All Fasteners (WA) v Grant Caple

REASONS FOR JUDGMENT 1 The appellant is a partnership comprising Mr Glenn McKenzie and his wife, Mrs Teresa McKenzie. In May 2002, a company, Grant Caple Pty Ltd, the first respondent to the originating application (the first respondent), carried on business as a stockist and seller of a range of nailing and stapling hardware to the building, cabinet‑making and furniture‑making businesses. The business was carried on from premises at Unit 4, 42 Farrall Road, Midvale in the State of Western Australia. On 16 May 2002, the appellant entered into a contract to purchase the business from the first respondent. The shareholders and directors of the first respondent were Mr Grant Caple, the second respondent to the originating application (the second respondent) and his wife, Mrs Michelle Caple, the fifth respondent to the originating application (the fifth respondent). The business premises were owned by Mr and Mrs Caple as co‑owners. 2 The appellant agreed to pay $150,000 for the business. As part of the purchase, the appellant also agreed to be novated as a party to existing financial leases between the first respondent and credit providers in relation to three motor vehicles which were used in the business. These three motor vehicles were a 1999 Ford Explorer, a 1998 Ford station wagon and a 1999 Falcon station wagon. In addition, the appellant entered into a lease of the business premises in Midvale on the purchase of the business. The contract for the purchase of the business was completed on 28 June 2002. 3 The purchase of the business proved an unsuccessful venture for the appellant. On 20 December 2002, the appellant commenced an originating application in the Federal Magistrates Court claiming damages pursuant to s 82 of the Trade Practices Act 1974 (Cth) (the TPA). In an amended application, the appellant alleged that the first respondent had engaged in misleading or deceptive conduct in contravention of s 52 of the TPA and that the second and fifth respondents were each knowingly involved in contraventions of the TPA by the first respondent. 4 No appearance to the service of the originating application was filed by or on behalf of the second respondent, whose relationship with the fifth respondent had broken down and who had by that time, left Australia to live in Thailand. On 19 March 2003, an order was made by Federal Magistrate Raphael that judgment be entered for the appellant against the second respondent in default of his filing an appearance, for damages to be assessed. 5 On 21 November 2003, the appellant sold the business for $37,692.19. 6 In May 2004, there was a trial before Federal Magistrate McInnis of the claim made against the fifth respondent. The trial was limited to the question of the fifth respondent's liability. The appellant alleged that in purchasing the business, the partners had relied upon statements contained in a sales document which had been prepared by the business agent engaged by the first respondent. The sales document stated that the first respondent had developed customer loyalty through regular visits by sales representatives, which was successful because it was a contact business where customers were visited, orders taken and personal relationships developed. It was said that direct calling by sales representatives accounted for approximately 80% of the sales of the first respondent. The sales document also stated that one of the sales representatives, Mr McCaughan, was leaving the business to retire and would be leaving the industry. 7 There was also a representation in the sales document that some of the stock of the business comprised nails that were imported from Thailand which were of no lesser quality than those from other suppliers, but would provide a substantially better profit margin. 8 The trial lasted two days. Each of Mr and Mrs McKenzie gave evidence and was cross‑examined. The Federal Magistrate found that the first respondent had engaged in misleading or deceptive conduct in that it had failed to disclose that Mr McCaughan, the sales representative who had resigned, was intending to commence employment with a direct competitor of the first respondent, and that there had been problems with the quality of the stock of nails from Thailand. The Federal Magistrate found that the fifth respondent was knowingly involved in the misleading or deceptive conduct of the first respondent, and entered judgment against the fifth respondent for damages to be assessed. 9 The hearing for the assessment of damages occurred on 17 May 2005 before Federal Magistrate McInnis. By that time, there was an order made by Federal Magistrate Raphael on 19 March 2003 that damages be assessed in respect of the default judgment obtained against the second respondent, and the order of Federal Magistrate McInnis in respect of the liability of the fifth respondent. At that hearing, the appellant relied upon the affidavits of Mrs Teresa Lea McKenzie sworn 5 March 2004 and 23 February 2005, and the affidavits of Mauro Federico, an accountant, sworn 4 March 2004 and 24 February 2005. Each of the deponents was cross‑examined on their affidavits at the hearing on 17 May 2005 ‑ although only the cross‑examination of Mrs McKenzie is in the appeal book. 10 The appellant claimed damages of $200,000, being the maximum under the jurisdiction of the Federal Magistrates Court. The appellant claimed damages in respect of capital loss, trading losses, financing costs, income forgone and losses arising from the purchase of the motor vehicles which the appellant acquired as part of the business. The appellant also claimed an order under s 87(2)(c) of the TPA for the refund of $11,706.70 in respect of the rent paid to the second and fifth respondents for the lease of the Midvale business premises. 11 Between the date of the hearing on 17 May 2005 and the delivery of the judgment in December 2005, the fifth respondent succeeded in an appeal against the decision of Federal Magistrate McInnis that she was liable for damages to be assessed. Accordingly, when Federal Magistrate McInnis made orders in respect of the quantum of damages to be paid, those orders were made only against the second respondent. It is in respect of those orders that this appeal is brought. The decision of the Federal Magistrate 12 The Federal Magistrate ordered that the second respondent pay by way of damages the sum of $90,000, representing primarily the capital loss suffered by the appellant, adjusted to take account of his finding that the partners of the appellant elected to conduct the business "at a lower level than it could have been run", and to reflect other factors, including the benefit derived from the sale of two of the motor vehicles. 13 In his judgment, McInnis FM observed at [21]: There were criticisms made during the course of the hearing in this matter of the manner in which the [appellant] conducted the business. It is important to at least make some allowance for that conduct which may lead a court to conclude that it was not conducted in a way which might have attracted a better "sale price". Of course in the assessment of damages it is difficult to make a precise finding in relation to that but rather simply make some allowance by way of reduction to the damages claimed. 14 Further McInnis FM observed at [22]: I am satisfied the business would not have been purchased had the representations not been made, and therefore am prepared to conclude that the damages by way of capital loss have been sustained. I am not prepared however to accept that the total amount of capital loss of $106,114.18 is an appropriate amount of damages and I make some allowance for what might be described as the less than efficient conduct of the business on the evidence before me by the [appellant]. A further reduction should be made for transactions including the acquisition and sale of at least two of the three vehicles. Doing the best I can on the material before me, I am prepared to find that there has been a capital loss constituting damages, which I assess at $90,000. 15 At [23] the Federal Magistrate also said: I accept in this instance the downturn in the business occurred soon after the purchase and I do not find that there has been a contrived downturn in the business caused by the [appellant]. Rather I accept, as indicated, that a loss and damage has occurred in the nature of a capital loss arising from the purchase and sale of this business. The sale in itself, I am satisfied, was appropriate in order for the [appellant] to mitigate the loss, and that the loss as found was caused by the claimed contravention of the s 52 of the TPA by the Second Respondent. 16 The Federal Magistrate rejected the appellant's claims for trading losses of $74,090.88. His Honour said at [14]: I apply the principles set out in the decision of the Federal Court in Starborne Holdings Pty Ltd v Radferry Pty Ltd where the Court held an Applicant is not entitled to recover damages from trading losses from having elected to operate a business at a lower level than it could have been run. (Footnote omitted.) 17 The Federal Magistrate also rejected the appellant's claim in respect of losses in relation to the motor vehicles, and loss of income forgone by reason of unrewarded work in the business, and financing costs. 18 The Federal Magistrate observed at [26]: Whilst I accept the assessment of damages in this instance may reflect a somewhat robust approach, I should add that it is not for the court to merely accept all the damages claimed in circumstances where it is clear that the Court's duty is not to make a damages order for all losses, where it may well be that some of those losses do not arise directly out of the contravention of the TPA by the Second Respondent. It is clear that in the conduct of a business that other losses were sustained and adjustments made, though the substantive loss, I am satisfied, which justifies the assessment of damages in the sum of $90,000 is for the capital loss, and that in my view, is sufficient compensation for the [appellant] in this application. 19 The Federal Magistrate also declined to make any separate order under s 87(2)(c) of the TPA in the amount of $11,706.70 by way of refund of the rent paid, as value was delivered to the appellant for the payment of rent. The appeal 20 It was contended that the Federal Magistrate erred by refusing to award the amount claimed in respect of trading losses and by making an adjustment in the capital loss, because there "was no evidence to support" the finding that the appellant elected to run the business at a lower level than it could have been run (Grounds 2 and 3 of the appeal). The appellant also contended that the Federal Magistrate erred in not awarding damages in respect of the other heads of damages claimed, which said the appellant, were items of loss that occurred as a direct consequence of the contravening conduct, and therefore, compensable in accordance with the causation principles espoused by the High Court in Henville v Walker (2006) 206 CLR 459 (Henville). Trading losses and adjustment to the capital loss 21 I deal firstly with the appellant's contention that the Federal Magistrate erred in not awarding trading losses and in reducing the amount of capital loss. 22 In Gould v Vaggelas (1983) 157 CLR 215 (Gould), Gibbs CJ recognised that in actions for deceit, trading losses could, in certain circumstances, be recovered in addition to a capital loss. Gibbs CJ observed at 221‑222: There is no reason in principle why the defrauded purchaser should not recover damages for all the loss that flowed directly from the fraudulent inducement (unless, possibly, the loss was not foreseeable). If the purchaser, besides paying more for the business than it was worth, has suffered additional losses which resulted directly from the fraud he ought to be compensated for them. Of course, the court must be satisfied that the loss did result directly from the fraud and not from some supervening cause such as the folly, error or misfortune of the purchaser himself, and must ensure that no additional compensation is given for losses when those losses, or the probability of their occurrence, has already been taken into account in determining the value of the business. (Footnotes omitted.) 23 In the case of Kizbeau Pty Limited v W G & B Pty Limited (1995) 184 CLR 281 (Kizbeau), the High Court observed at 290‑291: Actions based on s 52 are analogous to actions for torts. It follows that, in assessing damages under s 82 of the Act, the rules for assessing damages in tort, and not the rules for assessing damages in contract, are the appropriate guide in most, if not all, cases. In an action for damages for deceit for inducing a person to enter a contract of purchase, which is an action that is closely analogous to an action for damages for breach of s 52, the courts have consistently held that the proper measure of damages is the difference between the real value of the thing acquired as at the date of acquisition and the price paid for it. Nevertheless, although the value is assessed as at the date of the acquisition, subsequent events may be looked at in so far as they illuminate the value of the thing as at that date. A distinction is drawn, however, between subsequent events that arise from the nature or use of the thing itself and subsequent events that affect the value of the thing but arise from sources supervening upon or extraneous to the fraudulent inducement. Events falling into the former category are admissible to prove the value of the thing, those falling into the latter category are inadmissible for that purpose. Thus, the takings of a business subsequent to purchase are generally admissible, not only to prove that a representation concerning the takings was false but also to prove the true value of the business as at the date of purchase. Even when some difference exists between the conditions under which the business was conducted before and after purchase, evidence of subsequent takings may be admissible, "subject to due allowance being made for any differences in relevant conditions". But if it is established that the decline in takings has been caused by business ineptitude or unexpected competition, evidence of subsequent takings is not admissible to prove the value of the business as at that date, events such as ineptitude and unexpected competition being regarded as supervening events. In some cases of deceit, it may also be proper to compensate the defrauded party not only for the difference between the value of the thing acquired and the price paid for it but also for losses induced by the fraud and directly incurred in conducting the business. All of these principles are appropriate to the assessment of damages under s 82 where a breach of s 52 of the Act has induced a person to purchase a business. 24 There was no evidence produced by the appellant as to the value of the business at the date of purchase. Thus, the Federal Magistrate was not in a position to apply the usual measure of damages referred to by the High Court in Kizbeau, namely, the difference between the price paid and the value of the business as at the date of purchase. The appellant claimed capital loss of $106,114.18 on the basis of the difference between the price paid for the business in June 2002 and the price obtained for the business when it was sold in November 2003. In assessing the damages generally, and capital loss in particular, the Federal Magistrate had to do the best he could with the evidence which was available to him. Although the Kizbeau approach is the preferred, or usual approach, to assessing damages, it is not the only approach available to give effect to the general rule which is to seek to to put the applicant into the position he or she would have been but for the contravening conduct (HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640 at 663). 25 The Federal Magistrate's approach to trading losses, although not articulated in this way, can be explained as follows. Insofar as the trading losses claimed by the appellant arose from causes inherent in the business, in accordance with the observations of Gibbs CJ in Gould, the Federal Magistrate took them into account in assessing the "true value" of the business, when making his award for capital loss. However, there were, in his view, other trading losses that were not inherent, and which were not, therefore, to be accounted for in the award for capital loss. Those trading losses were attributable to the appellant's own conduct in electing to operate the business at a lower level, and, therefore, not compensable. 26 In my view, in discounting the difference between the price paid and the amount obtained on sale, the Federal Magistrate, in effect, determined that the "true value" of the business by the date of sale, had been reduced to some extent by "extraneous factors" - namely, the election of the appellant to operate the business at a lower level than it could have been operated. His Honour, therefore, made an allowance to accommodate that finding. Subject to the evidentiary limitation as to the value of the business already referred to, this approach generally accords with the tenor of the observations by the High Court in Kizbeau. 27 The next question is whether there was evidence to support the Federal Magistrate's finding that the appellant operated the business at a lower level than it could have been operated. The appellant contended that there was not. 28 The evidence was that prior to the appellant purchasing the business, Mr McKenzie carried on business as a therapeutic masseur, a courier and a postman. He had no sales experience. Before purchasing the business, Mr and Mrs Mckenzie knew from the sales document that the performance of the business would depend upon a high level of direct sales contact, and that 80% of the revenue was generated by direct sales contact. Before the appellant contracted to purchase the business there were two full‑time experienced sales representatives working in the business - one of whom was Mr McCaughan. On taking over the business, Mr McKenzie started assisting the remaining sales representative, Mr Milton, in sales activities. Within three months Mr Milton left the employment of the appellant. The appellant decided not to replace Mr Milton, leaving Mr McKenzie, a person with no prior sales experience, as the only sales representative. 29 Mrs McKenzie said in evidence that the reason why the sales representative was not replaced was to cut costs, and that she was confident Mr McKenzie could perform well as a sales representative. 30 In my view, there was evidence before the Federal Magistrate upon which it was open to conclude that the decision to operate with one inexperienced sales representative, was a decision to operate a business at a lower level than it could have been operated. 31 The grounds of appeal which raise these points fail. Losses associated with the sale of the motor vehicles 32 I now deal with the appellant's contention that the Federal Magistrate erred in not awarding damages in respect of the losses associated with the motor vehicles it acquired and used in the business. The appellant claimed as damages a total amount of $18,503.71 comprising the following sums: (a) $14,250.34 - in respect of two of the three vehicles acquired on the purchase of the business, which were traded‑in on a new Mitsubishi Pajero vehicle in July 2002; being the difference between the amount obtained by the appellant when the vehicles were traded‑in, and the amount which was then outstanding on the finance leases in respect of those vehicles. (b) $617 - in respect of the third vehicle acquired on the purchase of the business; being the difference between the amount obtained on the sale of the vehicle in April 2004 and the residual payment then outstanding on the financial lease; and (c) $3,636.37 ‑ being the difference between the true value of a vehicle which Mr and Mrs McKenzie owned privately, prior to the purchase of the business, and the amount obtained on trading it in as part of the July 2002 transaction. 33 The Federal Magistrate did not award any damages in respect of this claim. In my view, the Federal Magistrate erred in declining to award damages under this head of claim. Consistent with the findings made by the Federal Magistrate, the appellant was induced to acquire three motor vehicles for an amount in excess of the true value of the vehicles as a direct consequence of the misleading or deceptive conduct. The usual measure of damages to be applied in relation to the losses associated with the motor vehicles would, on the principles referred to in Kizbeau, be the difference between the price paid for the three motor vehicles acquired with the business (being the vehicles referred to in [32(a)] and [32(b)]) and their value at the date of purchase. The appellant did not produce evidence of the amount which the appellant undertook to pay in respect of each of the three vehicles under the novated arrangements entered into at the time of the purchase of the business, nor of the true value of the vehicles at that time. Doing the best I can and, acting on the evidence which was before the Federal Magistrate, I would award damages in the amount claimed of $14,867.34 in respect of those three vehicles. 34 As to the loss claimed in respect of the sale of the vehicle referred to in [32(c)], the evidence does not establish a causal connection between the contravening conduct and the loss which was allegedly incurred through trading‑in the pre‑existing family car in order to purchase a new vehicle. The evidence did not establish that it was necessary to sell that vehicle, as opposed to the vehicle referred to in [32(b)], nor that the failure by the appellant to obtain a trade‑in amount which represented the true value of the vehicle at the appropriate time, was attributable to the contravening conduct. Unrewarded work 35 The next head of damage to the claim which it is said the Federal Magistrate ought to have allowed was for earnings forgone by reason of unrewarded work during the period 1 July 2002 to 21 November 2003 - when the appellant sold the business. Under this head, the appellant claimed the amount of $25,197. 36 This amount was derived from a claim that Mr McKenzie earned $18,198 in the 2002 financial year as a therapeutic masseur, courier and postman. The claim was said to be evidenced by his taxation return for 2002. The Federal Magistrate rejected this claim on the basis that the amount he awarded for capital loss covered this loss. He also said that it would not be appropriate to make such an award because it was clear that some income and benefit was derived from the conduct of the business. However, the Federal Magistrate did not give reasons for coming to that view. 37 In my view, the Federal Magistrate erred in failing to award an amount in respect of that head. The evidence was that Mr McKenzie was required to work full‑time in the business and that the business was a loss‑making business. The inference is open on the evidence that had the partners not bought the business, Mr McKenzie would have continued to operate his massage business and his courier business and would have earned income during the period in question. There are a number of authorities which support the proposition that where a person, in reliance upon the contravening conduct, purchases and works in a loss‑making business without reward, that party is entitled to receive compensation for income forgone (Cut Price Deli Pty Limited v Jacques (1994) 49 FCR 397, Crystal Auburn Pty Ltd v IL Wollermann Pty Ltd [2004] FCA 821). I would allow the appellant's appeal in respect of this claim. 38 As previously mentioned, the quantum of the claim was based on the evidence of Mr McKenzie's tax return for the financial year ended June 2002. During cross‑examination Mrs McKenzie was unable to explain how that figure of $18,198 was derived from the 2002 tax return. In my view, the tax return only supports an annual income after expenditure of $12,655. It is that figure which should provide the basis for assessing damages in respect of the claim for income forgone, with the consequence that I would award $17,500 damages under this head. Financing and borrowing costs 39 The appellant also claimed financing and borrowing costs. The financing and borrowing costs claimed comprised fees related to obtaining finance in order to purchase the business, as well as interest and fees on the business overdraft. The fees relating to the raising of the money to complete the purchase of the business comprised broker's fees of $1,485 and bank fees of $1,598.25. 40 The Federal Magistrate rejected this head of claim on the basis of observations in the case of Yorke v Lucas (1982) 69 FLR 116 that these costs were not compensable because they were incurred as the result of the lack of ready money to pay for the purchase of the business, and not the direct consequence of the purchase of the business. Since that case, the High Court has observed that ordinarily an award of damages under s 82 of the TPA will compensate for the actual loss incurred where the contravening conduct is a cause of that loss (I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (2002) 210 CLR 109 at 121‑122, at [33], at 125‑126, at [50] and at 130, at [62]). On the basis of the Federal Magistrate's finding that the appellant purchased the business in reliance on the contravening conduct, the incurring of the fees to raise finance to purchase the business would be causally connected to the contravening conduct. In my view, the Federal Magistrate should have accepted the appellant's claim for these fees, being fees relating to the completion of the purchase of the business. I would, accordingly, award the appellant damages in the sum of $3,083.25. 41 The interest and bank fees payable on the business overdraft after the purchase of the business until the sale of the business in November 2003, are embraced within the claim made in respect of the trading losses. The Federal Magistrate did not err in rejecting the claim for those amounts. 42 The appellant also made a claim in respect of ongoing interest paid after the sale of the business in November 2003, on the outstanding balance of the loan taken out to purchase the business. In my view, for the reasons referred to above, the Federal Magistrate should have accepted this claim as a head of consequential loss. The amount that the appellant claims under this heading is not fully particularised. Up to February 2004, the amount claimed is $2,510 and between July 2004 to January 2005, the amount is $6,498. To those sums I would add an amount of $3,600 reflecting the intervening months. The rounded total would be $12,600. In my view, however, any amount awarded in respect of this head should reflect the Federal Magistrate's finding that the performance of the business, and therefore, the extent of the outstanding balance of the borrowing, was affected by the appellant electing to run the business at a lower level. Doing the best I can on the evidence, I would award the sum of $9,000 under this head. Rent 43 As to the claim in respect of the refund of the rent, in my view, the Federal Magistrate did not err in refusing that claim. The Federal Magistrate correctly found that the appellant suffered no loss because it obtained value for the monies that it paid by way of rent. 44 It follows that the appellant's appeal is allowed in part. I will hear the parties on costs and the terms of the order. I certify that the preceding forty‑four (44) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Siopis.