase. It might be supposed that a warranty that information supplied is true and accurate is breached either by the failure to supply the true records, or the failure to provide a business which has a financial performance in accordance with the records supplied. The former approach renders the warranty equivalent to a representation and the damages similar to a misleading conduct case. However, I have concluded that the proper construction of the warranty is the latter meaning, namely that the vendor was warranting that the business it was selling had a financial performance as shown by the financial records supplied. Thus, the appropriate method of calculation of contractual damages is to put the plaintiff in the position it would have been in had the business performed as promised in the financial records. 4. The first item claimed is goodwill in the sum of $33,428. I accept that if the sales and profits are lower in the period leading up to the purchase, then the value of the goodwill of the business will be lower, but the damages for lost goodwill is complicated by a number of matters. 5. First, Mr Meldrum asserts a calculation of a value of goodwill based upon one year's profit. His method of calculating one year's profit is to average the final two years and this average is said to represent the lost value of the business. Mr Santillana calculates the lost value of the business, including goodwill, as between one and one and a half years' profit, effectively 1.25 years' profit. As Mr Meldrum asserts one year's profit, and Mr Santillana seems to concede one year as within the range, I propose to use one year's profit as the value of the business. 6. Secondly, Mr Meldrum adopts a figure of an average of two years of adjusted figures, namely $140,572, whereas Mr Santillana adopts the adjusted figures for the final year before purchase being $144,047. There is little difference between the two, but I accept Mr Santillana's adjustments and methodology. I accept that on the figures provided to Enterprise the value of the goodwill was $144,047. 7. Thirdly, Mr Meldrum calculates the lost goodwill as the difference between the figure apportioned by the parties in the contract, $174,000, and the sum of $140,572, the one year's profit average. This approach seems to be incorrect for two reasons. 8. First, as Mr Santillana says, the goodwill paid at the time of purchase is only a nominal figure agreed between the purchaser and the vendor. I do not regard it as an agreed value of the business, especially as there are other matters in the purchase price of the business. 9. Secondly, the lost goodwill should involve a comparison between the goodwill obtained and the goodwill that would have been obtained had there been no breach of warranty. There is no calculation of the goodwill that existed based upon the actual figures of the business as shown by, for example, Ms Tomasevich's actual tax returns. Mr Santillana also performs no calculation of the actual value of the business purchased. 10. The fourth complication is that accepting the 2011 tax return of Ms Tomasevich to be accurate, which shows a profit of $57,395, the difference in value of the business, that is, one year's profits, from that figure to the value I have accepted, as Mr Santillana has calculated, is the sum of $86,652 (i.e. $144,047 - $57,395). This sum is substantially more than the amount which seems to be claimed by Enterprise, adopting Mr Meldrum's report, of $33,428. I will return to this matter later in this judgment. 11. The other component of damages claimed is trading losses. Enterprise seeks the difference between the warranted profit and the profit achieved in the period immediately prior to purchase, extrapolated over the entire period of the lease. There are at least two reasons why this does not seem to be appropriate. 12. First, as Mr Santillana says: "There may be many other factors that have affected sales of the business, including inferior management by the plaintiff and other internal and external factors. The calculation of lost earnings should take account of this likelihood…[depending on] different levels of shared accountability between the plaintiff and the defendant." 1. One external factor is that there was evidence of Ms Tomasevich competing against Enterprise. It was not suggested this constituted a breach of the agreement, and it was accepted that it could impact on profits. Further, in the first full year after sale, on the plaintiff's case, the sales declined from $398,744 as shown in the actual tax returns of Ms Tomasevich, to $336,096, a reduction of $62,648. This is a reduction in sales of almost the same magnitude as the difference between the warranted sales of $475,406 and the actual sales of $398,744, and is approximately the same percentage decline of about 16%. 2. Secondly, I doubt whether a loss in each subsequent year of trading of a specified amount can be said to arise naturally from the breach of the warranted sales figures in the year prior to trading, in accordance with the Hadley v Baxendale first limb, or that it was contemplated by the parties that that would be the measure of damage, the second limb. In my view, there must be a discount to reflect the increasing impact over time of the management of the business by Enterprise and other factors unconnected with the sales figures in the year immediately before purchase. 3. The records show that of the difference between the represented and warranted figures in the year prior to purchase, and the figures achieved in the year after purchase, about half of the difference is attributable to the incorrect figures, and about half is attributable to a decline under Enterprise's management. In those circumstances, I think I should attribute the trading decline in the first year after purchase to be 50% due to other factors, including Enterprise's management, internal and external factors, and 50% due to the defendant's breach of warranty in respect of the earlier figures. In each subsequent year, in my view, the contribution of the breach of warranty to the diminished profits should decline by 50%. 4. Thus, in the first full financial year of trading by Enterprise, the adjusted profit was $88,566, according to Mr Santillana, which I accept. This was different from the adjusted profit on the warranted figures for 2011 ($144,047 as determined above) in the amount of $55,481. In my view, half of this differential should be paid as damages, namely $27,741. In each subsequent year this differential should decline by 50%. As the lease had four years to run, the trading losses attributable to the breach of warranty are thus: Year Amount 1st year $ 27,741 2nd year $ 13,870 3rd year $ 6,935 4th year $ 3,467 This indicates a total trading loss attributable to the breach of warranty of $52,013. 1. In addition, Enterprise is entitled to the difference in value of the business purchased. As I have mentioned earlier, an amount of about $33,000 was claimed, but on the figures provided and the methodology adopted, it seems that the difference was a larger sum of $86,000 approximately. 2. As to the value of the business, it must also be remembered that the lease had four years running and any goodwill in the business would likely reduce as the lease neared termination. There was no evidence that the lease would be likely to be renewed and it seems to me that there must be some discount for the fact that the value of the lease was declining with each passing year. Although I am prepared to allow a greater amount of goodwill than that which appears in the report of Mr Meldrum, on the basis that he seems to have adopted the wrong figures for the calculation, nevertheless the amount of $86,652 - being the difference between the actual profit immediately before purchase of $57,395, taken from Ms Tomasevich's 2011 tax return, and the adjusted profit in the accounts of $144,047 - should be discounted. This discount is to take account of the decreasing value of the lease. In these circumstances, rather than the sum of $86,652 I propose to allow a sum of $60,000 inclusive of interest. 3. I note that a claim was also made but abandoned for some legal costs in connection with the purchase. In the result, the amount of damages is thus $112,013, comprising the trading losses reasonably attributable to the breach of $52,013 and lost goodwill of $60,000. Costs 1. Enterprise seeks indemnity costs. The only basis for such an award is the absence of Ms Tomasevich at the hearing. She served affidavits and an expert report, apparently in accordance with directions, and the report she served was ultimately tendered and thus of some value to Enterprise. In my opinion, her absence is insufficient to establish that her conduct warranted some special order for costs. Nor do I see her defence to the claim as being unreasonable, although in the circumstances I have found in favour of Enterprise. Enterprise, of course, did not avail itself of the offer of compromise procedure that would offer some protection against unrecoverable legal costs. Orders 1. Accordingly, the orders of the Court are: 1. Judgment for the plaintiff against the defendant in the sum of $112,013. 2. The defendant to pay the plaintiff's costs. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 17 June 2015