[2004] HCA 60
CH Real Estate Pty Ltd v Jainran Pty LtdBoyana Pty Ltd v Jainran Pty Ltd [2010] NSWCA 37
Google Inc v ACCC (2013) 249 CLR 435[2013] HCA 1
Havyn Pty Ltd v Webster [2005] NSWCA 182
Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (No 1) (1988) 39 FCR 546(1988) 79 ALR 83
Henville v Walker (2001) 206 CLR 459[2001] HCA 52
Houghton v Arms (2006) 225 CLR 553
[2006] HCA 59
I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (2002) 210 CLR 109
[2002] HCA 41
Khoury v GIO of NSW (1984) 165 CLR 622
Munchies Management v Belperio (1988) 58 FCR 274
(1988) 84 ALR 700
Myers v Transpacific Pastoral Co Pty Limited (1986) ATPR 40-673
Rafferty v Madgwicks
Time 2000 Systems (Aust) Pty Ltd v Rafferty (2012) 203 FCR 1
Judgment (24 paragraphs)
[1]
John Kagelaris Pty Ltd (first defendant)
John Kagelaris (second defendant)
Paul Sengos (third defendant)
Representation: Counsel:
D Hand (plaintiff)
[2]
Self-represented (second defendant)
B Ilkovski (third defendant)
[3]
Solicitors:
Woods & Day Solicitors (plaintiff)
[4]
Hassett Lee & Co Lawyers (third defendant)
File Number(s): 2017/00269614
Publication restriction: Nil
[5]
Judgment
On 18 January 2017, the plaintiff, Stephen Badger, entered into an agreement with the first and second defendants, John Kagelaris Pty Ltd and John Kagelaris, to purchase a wholesale confectionary distribution business in South-Western Sydney for $118,000, of which $112,000 was for goodwill and $6,000 was for stock (Business Sale Agreement).
On the same day, Mr Badger entered into an agency distribution agreement with Associated Products Pty Limited (Associated Products) under which Mr Badger was appointed Associated Products' agent to distribute its confectionary products in South-Western Sydney (Distribution Agreement). The third defendant, Paul Sengos, was the sole director and shareholder of Associated Products.
In May 2017, Mr Badger purported to terminate the Business Sale Agreement claiming that he entered into it in reliance on inaccurate and misleading information about the South-Western Sydney wholesale confectionary distribution business (Business) which was contained in two emails sent to him on 15 December 2016 by Mr Sengos (15 December emails).
[6]
The proceedings, the parties and the issues for determination
In November 2018, Mr Badger commenced these proceedings against John Kagelaris Pty Ltd (JKPL), Mr Kagelaris and Mr Sengos.
Mr Badger seeks orders declaring the Business Sale Agreement void under Competition and Consumer Act 2010 (Cth), Sch 2 - Australian Consumer Law, s 243 (ACL) and for compensation pursuant to s 237 of the ACL in relation to misleading or deceptive conduct (in the form of the pre-contractual representations) alleged to have been engaged in by the defendants. An alternative claim of accessorial liability is made against Mr Sengos and Mr Kagelaris in respect of the alleged misleading conduct contraventions.
Mr Badger also seeks, in the alternative and against JKPL and Mr Kagelaris only, a declaration that he validly rescinded the Business Sale Agreement and an order for the return of the amount he paid for the Business based on the pre-contractual misrepresentations contained in the 15 December emails which Mr Badger asserts Mr Kagelaris knew were false.
Mr Badger also pleads various breaches of the Business Sale Agreement by JKPL and Mr Kagelaris which caused Mr Badger loss and damage (at [16] - [41] Further Amended Statement of Claim (FASC)).
At the hearing, Mr Badger's counsel did not make any submissions to advance the pleaded breach of contract and damages case and confirmed that his contract claim was one for rescission in equity arising from the pre-contractual misrepresentations (T127:34-35). The Court was informed that JKPL had been deregistered which means that the company no longer exists: Corporations Act 2001 (Cth), s 601AD(1).
Given these matters and the way the hearing and submissions progressed, I have approached these reasons on the basis that Mr Badger's primary case is for alleged contraventions of the ACL for misleading and deceptive conduct, the only relief sought is against Mr Sengos and Mr Kagelaris and no findings are required to be made in relation to the pleaded breach of contract or contractual damages case.
Mr Kagelaris was the director of JKPL. He did not adduce any evidence and appeared for himself on the first day of the hearing only. He accepted that some of the information contained in the 15 December emails which were provided to Mr Badger did not reflect the actual financial position of the Business but were his estimates (T10:9-21).
[7]
Credibility of witnesses
Before setting out the facts, I first deal with some submissions regarding the evidence of Mr Badger and Mr Sengos.
Mr Badger read two affidavits and was cross-examined at the hearing. Mr Sengos submits that aspects of his evidence are unsatisfactory because he was, on occasion, non-responsive to questioning and sought to volunteer evidence that would best suit his case. I do not accept that submission.
Mr Badger was, in his own words, nervous while giving his evidence. While he sometimes required questions to be clarified or repeated, I found him to be an honest and persuasive witness who did his best to recall events going back to late 2016 and early 2017.
By contrast, there were aspects of Mr Sengos' evidence that, in my view, were unsatisfactory. His evidence about who owned the South-Western run was inconsistent, with his affidavit suggesting it was Mr Kagelaris' run (at [12]) when he accepted it was company-owned and he had simply given Mr Kagelaris the "opportunity to sell the business" (T104:19). His affidavit evidence about the figures sent to Mr Badger on 15 December 2015 was also internally inconsistent, stating at [15] that he did not consider them at all, but simultaneously at [32] saying that some figures "looked right to me".
I also consider Mr Sengos' evidence that he relied on Mr Kagelaris for the sales figures, had little knowledge of them and had limited involvement in the sale of the South Western run to be implausible (eg. T99:34-38; T101:37-41; T103:4-11) in circumstances where he knew that Mr Kagelaris did not operate the run for the period November 2015 to August 2016, the run was company-owned from August 2016, Mr Sengos was Mr Badger's initial contact person and his involvement in preparing the Business Sale Agreement.
Accordingly, to the extent there is inconsistency between the evidence of Mr Badger and Mr Sengos, I prefer the evidence of Mr Badger.
[8]
Factual findings
The following sets out the relevant facts. Many of them are not in dispute. Where there are disputes, the following should be taken as the findings of the Court based on the evidence.
[9]
Associated Products and Mr Sengos
Mr Sengos operated a confectionery distribution business through various companies in Australia and New Zealand for approximately 40 years. He had been a director of Associated Products since it was first registered in 1994, its sole director from 12 October 1996 to 19 June 2017, and its secretary from 5 June 1996 to 19 June 2017.
Associated Products' business model involved sourcing and selling (via salespeople or distributors) confectionery on which high profit margins could be obtained, which often involved sourcing confectionary that was close to or past the manufacturer's best before date. Associated Products supplied the confectionary it sourced to distributors who operated in particular geographic territories, who would on-sell the confectionary to retailers, such as grocery and convenience stores. This model required the salespeople and distributors to physically visit retailers to make sales.
From 2015 to 2016, Associated Products had a number of distributors operating in various geographic areas across Sydney, as well as in Wollongong, Perth, South Australia, Gold Coast, Melbourne and New Zealand. Most of the distributors had written distribution agreements with Associated Products.
One of Associated Products' distributors was Mr Kagelaris. He had worked as a salesman and/or distributor for Mr Sengos for over 20 years and was a friend of Mr Sengos' as well as a business associate. In 2015, Mr Kagelaris owned and operated the Business as well as a business distributing Associated Products' confectionary in Western Sydney.
[10]
October 2015 - December 2016
In August 2015, 1 Plus 2 Pty Ltd (1Plus2) purchased the Business from JKPL for $95,000 and entered into a distribution agreement with Associated Products. Elisabeth Orfanos, the director of 1Plus2, operated the Business during the period from October 2015 to August 2016.
Prior to purchasing the Business, Ms Orfanos was provided with an information memorandum which included sales and profit figures for the business for the period to July 2015.
On 22 August 2016, Ms Orfanos informed Mr Sengos that she was handing the Business (which she referred to as the South-Western distribution run) back to him as she did not want to go through a process to sell the Business, even though it involved a financial loss for her. Her evidence, which I accept, is that she ceased operating the Business because she considered it was not viable and because she thought the sales figures she had been provided in the information memorandum were overstated.
After Ms Orfanos gave up the Business, Mr Sengos arranged for Mr Kagelaris to step in and run it because he knew all the customers. Mr Sengos told Mr Kagelaris that, if he looked after the stores, he could later sell the Business. Mr Kagelaris did not pay Mr Sengos or Associated Products for the right to sell the Business when he took over running it (T81:20-28; T81:49-50; T82:36-37).
[11]
December 2016 - Mr Badger enquires about Business
In December 2016, Mr Badger, who was then working as a storeman at Woolworths, saw an advertisement for the sale of a wholesale confectionary distribution business in the western suburbs of Sydney for $129,950.00 with a weekly gross profit of $2,284.00, over 110 existing retail customers and "huge room for growth" (Western Sydney business).
On 13 December 2016, Mr Badger submitted an enquiry and was provided with an information memorandum for the Western Sydney business from the broker, Mr Scully, of SBX. The information memorandum identified that the vendor was "John" from JKPL and that the rights to sell confectionary were purchased from Associated Products. It also stated that the sale was for the goodwill and that the buyer would receive:
1. a list of all current customers with contact details;
2. an introduction to all of the customers;
3. training during the handover period with the vendor to familiarise the buyer with the current service standards and methodology; and
4. an agreement with the confectionary supplier, Associated Products Pty Ltd for an exclusive geographical area for a 4 year period with an option for a further 4 year term.
The information memorandum set out the sales, cost of goods, profit and profit margin for the Western Sydney business from January 2014 to June 2016 and noted that selling of confectionary was a "personal art" and that a purchaser may not achieve the same sales in the future or alternatively may achieve greater sales. It also stated that, since the vendor sold to retailers on a cash only basis, verification of sales was through vendor tax returns, the sales spreadsheet and purchases from suppliers.
On 14 December 2016, Mr Badger contacted Mr Scully who advised that the Western Sydney business had sold but another run in South-Western Sydney was about to come onto the market and that he could pass on Mr Badger's details to Mr Sengos, the owner of Associated Products, which supplied the confectionery and set the distribution runs.
On 15 December 2016 at about 7:30 pm, Mr Sengos telephoned Mr Badger and told him that the Business, which was operated by Mr Kagelaris, was about to come onto the market. Mr Sengos told Mr Badger that the information in the Western Suburbs business information memorandum was basically the same for the Business and that the Business was "just as good" as the Western Sydney business (T96:20-21). He also told Mr Badger he could obtain the turnover figures for the Business from Mr Kagelaris, which he would email to Mr Badger.
[12]
On 16 December 2016 at 8.00am, Mr Badger sent an email to Mr Sengos advising that he was interested in purchasing the Business but wanted to accompany Mr Kagelaris when he was working in the Campbelltown area to see how the Business operated. Later that day, at around 8.30pm, Mr Sengos telephoned Mr Badger to see whether he was interested in purchasing the Business and advised that he would organise for Mr Kagelaris to take Mr Badger on the distribution run.
On 19 December 2016, Mr Badger accompanied Mr Kagelaris on the distribution run. This was the first time that Mr Badger had met or had any direct contact with Mr Kagelaris. Later that day, Mr Sengos telephoned Mr Badger asking how he went with Mr Kagelaris and advised that he wanted Mr Badger to own the Business as he knew the local area well.
Between 19 December 2016 and 7 January 2017, Mr Badger and Mr Kagelaris exchanged text messages. Mr Badger expressed some indecision in respect of purchasing the Business as it was a "big investment for me" and because he was considering moving out of the Campbelltown area that year.
On 10 January 2017, Mr Kagelaris sent an information memorandum for the Business to Mr Sengos, which contained different sales figures to those contained in the Sales Figures provided to Mr Badger. Mr Sengos forwarded the information memorandum to Mr Scully at SBX. This information memorandum was not provided to Mr Badger at the time.
The 10 January information memorandum also stated that Mr Kagelaris, from JKPL, had purchased the rights to the run from Associated Products and had only worked the area for two to three days a week for the last couple of years. Both of those statements were not accurate as Mr Kagelaris had not purchased the run from Associated Products after Ms Orfanos gave it up, nor had he worked the area during the period from November 2015 to August 2016.
On 11 January 2017, Mr Badger sent a text message to Mr Kagelaris asking if he could accompany him on the distribution run again before committing to purchase the Business. Mr Kagelaris advised Mr Badger that he would be doing another run at the end of the month, that he was putting the Business on the market that week and that it would be sold in 2 to 3 weeks.
On 13 January 2017, the Business was listed for sale by SBX for $119,950.00. Mr Badger saw the advertisement which included a statement that there were "over 130 existing retailers", weekly takings of $3,592 and gross profits of $2,185.
[13]
February 2017 - Mr Badger completes purchase, commences to operate and then decides to sell Business
In February 2017, Mr Sengos sent several emails to Mr Badger regarding settlement of the purchase of the Business and Mr Badger's first order of stock from Associated Products. The emails directed Mr Badger to pay the balance of the purchase price, being $71,392.88, into an account held in Mr Sengos' name.
On 9 February 2017 and 10 February 2017, Mr Badger paid the balance of the purchase price for the Business into an account held in Mr Sengos' name. Mr Sengos' evidence is that the purchase price, including the deposit, was paid to him because Mr Kagelaris owed Mr Sengos a substantial sum of money which was to be repaid if Mr Kagelaris sold the Business.
On 9 February 2017, Mr Badger attended Associated Products' warehouse and collected his initial order of stock, together with the run cards for 116 retailers and a customer list containing details for 116 retailers.
On 13, 14, 15 and 17 February 2017, Mr Kagelaris trained Mr Badger in the operation of the Business and introduced him to retailers in the area.
On or about 17 February 2017, Mr Badger decided that he wanted to sell the Business. He had been offered a promotion at Woolworths and found that operating the Business was causing strain on his relationship with his fiancé (with whom he lived in Newtown).
On 17 February 2017, Mr Badger advised Mr Kagelaris that he wanted to get out if the Business and offered to sell it back to Mr Kagelaris. Mr Kagelaris refused stating that "Paul doesn't want me doing this run anymore". Mr Kagelaris advised Mr Badger to talk to Mr Sengos and suggested he say "that the sales are good and the profit is there but that it's not for you".
On 17 February 2017, Mr Badger emailed Mr Sengos and advised him that the Business was not for him. He informed Mr Sengos about the promotion and that he had told Mr Kagelaris about his intentions. He also stated that "the sales [were] there and the money [was] good" based on Mr Kagelaris' suggestion.
Mr Sengos responded suggesting that Mr Badger give it a few weeks before making a decision. Mr Badger confirmed his decision to sell the Business to which Mr Sengos responded "Until you find a buyer you will need to ensure you service the customers or alternatively John may do this for you if you ask him". He later suggested that Mr Badger should wait for a few weeks to sell because another run in Parramatta was on the market.
[14]
Attempts to sell the Business
From late February until early April 2017, various communications were exchanged between Mr Badger and Mr Sengos relating to Mr Badger's plan to sell the Business. The communications included further requests by Mr Badger for Mr Sengos to provide him with the monthly sales figures for the Business (particularly for the period for July 2016 to December 2016), advice from Mr Sengos to Mr Badger to increase the sales price from $65,000 to $139,000 and a suggestion by Mr Sengos for Mr Badger to consider handing the customer base back to Mr Kagelaris until he found a buyer to allow the value of the Business to be maintained.
On 10 March 2017, in response to a further request from Mr Badger for the monthly sales figures for the Business, Mr Sengos sent an email to Mr Badger stating:
"Do you really need them. BEST thing you can do is when you have someone who has an interest and you have given them a run down on the busn tell them you will get me to call them and I will go through the busn in more detail and arrange to meet with them".
Around 20 March 2017, Mr Sengos prepared an information memorandum for the sale of the business and sent it to SBX, which Mr Badger had reviewed.
On 29 March 2017, Mr Sengos sent an email to Mr Badger asking whether he wanted Mr Kagelaris to service the Business until he found a buyer. Mr Badger responded advising him that he would like him to do so and that he just wanted the business sold. Neither event transpired.
On 31 March 2017, Mr Sengos advised Mr Badger that he had someone interested in buying the Business for $20,000, which Mr Badger declined to accept.
[15]
April - May 2017: review and cessation of Business
In early April 2017, Mr Badger separated from his fiancée and moved back to Campbelltown.
Around this time, Mr Badger formed the view that it was not possible that the Business had made the sales and profits referred to in the Sales Figures or customer numbers that he had been given by Mr Sengos on 15 December 2016.
Mr Badger's evidence is that he formed this view based on his experience that most of the retailers in the area were not interested in purchasing any confectionary products from him and because those that made purchases either did not make any further purchases or purchased a reduced quantity of products when Mr Badger re-visited them. His view was also informed by an analysis he undertook around this time of the customer run cards he had been given by Mr Sengos when he took over the Business. That analysis indicated that the run cards for 46 retailers had either been crossed out, had no purchases recorded at all, or had no purchases recorded in the 6 months before his purchase of the Business and the run cards for an additional 26 retailers had 10 or less items purchased recorded in the 6 months before his purchase of the Business.
On 6 April 2017, Mr Badger emailed Mr Sengos advising that the real reason he wanted to sell the Business was that "the turnover [wasn't] anything like the turnover figures [he] had emailed to [him] or was in the sbx add".
On 7 April 2017, having formed the view that the Sales Figures were overstated, Mr Badger instructed SBX to remove the Business for sale from its website.
On 10 April 2017, Mr Sengos emailed Mr Badger advising that Mr Kagelaris wanted Mr Badger to sign a mutual deed of release before entering into any further communications with him and providing him with a breakdown of the sales figures Mr Badger had requested. Mr Sengos also asked whether Mr Badger wanted Mr Kagelaris to take care of the Business until a buyer was found, noting that the situation needed to be resolved soon as they both had obligations to perform under the Distribution Agreement. There is no evidence of any reply sent by Mr Badger to that email.
On 29 April 2017, Mr Sengos emailed Mr Badger advising that Associated Products would terminate the Distribution Agreement if Mr Badger did not rectify certain breaches of the Distribution Agreement within 7 days, including Mr Badger's failure to acquire minimum quantities of product from Associated Products of $500 per week. The email also offered Mr Badger an opportunity to sign a deed of release in respect of the alleged breaches, failing which proceedings would be commenced against him and the Distribution Agreement would be terminated.
[16]
The misleading and deceptive conduct claims
Mr Badger claims that he entered into the Business Sale Agreement having relied on various representations that arise from the contents of the 15 December emails sent to him by Mr Sengos (and referred to in paragraphs [35] and [37] above) which he asserts were misleading or deceptive in contravention of s 18(1) of the ACL.
There is no dispute that some of the pleaded representations were made and that they were misleading and deceptive. The primary issues for determination are:
1. whether Mr Sengos and Mr Kagelaris engaged in any misleading and deceptive conduct by making the representations, or alternatively, whether they were involved as accessories to the conduct of others;
2. whether Mr Badger relied on the representations and whether doing so caused him loss; and
3. what relief, if any, is appropriate to be ordered.
[17]
The pleaded representations
Mr Badger pleads three express representations arise from the terms of the 15 December emails, being that:
1. the Business had 105 current customers (Customer Representation);
2. the amounts of sales, cost of goods sold, and profit of the Business for the period from 1 July 2014 to 31 July 2016 were those set out in the Sales Figures (Sales Figures Representation); and
3. the Business had made sales of approximately $90,000.00 for the period from 1 August 2016 to about 15 December 2016 ($90,000 Sales Representation),
(together the Representations).
It was accepted at the hearing, and I am satisfied, that the Representations arise from the terms of the 15 December emails.
It was not disputed by Mr Sengos, and I find, that the Sales Figures Representation was misleading or deceptive for the reason that it materially misstated the Sales Figures for the period November 2015 to August 2016.
It was also not disputed by Mr Sengos, and I find, that the Customer Representation and the $90,000 Sales Representation were misleading or deceptive. The unchallenged evidence of Mr Badger that at least forty three retailers listed as customers of the Business had never been or were no longer customers of the Business or had not bought any products from the Business within the six months prior to Mr Badger entering into the Business Sale Agreement and that another thirty-four had not purchased in the three months prior to his purchase and twenty-one of those had purchased a total of ten or less products in the six months prior supports that finding.
Mr Badger also pleads that, implicit in the Representations, were three further representations, being that:
1. the Business currently had at least 105 customers that regularly purchased products from the Business;
2. the amount of sales, cost of goods sold, and profit of the Business would continue in the same vicinity as those disclosed in the Sales Figures; and
3. the Business would continue to have at least 105 customers that regularly purchased products from the Business.
I am not satisfied that Mr Badger has established that these implied representations arise as pleaded.
As Mr Sengos submits, the question of whether representations arise by implication is to be determined by reference to whether a reasonable person in the position of Mr Badger would draw the implied representations in all of the circumstances: Dynamic Lifter Pty Ltd v IncitecLtd (1994) 30 IPR 198 at 203 (Whitlam J); applied in Australian Competition and Consumer Commission v Birubi Art Pty Ltd [2018] FCA 1595, at [71] per Perry J.
[18]
Who engaged in the misleading and deceptive conduct by making the Representations?
All of the Representations were conveyed to Mr Badger in the 15 December emails sent by Mr Sengos.
Mr Badger's pleaded case is that the 15 December emails were sent by Mr Sengos as agent for Mr Kagelaris or JKPL (at [11] and [12] FASC) and that each of Mr Sengos and Mr Kagelaris (as well as Associated Products and JKPL) made the Representations thereby engaging in misleading and deceptive conduct for which they are each primarily liable (at [48] FASC).
At the hearing, Mr Badger's case seemed to change from an allegation that Mr Sengos acted as Mr Kagelaris' agent by sending the 15 December emails and making the Representations in that capacity, to a contention that Mr Sengos was acting as a principal and that he personally engaged in the conduct by making the Representations, with an alternative case being that Mr Kagelaris made the Representations and Mr Sengos was an accessory (T117:21-24; T119:35-47).
Regardless of how it is put, Mr Badger's primary case is that Mr Sengos engaged in misleading and deceptive conduct by sending the 15 December emails and making the Representations to Mr Badger for which Mr Sengos can be personally liable as the primary contravener of s 18(1) of the ACL.
Mr Sengos disputes that he made the Representations. He argues that he did no more than pass on information to Mr Badger that he had earlier obtained from Mr Kagelaris or JKPL for which he, personally, is not responsible. He also argues that if he is found to have made the Representations, he did so in his capacity as a director of Associated Products only, and not in his personal capacity, so cannot be primarily liable.
Mr Sengos submits that the terms of the 15 December emails make clear that he was just passing on information from Mr Kagelaris. He points to the first of the emails which notes that Mr Sengos had been advised by Mr Kagelaris "earlier today" that Mr Kagelaris was putting the Business up for sale in mid-January, that he has just called Mr Kagelaris and then goes on to state that "He [Mr Kagelaris] advises the run has the following". He also points to the second email from Mr Sengos (which contained the Sales Figures) having simply been the forwarding of the email Mr Sengos received from Mr Kagelaris five minutes earlier.
[19]
Did the Representations cause Mr Badger loss?
Section 237 of the ACL relevantly provides:
(1) A court may:
(a) on application of a person (the injured person) who has suffered, or is likely to suffer, loss or damage because of the conduct of another person that:
(i) was engaged in a contravention of a provision of Chapter 2, 3 or 4; or
(ii) constitutes applying or relying on, or purporting to apply or rely on, a term of a contract that has been declared under section 250 to be an unfair term; or
(b) on the application of the regulator made on behalf of one or more such injured persons;
make such order or orders as the court thinks appropriate against the person who engaged in the conduct, or a person involved in that conduct.
(2) The order must be an order that the court considers will:
(a) compensate the injured person, or any such injured persons, in whole or in part for the loss or damage; or
(b) prevent or reduce the loss or damage suffered, or likely to be suffered, by the injured person or any such injured persons.
Mr Badger must prove that he suffered loss or damage "because of" the misleading or deceptive conduct of Mr Sengos and Mr Kagelaris. While s 237 is directed to a causal connection between the conduct and the loss, in the context where the misleading conduct are the Representations made to Mr Badger (likely to induce him to enter into the Business Sale Agreement), 'reliance' is also often referred to as the relevant consideration: I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (2002) 210 CLR 109; [2002] HCA 41.
The principles to be applied to the question of reliance and causation in this case were not in dispute. The parties agreed they are those set out in Havyn Pty Ltd v Webster [2005] NSWCA 182 at [116] (per Santow JA, Tobias JA and Brownie AJA agreeing) as follows:
1. loss or damage is causally connected to a contravention of the Act if the conduct materially contributed to the loss or damage. It is not necessary that the conduct be the sole, principal or dominant cause;
2. in the context of s 18 of the ACL, in the form of misleading conduct constituted by misrepresentation, acts done by the representee in reliance upon the misrepresentation amount to a sufficient connection to satisfy the concept of causation;
3. a plaintiff's right to relief for loss of which the contravening conduct was a cause does not depend upon him or her having taken reasonable care for his or her own interest. It will be a rare case where the quality of the reliance by an innocent party on a misrepresentation can be treated as so dominant in the causal chain as to properly be regarded as the real and effective cause of the loss, negating the causative effect of the misrepresentation; and
4. the onus of establishing that the quality of the reliance negates the causative effect of the conduct, lies on the party in contravention of the Act.
[20]
Relief
Mr Badger's primary claim for relief is for a declaration that the Business Sale Agreement is void in whole pursuant to s 243(a) of the ACL and an order that JKPL, Mr Kagelaris and Mr Sengos pay to Mr Badger the whole of the purchase price, adjusted to account for the small profit he made during the period he operated the Business between 13 February 2019 to early May 2017 by way of a compensation order under s 237 of the ACL.
In the alternative, Mr Badger claims damages under s 236 of the ACL.
Mr Badger contends that an order declaring the Business Sale Agreement to be void is appropriate in these circumstances, including because Mr Badger operated the Business for only a short time and did not affirm the agreement after he became aware that the Representations were false. Rather, he took steps purporting to terminate and then walked away from the Business.
Mr Sengos takes issue with this submission contending that an order, akin to rescission, is not appropriate because Mr Badger engaged in affirmatory acts by making his own further and independent attempts to operate the Business after he questioned the Sales Figures and performed an analysis of the run cards in early April 2017. He submits that, as such acts would call into question an entitlement to rescind at general law, the same conclusion applies under the ACL and to this case, relying on Myers v Transpacific Pastoral Co Pty Limited (1986) ATPR 40-673.
In Myers v Transpacific Pastoral Co Pty Limited (1986) ATPR 40-673, the Court considered a claim for damages under s 87(2) (the precursor to s 243 of the ACL) in circumstances where the impugned contract for sale of land had not completed. The Court did not have to determine whether the purchasers had affirmed the contract but what damages were payable, noting that the right to damages for misleading conduct survives an affirmation. Ultimately, the Court concluded that the purchaser was entitled to a refund of the deposit paid and other purchase related costs notwithstanding they had been in possession of the land for some time and gained some advantage.
I am not persuaded by Mr Sengos' submission that Mr Badger's actions after April 2017 constituted an affirmation of the Business Sale Agreement. It follows that I do not consider that Mr Badger lost his right to rescind the Business Sale Agreement.
[21]
Contract claims against Mr Kagelaris
As noted above, Mr Badger also seeks, in the alternative and against Mr Kagelaris, a declaration that he validly rescinded the Business Sale Agreement and an order for the return of the amount he paid based on the pre-contractual misrepresentations which Mr Badger asserts Mr Kagelaris knew were false. Mr Kagelaris did not appear at the hearing beyond the first day, and he did not make any submissions on the issues raised by this alternate claim.
As I have found that Mr Kagelaris is primarily liable for the Representations under the ACL, and for the loss suffered by Mr Badger, it is unnecessary for me to determine this alternative claim and so I have done so only in a summary way.
In my view, it follows from my findings regarding the ACL claims, that Mr Kagelaris made pre-contractual misrepresentations that gave rise to a right to Mr Badger to rescind the Business Sale Agreement.
In relation to the ACL claims, I have also found that that Mr Badger did not affirm the Business Sale Agreement and that the Business was, in effect, returned to Mr Kagelaris after Mr Badger became aware of the misrepresentations.
It is a prerequisite of the right to rescind that restoration to the status quo that existed before the contract should be substantially possible. It may be possible to make adjustments between the parties to effective restoration of the status quo: Alati v Kruger (1955) 94 CLR 216.
Therefore, had I not made orders for relief against Mr Kagelaris under the ACL, I would have made a declaration that Mr Badger validly rescinded the Business Sale Agreement by the letter dated 15 May 2017 and that Mr Kagelaris should refund to him the purchase price with an adjustment to reflect the profit Mr Badger made while operating the Business.
[22]
Costs and orders
I see no reason why costs should not follow the event in the usual way and will order Mr Sengos and Mr Kagelaris to pay Mr Badger's costs of the proceedings.
For these reasons, I make the following orders:
1. Pursuant to Competition and Consumer Act 2010 (Cth), Sch 2 - Australian Consumer Law, s 243, declare the whole of the Business Sale Agreement between the plaintiff and the first and second defendants dated 14 January 2017 to be void.
2. Pursuant to Competition and Consumer Act 2010 (Cth), Sch 2 - Australian Consumer Law, s 237, order the second and third defendants to pay to the plaintiff the sum of $114,991.48.
3. Order the second and third defendants to pay the plaintiff's costs of the proceedings.
[23]
Addendums
When these reasons were handed down, plaintiff's counsel requested an additional order to provide time for the plaintiff to make an application in respect of a special costs order. I indicated I would make that order and informed the parties that if such an application was made, the parties could inform my chambers whether they were content for it to be dealt with on the papers. Accordingly I make the following additional order:
(4) The plaintiff to file and serve any application for a special costs order by 14 January 2020.
On the morning of 16 December 2019, the plaintiff's solicitor emailed the Court (copying the other parties) to clarify whether the order sought in Mr Badger's FASC for interest pursuant to Civil Procedure Act 2005 (NSW), s 100, was deliberately omitted. He also emailed to the Court a schedule calculating the pre-judgment interest claimed in the amount of $17,999.06. Later that morning, the Court emailed the parties to advise that the omission was unintentional, and provided the second and third defendant until 4pm on 17 December 2019 to raise any matters with the Court in relation to the making of the order for interest or arising from the plaintiff's schedule calculating the amount sought.
No submissions or other correspondence have been received from the second or third defendants in relation to Mr Badger's claim for interest under s 100, or the calculations supporting the amount claimed. Accordingly the Court makes the following order pursuant to Uniform Civil Procedure Rules 2005 (NSW), r 36.17:
(5) The second and third defendants to pay the plaintiff interest of $17,999.06 pursuant to Civil Procedure Act 2005 (NSW), s 100.
[24]
Amendments
18 December 2019 - Coversheet: additional order (5)
Paragraphs 198 and 199 added, together with an additional order, order (5)
Minor typographical and grammatical amendments in paras 9, 29, 34, 73, 98, 118, 121, 122, 134, 141, 145, 149 and 150.
18 December 2019 - Legislation citations added to coversheet.
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: 18 December 2019
Parties
Applicant/Plaintiff:
Badger
Respondent/Defendant:
John Kagelaris Pty Ltd
Legislation Cited (5)
Pursuant to Competition and Consumer Act 2010(Cth)
Mr Sengos has actively defended the claims made against him in the proceedings and appeared by counsel at the hearing.
Mr Sengos accepts that some of the information about the Business provided to Mr Badger as contained in the 15 December emails was inaccurate and that some of the pleaded representations were misleading and deceptive. But Mr Sengos contends that he did not make the representations and is not primarily liable or liable as an accessory for misleading and deceptive conduct under the ACL.
For the reasons that follow, I have found that Mr Sengos and Mr Kagelaris engaged in misleading and deceptive conduct in breach of s 18(1) of the ACL for which they are both primarily liable.
I have also found that the misleading and deceptive conduct caused Mr Badger to enter into the Business Sale Agreement and suffer loss. In circumstances where Mr Badger purported to terminate the Business Sale Agreement and Mr Sengos allowed Mr Kagelaris to take back the Business, I have declared the Business Sale Agreement to be void and that Mr Badger is entitled to compensation for his loss in the amount of $114,991.48, representing the purchase price of the Business less the profit Mr Badger made from operating it during the period from 13 February to early May 2017.
At 8.44pm that evening, Mr Sengos sent Mr Badger an email which stated:
"Hi Stephen
Thanks for your time on the phone - see below details of the run we spoke about.
The guy that does the western suburbs run that just sold (John) has also been doing the south west Sydney run, he has been spending 2-3 days a week in each area.
Although the south west Sydney run is a company owned run we have an agreement with John that once he sells the western suburbs run (which has just happened) we were going to allow him to also sell the south western suburbs run.
He advised me earlier today that he was going to put on the market the south west run in mid-January, I have just called him and he has asked me to offer this to you now before it is officially listed as you live in the area.
He advises the run has the following:
105 customers in an exclusive geographical area being the South Western Suburbs of Sydney - Liverpool - Fairfield to Campbelltown area to but not including Mittagong
He is emailing me the sales shortly and has confirmed the south west area is just as profitable as the western suburbs area.
The information memorandum you have contains all the other details you need to know re our business model.
If you are interested in buying this run please advise ASAP as these runs do sell quickly once they are marketed.
His asking price is $129,950-no gst as it is being sold as an ongoing business and therefore exempt from.
Regards Paul"
At 8:50 pm, Mr Kagelaris sent an email to Mr Sengos headed "South West Sales". It set out the dollar figures for the sales, the cost of goods and the profit as well as the percentage profit margin of the Business for the period from July 2014 to July 2016 (the Sales Figures). The Sales Figures recorded a total profit of $98,584 for the financial year ended 30 June 2015 and a total profit of $104,584 for the financial year ending 30 June 2016. The email also stated that, since July 2016, Mr Kagelaris had made sales of more than $90,000 in respect of the run, but did not provide a breakdown of that figure.
At 8.55pm, Mr Sengos forwarded Mr Kagelaris' email to Mr Badger.
Pausing here, it is not in dispute that the Sales Figures for the period from November 2015 to August 2016 included figures based on estimates made by Mr Kagelaris rather than actual sales, costs and profit figures based on 1Plus2's operation of the Business. This is significant, as the comparison of the Sales Figures sent to Mr Badger and Ms Orfanos' figures for the same period which is set out below highlights:
Month Year Sales Figures sent to Mr Badger Ms Orfanos' Sales Figures
Sales Cost Profit Sales Cost Profit
Nov 2015 $14,480 $5,057 $9,423 $4,197 $9,060 -$4,863
Dec 2015 $15,508 $5,142 $10,366 $2,740 $908 $1,832
Jan 2016 $8,457 $3,148 $5,309 $2,589 $3,116 -$527
Feb 2016 $12,427 $4,986 $7,441 $1,815 $4,087 -$2,272
March 2016 $14,325 $5,230 $9,095 $1,608 $70 $1,538
April 2016 $13,465 $5,015 $8,450 $2,676 $557 $2,119
May 2016 $14,165 $5,322 $8,843 $2,216 $2,755 -$539
June 2016 $16,021 $5,833 $10,188 $2,608 $2,643 -$35
July 2016 $14,235 $5,438 $8,797 $2,076 $450 1,626
$108,848 $45,171 $69,115 $22,523 $23,645 -$1,122
On 13 January 2017, Mr Badger attempted to telephone Mr Kagelaris to tell him that he wanted to purchase the Business. After being unable to contact Mr Kagelaris, Mr Badger telephoned Mr Sengos and advised him that he wanted to purchase the Business. Mr Sengos directed Mr Badger to pay a deposit of $48,000 into an account held in his name.
On 14 January 2017, Mr Badger transferred $48,000 into an account in Mr Sengos' name, as payment of the deposit.
On 14 January 2017, Mr Sengos emailed Mr Badger confirming receipt of the deposit and advising that the balance payable on settlement would be $70,000. Mr Sengos also advised that Mr Kagelaris wanted to start training Mr Badger on 13 February 2017 with settlement a couple of business days beforehand.
On 16 January 2017, Mr Badger met with Mr Sengos at Associated Products' warehouse in Strathfield where Mr Sengos provided him with a draft Distribution Agreement. Around this time, Mr Badger was also provided with a copy of Business Sale Agreement. Both the Distribution Agreement and the Business Sale Agreement were prepared by Mr Sengos.
The Business Sale Agreement was executed between Mr Kagelaris and JKPL as vendor and Mr Badger as purchaser. It included the following provisions:
1. the purchase price for the Business was $118,000, comprising $112,000 for goodwill and $6,000 for stock;
2. the vendor had or would provide the purchaser with an information memorandum setting out the products for sale, price lists, a printed out Excel spreadsheet setting out prior sales by month and costs of goods sold, profit and profit margin, run cards and a Distribution Agreement;
3. the vendor warranted the accuracy of past sales and profits as disclosed in the Excel spreadsheet;
4. the purchaser acknowledged that it had made its own and all necessary enquiries in relation to the past sales and profit figures and did not rely on them in entering into the agreement. The agreement also provided that the vendor made no representations as to future levels of sales or future matters whatsoever;
5. the supply of confectionary products was on the terms set out in the Distribution Agreement with Associated Products Pty Ltd (not the vendor) and that the purchaser must abide by the terms of that Distribution Agreement in order to maintain supply; and
6. the agreement was conditional upon the purchaser entering into a Distribution Agreement with Associated Products Pty Ltd before the completion date.
The Distribution Agreement was executed between Associated Products as principal and supplier, and Mr Badger as agent and distributor. It included the following provisions:
1. Associated Products would appoint Mr Badger for a period of 2 years as agent for Associated Products to distribute confectionary products to independent retail outlets within the South Western suburbs of Sydney;
2. Associated Products would from time to time consult with Mr Badger and give to Mr Badger the benefit of its knowledge and experience to assist Mr Badger to achieve increased distribution and sales of the products;
3. Associated Products would provide customer run cards to Mr Badger. The run cards would remain the property of Associated Products and needed to be updated on each call cycle by the agent with the date of the call and products purchased;
4. Mr Badger's knowledge of the products and the manner of distribution of the same, including the name and address of persons within the territory who may have obtained confectionary products from or were provided with confectionary products by Mr Badger, Associated Products or any other person or company authorised by Associated Products to distribute the confectionary products, was derived from information disclosed to Mr Badger by Associated Products pursuant to the Distribution Agreement and that information was proprietary, confidential and a trade secret of Associated Products; and
5. Mr Badger agreed to purchase a minimum of $5,000 worth of stock each month (increasing by 10% each 6 months for the first 18 months).
On or about 18 January 2017, Mr Badger signed the Distribution Agreement and the Business Sale Agreement.
Around 18 or 19 February 2017, Mr Badger put the Business up for sale on Gumtree.
On 20 February 2017, Mr Badger emailed Mr Sengos to advise that he had some interest in the Business, people were asking for sales figures to verify the profitability and whether those figures could be sent to him. When Mr Sengos did not respond, Mr Badger requested the same from Mr Kagelaris who responded stating "Paul has all the sales figures" and "he has the spreadsheet".
On 20 February 2017, Mr Sengos emailed Mr Badger a modified copy of the information memorandum that Mr Kagelaris had sent to Mr Sengos on 10 January 2017. Following receipt of it, Mr Badger requested Mr Sengos to provide him with a monthly breakdown of the sales figures for 2016 to which Mr Badger responded "no just run with what's there if people want to talk with me I can call them no problem".
On around 28 February 2017, Mr Badger listed the Business for sale through SBX for $95,000 but instructed them not to proceed by email dated 2 March 2017.
While operating the Business in the period 21 February to 2 March 2017, Mr Badger found that a number of retailers were not interested in purchasing products. On 2 March 2017, he emailed SBX to advise not to put the Business up for sale as he believed "profit was fake."
On 6 March 2017, Mr Badger raised concerns about the Business with Mr Sengos who responded that all of his distributors were struggling because of the extreme heat and offered for Mr Kagelaris to come out with Mr Badger again the following Monday.
Mr Badger continued to operate the Business in order to service the customers and maintain its value during the period from 20 February through to the end of March 2017 while he attempted to sell the business. This included carrying out a further day of training with Mr Kagelaris on 20 February 2017 and visiting retailers on fifteen days in March, on one day with a potential purchaser and on 13 and 20 March with Mr Kagelaris. On those days, Mr Badger noticed a drop in purchases compared to his first week of training with Mr Kagelaris.
During April and early May, Mr Badger continued to operate the Business, attending retailers on 6, 10, 13, 15, 17, 18, 19 and 28 April and on 1, 2 and 3 May 2017.
On 5 May 2017, Mr Badger's solicitor sent a letter to Mr Sengos purporting to terminate the Distribution Agreement and demanding repayment of the purchase price of the Business. The letter asserted that the Sales Figures given to Mr Badger by Associated Products were misleading, as was the statement that there were 105 current customers.
On 8 May 2017, Associated Products' lawyers responded asserting that the Business had been sold by JKPL, the representations were made by that company, and that Mr Badger should look to them. It also gave notice that Associated Products terminated the Distribution Agreement.
On 19 May 2017, Mr Badger's solicitors wrote to Mr Kagelaris and JKPL asserting that the Sales Figures and customer information provided was inaccurate and purported to terminate the Sale Business Agreement for breach. They also demanded repayment of the purchase price and reserved all rights to commence proceedings.
There is no dispute that Mr Badger ceased operating the Business sometime in early May 2017, around the time his lawyers sent the letter to Mr Sengos.
Mr Sengos put Mr Kagelaris back in again to take over the South Western run and did not take any steps to sell the Business after Mr Badger handed it back (T81:48 - T82:12).
On 19 June 2017, Mr Kagelaris was appointed the sole director and secretary of Associated Products to replace Mr Sengos.
On 20 June 2017, liquidators were appointed to Associated Products.
Mr Badger's evidence, which was not challenged, is that during the period that he operated the Business, he made total sales of $5,439.80 and purchased stock from Associated Products in the total sum of $1,038.40 (not including the amount of stock included in the purchase price for the Business), resulting in a total profit of $4,401.40.
Mr Badger did not provide any submissions to the Court as to why someone in Mr Badger's position would imply the three further representations from the circumstances other than asserting that they arise from the Representations made in the commercial context of the transaction (T125, T126). Nor does his pleading provide any particulars of the commercial context of the transaction which supports the implied representations.
The only circumstances pleaded by Mr Badger from which the three further representations are said to arise by implication are the Representations themselves. Given the Representations are in limited and precise terms, it is difficult to see how the three further implied representations could arise from those words alone.
I also accept there is force to Mr Sengos' submission that the terms of the Western Sydney business information memorandum which had been provided to Mr Badger militate against the implied representations arising given it states that what was being sold was a right to sell in a geographic area with a list of customers who were not obliged to purchase and that future sales, profits and level of custom were dependent upon the direct selling effort of the purchaser of the business.
Mr Sengos also submits that, as Associated Products was a supplier of confectionary products (and not a distributor), it had no direct interest in knowing about the day-to-day sales or workings of the distributors which supports a finding that Mr Sengos (and Associated Products) did not adopt the information within the 15 December emails and merely acted as Mr Kagelaris' conduit.
Mr Sengos also submits that while he was involved in assisting in the discussions with Mr Badger as a prospective purchaser, he did so as a director of Associated Products only and any information sent was in that capacity as made clear by the sign off on the 15 December emails (which included a reference to Mr Sengos as director of Associated Products) and Mr Badger having been told by Mr Scully that Mr Sengos owned Associated Products, the company that supplies the confectionary products.
I do not accept Mr Sengos' submission that his role as director of Associated Products means that, if the Court concludes that the Representations were made by him (and not merely as a conduit), he cannot be found to have engaged in the alleged misleading and deceptive conduct and be personally liable.
A director of a corporation who engages in conduct on its behalf also engages in conduct for which he or she can be directly liable under the ACL. That liability is a product of their own conduct which they engaged in as a director. There is no need to find "separate conduct", being conduct engaged in other than in the capacity as a director, to conclude that a director who engages in conduct for a company also can attract primary and personal liability for that conduct: CH Real Estate Pty Ltd v Jainran Pty Ltd; Boyana Pty Ltd v Jainran Pty Ltd [2010] NSWCA 37, at [101] - [105]; Arktos Pty Ltd v Idyllic Nominees Pty Ltd [2004] FCAFC 119, at [13]; Houghton v Arms (2006) 225 CLR 553; [2006] HCA 59.
In this case, Mr Sengos was, as Mr Badger submits, the "human embodiment" of Associated Products. In his own words, Mr Sengos operated Associated Products as a "one man band". In that sense, Mr Sengos' conduct in sending the 15 December emails as a director of Associated Products was his own conduct for which he can personally be liable.
The question in this case is whether, by conveying the Representations to Mr Badger in the 15 December emails, Mr Sengos did so in circumstances where he would be regarded as having adopted them in some way, and thereby engaged in the misleading and deceptive conduct, or whether he was merely passing the misleading information on as an intermediary.
A person who merely acts as a conduit and does nothing more than pass on information will not be found to have engaged in misleading or deceptive conduct. In Yorke v Lucas (1985) 158 CLR 661 (at 666), Mason ACJ, Wilson, Deane and Dawson JJ stated:
"If the circumstances are such as to make it apparent that the corporation is not the source of the information and that it expressly or impliedly disclaims any belief in its truth or falsity, merely passing it on for what it is worth, we very much doubt that the corporation can properly be said to be itself engaging in conduct that is misleading or deceptive".
It is a question of fact whether a person does more than pass on information as a conduit. That question is to be decided by reference to all the circumstances of a particular case, having regard to factors such as the nature of the parties, the character of the transaction contemplated and the contents of the documents containing the misleading statements, including whether the document clearly states that a third party supplied the information conveyed: Google Inc v ACCC (2013) 249 CLR 435; [2013] HCA 1 at [13] and [70]; Butcher v Lachlan Elder Realty Pty Limited (2014) 214 CLR 592; [2004] HCA 60 at [40]; Borzi Smythe Pty Limited v Campbell Holdings (NSW) Pty Limited [2008] NSWCA 233 at [56] per Beazley JA (as her Excellency then was, Handley AJA agreeing).
Had it been a matter of considering the 15 December emails on their own, I may have been persuaded to conclude that Mr Sengos was acting as a mere conduit and did not make the Representations for which he could be personally liable. But the factual context in this case provides, in my view, a proper basis to reach a different conclusion, which is that Mr Sengos sent the 15 December emails as more than as a mere conduit of the Representations contained within them and for which he can be personally liable.
The 15 December emails containing the Representations were sent by Mr Sengos after an earlier discussion in which Mr Sengos told Mr Badger that (T96:15-40):
"The Western Suburbs memorandum is basically the same for the South West barring the turnover, but it's just as good. I can get the figures. Send me your email address."
That statement indicates that Mr Sengos had knowledge of the Business, was in a position to provide a sound judgment as to its viability and had access to the relevant figures, which was then supported by the making of the Representations within the terms of the 15 December emails themselves.
The first of the 15 December emails also states that "the south west Sydney run [the Business]" was a "company owned run". That is, it was not a run owned by Mr Kagelaris (although he was to be given the right to sell it), but a run owned by Associated Products. Being a company-owned run, it is to be expected that Mr Sengos, as the sole director and owner of the company, would have access to, an interest in and knowledge about its viability, including the sales, profits and number of customers.
The first 15 December email also stated that Mr Kagelaris had confirmed that the Business was "just as profitable as the Western suburbs area". In my view, that statement can be taken to be confirmatory of what Mr Sengos had earlier told Mr Badger, that the South-Western Sydney run was "just as good" as the Western Sydney run, and an indication that the figures Mr Sengos would get from Mr Kagelaris and send to Mr Badger would do the same.
Mr Sengos was also the only person in respect of the Business with whom Mr Badger had dealt at the time he received the 15 December emails. He was told that Mr Sengos owned the company which "set the runs". The Western Sydney business information memorandum which Mr Badger had seen also stated that Associated Products would assist the prospective purchaser as a new owner as it was "keen to grow the sales". Mr Sengos accepted that he was instrumental in orchestrating the sales transaction to Mr Badger (T76:30-38).
In those circumstances, it seems to me that a reasonable person standing in the shoes of Mr Badger would take the information contained the 15 December emails, which was not subject to express qualification or disclaimer by Mr Sengos, as being endorsed or approved by him, rather than as simply information passed on by him in which he had no interest or knowledge and to which he impliedly disclaimed any belief in the truth or falsity of the messages he was sending: CH Real Estate Pty Ltd v Jainran Pty Ltd; Boyana Pty Ltd v Jainran Pty Ltd [2010] NSWCA 37 at [375]; Butcher v Lachlan Elder Realty Pty Ltd (2014) 214 CLR 592; [2004] HCA 60 at [123] - [124].
Put another way, it may be inferred from the circumstances that, by sending the information Mr Kagelaris had passed on to him to Mr Badger in the form of the 15 December emails, Mr Sengos was accepting of the truth of the information contained with them, and thereby also made the Representations.
While unknown to Mr Badger at the time, to my mind it is also relevant that Mr Sengos had a clear commercial incentive in being involved in the dealings with Mr Badger beyond seeking to obtain a new distributor for the run in his capacity as a director of Associated Products. As Mr Sengos stated in his affidavit, he was owed money by Mr Kagelaris and stood to receive the funds from the sale of the Business as a payment of that debt.
This was not a situation where a third party intermediary such as a real estate agent, newspaper publisher, media organisation or search engine, made false information available to someone where it would be expected, because of the nature of the business and relationships, that the information sourced from the other person was information to which the intermediary had no interest or knowledge.
Rather, it was a situation where the sole director of a company was sending information to a person about a company-owned run which was being sold and in respect of which sale the director had a direct and personal financial interest as he was to be paid the sale proceeds in satisfaction (at least in part) of a debt. The Representations were, therefore, conveyed by someone that had a clear interest in, and actual knowledge of, information relating to the Business and would be expected to have had such interest and knowledge.
Against that factual background, I reject Mr Sengos' contention that he was a 'mere conduit' of the information.
It follows that I conclude that the Representations were made by Mr Sengos. This was misleading or deceptive conduct engaged in by him in trade and commerce, in breach of s 18(1) of the ACL.
I am also of the view that the making of the Representations was misleading and deceptive conduct for which Mr Kagelaris is also personally liable.
The 15 December emails, which contain the Representations, were sent by Mr Sengos to Mr Badger in connection with the sale of the Business by Mr Kagelaris and JKPL.
The first of the 15 December emails identifies that Mr Kagelaris was the seller of the Business, even though at the time the email was sent the Business was "company owned". The email also indicates that Mr Sengos had been asked by Mr Kagelaris to offer the Business "now before it was officially listed".
In the absence of evidence from Mr Kagelaris, I infer that he provided authority to Mr Sengos to offer the Business to Mr Badger and also provided consent or authority (to the extent it was needed) to Mr Sengos to send Mr Badger the information in the 15 December emails which contained the Representations. In doing so, Mr Sengos also made then Representations as agent for Mr Kagelaris and JKPL in relation to the sale of the Business.
Any conduct engaged in on behalf of a corporate or a person (principal) by an agent within the scope of their actual or apparent authority or at the direction of the corporate or the principal is taken, for the purposes of the ACL, to have been engaged in also by the corporate and principal: s 139B(2) and s 139C(2) of the Competition and Consumer Act 2010 (Cth).
Thus, Mr Sengos' conduct in sending the 15 December emails which contained the Representations to Mr Badger was also conduct engaged in by Mr Kagelaris (and by JKPL) for the purposes of the ACL for which Mr Kagelaris is primarily liable as conduct in breach of s 18(1) of the ACL.
That does not mean that Mr Sengos cannot also be primarily liable as well.
An agent can be liable directly (not simply as an accessory) for misleading and deceptive conduct engaged in on behalf of their principal: Houghton v Arms (2006) 225 CLR 553; [2006] HCA 59.
As I have found Mr Sengos and Mr Kagelaris to be primary contraveners, it is not necessary to consider the alternative pleaded case of accessorial liability. However, as it was argued at the hearing and the subject of submissions, I set out below in summary form, my reasons as to why I would have found Mr Sengos to have been liable as an accessory to the making of the Sales Figures Representation.
To be liable as an accessory, Mr Sengos had to be directly or indirectly knowingly concerned in or party to the misleading and deceptive conduct (being the making of the Representations), in that he had to have known the facts and circumstances giving rise to the falsity of the Representations.
For the reasons set out above, I do not accept Mr Sengos' submission that having sent the emails as a director of Associated Products, he did not "participate" in the conduct and cannot be liable as an accessory.
As to knowledge, in my view, there is sufficient evidence to infer that Mr Sengos had the requisite knowledge of falsity in respect of the Sales Figures Representation.
As noted above, the Business was a company-owned run. Mr Sengos was the sole director of Associated Products. Associated Products was in possession of the run cards for the Business, having been given them by Ms Orfanos when she gave up the Business in August 2016. Mr Sengos was aware that the sales during the whole of the period that Ms Orfanos had the Business were "poor", she had a low volume of purchases and made minimal returns on her products. Mr Sengos was also aware that Mr Kagelaris had no involvement in the Business during the period November 2015 to August 2016 and did not have access to the Sales Figures for that period (T101:10-41).
Having regard to these factors, Mr Sengos must have known that the sales, purchases and profits of the Business could not be as represented by the Sales Figures for the period November 2015 and August 2016 sent to him by Mr Kagelaris and as contained in the second of the 15 December emails. Thus he must have known that the Sales Figures Representation was false.
In the alternative, I would have concluded that actual knowledge on the part of Mr Sengos could be inferred from his wilful blindness in sending the Sales Figures in circumstances where he knew that Mr Kagelaris had no involvement in the Business during the period November 2015 to August 2016 and did not have access to the Sales Figures for that period. Sending the Sales Figures to Mr Badger in those circumstances was not, in my view, an act of honest ignorance: Rafferty v Madgwicks; Time 2000 Systems (Aust) Pty Ltd v Rafferty (2012) 203 FCR 1; [2012] FCAFC 37.
Mr Badger's counsel did not point to any evidence to support a finding of actual knowledge on the part of Mr Sengos in relation to the falsity of the Customer List and the $90,000 Sales Representations.
Mr Badger asserts a no transaction case. That is, he claims that he relied on the Representations when entering into the Business Sale Agreement and paying the purchase price and would not have done so if he had known the true position, particularly in relation to the Sales Figures for the period when Ms Orfanos ran the Business.
Mr Sengos submits that the Court should conclude that Mr Badger did not rely on the Representations to enter into the Business Sale Agreement and that he would have proceeded to purchase the Business notwithstanding the 15 December emails and Representations made in them.
In support of that submission, Mr Sengos points to Mr Badger's failure to exercise basic due diligence and seek legal or financial advice in connection with the purchase of the Business, including not seeking verification or explanation of the Sales Figures, paying the deposit without reviewing the Business Sale Agreement and signing it without advice, and without having seen the run cards and other documents referred to in the agreement.
He also points to Mr Badger having been motivated to buy the Business after seeing the advertisement for the Business on SBX on 13 January 2017 and the clause in the Business Sale Agreement which provided that the purchaser was to make their own enquiries in relation to past sales and profit figures and does not rely on them in entering into the agreement (no reliance clause).
I do not consider the no reliance clause to be of any import in this case. As counsel for Mr Sengos accepted at the hearing, such a clause cannot operate to negate the effect of misleading conduct and is only one factor which might be taken into account by the Court on the issue of reliance (T140:34). Given Mr Badger's lack of business experience and failure to obtain legal advice on the Business Sale Agreement, it is not clear that he even read the no reliance clause, let alone considered or acted upon it.
As to the other matters, I am not persuaded by the submission that Mr Badger's failure to check the Sales Figures or lack of due diligence suggests that he did not rely on the Representations. Failing to check the accuracy of a representation is not sufficient to deny a claimant a remedy. Nor it is necessary for reliance on misleading or deceptive conduct to be "reasonable": Henville v Walker (2001) 206 CLR 459; [2001] HCA 52 at [140] (McHugh J); Sykes v Reserve Bank of Australia (1998) 88 FCR 511 at 517 (Heerey J).
In any event, I accept Mr Badger's explanation that he did not consider it necessary to check the Sales Figures as he believed what Mr Sengos had given him, at (T21:19-31):
Q. You did not seek an explanation, or clarification, of those raw figures at any time and you did not seek to verify those figures at any time?
A. Between the time of 15 December and purchasing the business?
Q. That is so?
A. I believe those sales financials were true and I was speaking to Paul about the financials. He was the head boss, why would I not believe him?
Q. I am suggesting you had no basis to belief the truth of those figures, but you had an opportunity to have them explained for clarified to you, and verified, based on those things set out in the information memorandum, but you chose not to?
A. I didn't think I needed to. I believe I trusted Paul.
In this case, the circumstances provide a basis for finding that the conduct complained of caused Mr Badger to enter into the Business Sale Agreement.
Representations about the past sales, cost of goods, profits and the number of current customers of a business are, by their nature, persuasive and to be expected to induce a person's decision to buy a business.
Here, the Representations were made as part of information provided to Mr Badger to encourage his interest in buying the Business. They formed a large part of the information, and the only detailed financial information, which Mr Badger had about the Business and on which he could base his decision.
Mr Badger gave direct evidence to the effect that he relied upon the Customer Information and the Sales Figures contained in the 15 December emails, in particular because they suggested that the Business had achieved a high level of profit during the period from July 2014 to July 2016, and that the Business appeared to be well established with at least 105 existing customers.
He also gave evidence that had he would not have purchased the Business had he known the correct sales, cost of goods and profits figures for the period from November 2015 to August 2016 were those achieved by 1Plus2. This is also not surprising given the actual sales figure for the period was only $22,523, compared to $108,848 as referred to in the Sales Figures, and profits were only -$1,122, compared to $69,115.
I consider Mr Badger's evidence to be plausible in the circumstances and I accept it. In my view, Mr Badger's evidence about his failure to seek verification of the figures and his trust in what Mr Sengos sent him does not raise doubt about his claim that he relied on the Representations to enter into the Business Sale Agreement. Rather, and without intending any disrespect, it reflects his lack of business experience and naivety in buying a business without obtaining appropriate business or legal advice.
I accept Mr Badger may also have relied on the information contained in the SBX advertisement for the Business which he saw on 13 January 2017. But the financials in that advertisement were not inconsistent with the Sales Figures or the Business having 105 current customers. In that sense, the information he saw in the advertisement on 13 January was likely to have been confirmatory but not necessarily determinative of Mr Badger's decision to purchase.
Further, and as is clear from the legal principles referred to earlier, a party may rely on a number of different factors in coming to a decision. It is enough that the Representations were one reason and that they were a substantial and not minimal cause that led to Mr Badger's decision. For the reasons set out above, I have concluded that they were.
Mr Sengos also argues that, even if Mr Badger relied on the Representations, that reliance did not cause his loss. He argues that Mr Badger's loss was caused by his abrupt change of heart and attitude to the Business when he decided that he wanted to get out and sell by late February 2017. I do not accept that submission.
The loss suffered by Mr Badger was buying a Business which he would not have bought had he known the true position about its past sales, profits and customer base. Put another way, but for the Representations, he would not have owned the Business and would not have been in the position where he wanted to sell it.
Mr Badger's evidence is that by late February 2017 he realised he had made a bad decision and it was a mistake for him to have bought the business. He did not want to lose money but wanted to sell it quickly. He put the business up for sale on Gumtree around this time and advised Mr Sengos, by email dated 20 February 2017, that he had some interest in the business and that people were asking for sales figures to verify the profitability and whether that could be sent to him.
As events transpired, Mr Sengos did not provide Mr Badger with the sales figures despite repeated requests. I infer this was because they did not exist or, if they did, they would have highlighted what Mr Badger came to suspect which was that the Representations made to him were false and significantly so.
It was not until April 2017 that Mr Badger had formed the view that the Representations were false. It was shortly after that, in early May 2017, that Mr Badger walked away from the Business and sought to terminate the Distribution Agreement and Business Sales Agreement.
I accept that Mr Badger decided to get out of the Business before finding out the complete truth about the misleading conduct. He continued to operate the Business with a view to selling it for an amount which, at one point, represented a not insubstantial discount on what he paid. He failed to sell and then walked away from the Business entirely. In that context, arguably Mr Badger might be seen to have suffered loss by his own conduct.
But the fact is that, if not for the misleading Representations, on which he relied to his detriment, Mr Badger would not have entered into the Business Sale Agreement and paid the purchase price for the Business. In that context, and when viewed holistically (including the fabrication of parts of the Sales Figures for the period of Mr Orfanos' tenure and the failure of Mr Sengos to provide the sales figures to Mr Badger as repeatedly requested), it was the misleading conduct of Mr Sengos and Mr Kagelaris in making the Representations which occasioned Mr Badger's loss and not his decision to try and get out of the Business and sell very early on.
Accordingly, I find that Mr Badger suffered loss and damage because of the Representations, being misleading and deceptive conduct engaged in by Mr Sengos and Mr Kagelaris.
At law, a party who has been induced into entering into a contract due to misrepresentation has a right to elect whether to affirm the contract or rescind. A party must have full knowledge of the facts giving rise to the right to rescind, that is knowledge of the misrepresentations, before they are required to elect to affirm or rescind by some unequivocal act (or acts): Khoury v GIO of NSW (1984) 165 CLR 622.
In this case, Mr Badger may have had some basis for believing that the Representations were not accurate sometime in early April. He indicated that position to Mr Sengos by his email dated 6 April 2017, following which Mr Sengos advised that the sales figures that Mr Badger wanted to support the sale of the Business would not be forthcoming unless he signed a deed of release. It was only a few weeks later that Mr Badger retained lawyers. On 5 May 2017, he sought to terminate both the Business Sale Agreement and Distribution Agreement claiming that he had been misled, and then sent the further letter to Mr Kagelaris purporting to do the same on 15 May 2017.
In those circumstances, I do not accept that Mr Badger unequivocally elected to affirm the Business Sale Agreement by seeking to mitigate his loss and operate the Business for a period before seeking to terminate and walking away from it. To my mind, Mr Badger's conduct was indicative of reserving his rights and then seeking to elect to rescind (albeit by a letter purporting to terminate), rather than unequivocally affirming the Business Sale Agreement.
In any event, an entitlement to an order declaring a contract void under s 243 is not to be viewed by reference to general law analogues but by reference to the rule of responsibility in the statute that is directed against misleading and deceptive conduct. Whether to grant a form of rescission under s 234, or to limit a plaintiff to damages under s 236, is an exercise in discretion to be approached by reference to the facts of the particular case, the policy and underpinning of the ACL, and the evaluative assessment of what is the appropriate relief to compensate for, or to prevent the likely suffering of, loss or damage "by" the conduct: Awad v Twin Creeks Properties Pty Limited [2012] NSWCA 200.
I am persuaded by Mr Badger's submissions that the circumstances in this case weigh in favour of the exercise by the Court of its discretion to grant an order declaring the Business Sale Agreement void. The circumstances that are particularly relevant are Mr Kagelaris having made up parts of the Sales Figures which Mr Sengos either knew were false or was wilfully blind to, and Mr Badger's efforts to sell the Business having been frustrated by the refusal of Mr Sengos and Mr Kagelaris to provide him with the monthly sales figures that had been requested by potential buyers.
To my mind, it is also significant that, after Mr Badger gave up the Business and purported to terminate the Business Sale Agreement, Mr Sengos handed back the run to Mr Kagelaris to enable him to step back into the Business in the same way that he did after Ms Orfanos ceased operating it. As a result, the status quo was effectively restored, at least in large part, to Mr Kagelaris as the benefit of true value of the Business (whatever that value was) was given back to Mr Kagelaris.
In my view, this is not a case where there had been such a long period during which Mr Badger operated the Business or sufficient acts by him that means Mr Badger lost his right to an order for rescission in the form of a declaration that the Business Sale Agreement is void: Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (No 1) (1988) 39 FCR 546; (1988) 79 ALR 83 at 103; Alati v Kruger (1955) 94 CLR 216.
There is also no evidence before the Court of the true value of the Business at the time Mr Badger acquired it, nor when he walked away from it. Presumably, it would be very difficult to determine its value as the true position, at least in respect of the Sales Figures for the period July 2016 to December 2016 is still unknown.
In this case, I have found that the Representations caused Mr Badger to enter into the Business Sale Agreement and that, had he known the true position, he would not have done so. The Representations were material, persuasive and known to be false.
Accordingly, it is appropriate, in my view, to give relief by making an order declaring the Business Sale Agreement to be void.
As to compensation under s 236 of the ACL, I do not accept that Mr Badger's loss should be assessed by looking at the price paid for the Business less its true value, as contended by Mr Sengos. That rule might be appropriate where Mr Badger might have purchased the Business at another price (of which there is no evidence) or where Mr Badger had affirmed the Business Sale Agreement and retained the Business. But Mr Badger no longer has the Business. He ceased operating it and the value of the Business when Mr Badger acquired it (or the substantially the same value) went back into the hands of Mr Kagelaris.
In my view, Mr Badger's loss should be assessed by a comparison of the position he is in and the position he would have been in had there not been any contravention of the ACL by reason of the Representations. The position he would have been in absent the Representations is that that he would not have entered into the Business Sale Agreement and bought the Business. The position he is in today is that he has lost the purchase price, made a small profit during the period from 13 February 2016 to early May 2016 and, in effect, returned the Business to Mr Kagelaris, as the person from whom he purchased the Business. In these circumstances, Mr Badger is entitled to be refunded his purchase price and his obligation is to adjust that amount in respect of the profits he made: Munchies Management v Belperio (1988) 58 FCR 274; (1988) 84 ALR 700 at 713 - 714.
It follows that I accept that Mr Badger is entitled to an order for compensation in the amount of $114,991.48. There is no need to deal with Mr Badger's alternative claim for damages pursuant to s 236 of the ACL.