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[2009] VSCA 315
General information, not legal advice.
Court of Appeal (Vic)
2009-12-23
BUCHANAN AND DODDS-STREETON JJA and HANSEN AJA
Original judgment source is linked above.
Trade practices - Misleading or deceptive conduct - Contractual warranties - Sale of business - Representation as to the future - Reliance - Damages - Value of business - Not loss of a chance - Natural justice - Party not warned of representation found by trial judge.
Evidence - Admissibility of the statement pursuant to s 55 of the Evidence Act 1958 (Vic) - Maker of statement a person interested when the proceeding was pending.
1 The principal issue in this appeal is whether the trial judge erred in holding the appellants liable for a misleading or deceptive representation which induced the respondents to purchase a business. The appellants, Bresam Investments Pty Ltd ('Bresam'), Melamybek Investments Pty Ltd ('Melamybek'), Dennis Johnston and Peter Whitaker appeal from the judgment of a judge of the Trial Division given on 1 September 2008.
2 His Honour held that the appellants were liable to pay the first respondent, Shmee Pty Ltd ('Shmee'), the sum of $2,160,000 for loss and damage caused by a misleading or deceptive representation made in breach of s 52 of the Trade Practices Act 1974 (Cth) and s 9 of the Fair Trading Act 1999, which induced Shmee to purchase from Bresam and Melamybek, by a share sale agreement dated 29 November 2003 ('sale contract'), the total shareholding in Insulform Pty Ltd ('Insulform'), a company which conducted a long-standing business of manufacturing and supplying automotive acoustic insulation and trim components.
3 His Honour found that the making of the representation also constituted breach of warranties in schedule 2 clauses 3.1 and 3.2 of the sale contract, from which the same loss and damage arose.
4 His Honour dismissed the respondents' claim for $85,658 in respect of an alleged understatement of accrued employee leave entitlements which were to be deducted from the purchase price under the sale contract. His Honour also dismissed the respondents' claim in respect of an alleged overpayment for stock included in the purchase price under the sale contract.
5 By a notice of contention, the respondents challenged his Honour's ruling that the witness statement of Phillip McIvor, an employee of the second respondent INC who had died before the commencement of the trial, was not admissible pursuant to the provisions of s 55 of the Evidence Act 1958.
6 Insulform conducted a business of manufacturing automotive trim components and acoustic insulation for the automotive industry in Australia. The two issued shares in Insulform Pty Ltd were held by the first appellant, Bresam Pty Ltd, and the second appellant, Melamybek Pty Ltd.
7 Bresam was controlled by the third appellant, Dennis Johnston, and Melamybek was controlled by the fourth appellant, Peter Whitaker.
8 Industrial Noise Control Pty Ltd ('INC'), a business competitor of Insulform, originally made and supplied acoustic material, including noise control systems for tractors and heavy earth moving equipment. In the 1980s and 1990s, it moved into the supply of acoustic material products for motor cars. INC was controlled by its directors, Michael Coates and John Simmons, who were engineers. Anne Mutimer (Coates' wife) was also an engineer and a key employee of INC. She was a director of INC until 22 September 2005. Shmee, a company controlled by Coates and Simmons, was ultimately employed as the vehicle to acquire the shares in Insulform.
9 At a date prior to October 2001, INC's controllers became interested in the acquisition of the Insulform business. Negotiations for the purchase commenced prior to October 2001 and continued until December 2002 when the sale was concluded. Coates was the principal negotiator for the purchasers until his wife became ill in mid-December 2002, when Simmons took over. Johnston was the principal negotiator for the vendors throughout.
10 On 17 January 2002, Coates and Johnston met at Coates' home for two and a half hours. In the course of the meeting, Johnston showed Coates a document he had prepared entitled 'Additional Information for Justification of Acquisition Price', which they discussed.
11 On 17 January 2002, Johnston told Coates that he was unwilling to give detailed information to a direct competitor prior to entering an agreement, but on a due diligence process would permit the verification of any information in the 17 January document.
12 On 18 January 2002, Johnston emailed Coates a copy of the document he had shown him on 17 January 2002. The document listed five motor car components for which new materials were proposed in 2002, with estimated cost savings for each component, amounting in all to $666,950. In the case of four of the components, the new material was called 'Woodstock'. The document listed eight components described as new business for 2002 and stated annual sales, contribution to overheads and profit for each component, amounting in all to $2,035,766. The document also listed the amount of business which it was anticipated would be lost in 2002, an amount of $548,918.
13 On 22 January 2002, Johnston emailed to Coates a revision of the 18 January document which recalculated new business profit to a higher amount of $2,385.575 and slightly increased the amount of 'lost business'.
14 On 12 February 2002, Coates sent to Johnston and Whitaker a formal letter of offer for the acquisition of the Insulform business by INC. On 4 April 2002, Johnston and Whitaker sent a counter offer to Coates. On 12 June 2002, Coates made a verbal offer to purchase the Insulform business. On 18 June 2002, Johnston sent an email to Coates, stating that Johnston and Whitaker would be prepared to accept an offer of $5.5 million plus stock plus additional equipment costs less accrued employee leave entitlements.
15 In July 2002, Johnston had obtained a supply of material from Italy intended as a cheaper substitute for the Hy-Papia material currently used in the Insulform business. At trial, John Cain, who was then Insulform's development manager, gave evidence of his advice to Johnston in relation to the substitute material.
16 At a date prior to 29 July 2002, the purchaser engaged Horwath Corporate Advisory ('Horwath'), a firm of accountants and financial advisers to conduct a due diligence investigation of the Insulform business.
17 On about 22 August 2002, the vendors' accountants, Colville Williams, provided an Information Memorandum dated 9 August 2002 to Horwath. The Information Memorandum included a document headed 'Insulform Business Activity 2002', which was essentially a restatement of the 22 January document. It indicated that the cost reduction opportunities and the new business contributions were as stated on 22 January 2002.
18 From September 2002 to October 2002, Horwath prepared cash flow projections based on the information contained in the Information Memorandum.
19 From 26 November 2002, representatives of Horwath (and INC's directors) from time to time attended Insulform's premises to carry out a 'financial due diligence investigation'. J A Filimore & Co, the purchaser's solicitor, conducted a legal due diligence.
20 Shmee, a wholly-owned subsidiary of INC, was incorporated as a purchase vehicle on 28 November 2002. Coates and Simmons were the directors of Shmee.
21 On 29 November 2002, the sale contract, pursuant to which Shmee acquired the shares in Insulform owned by Bresam and Melamybek was executed.
22 In mid-December 2002, Coates' wife became seriously ill as a result of a brain tumour, which required surgery. Simmons therefore took over the role of the purchaser's principal negotiator.
23 Simmons gave evidence that on about 14 December 2002 he noticed that the draft due diligence report indicated that the ratio of cost of materials to sales was 65 per cent for the four months to 30 October 2002, showing a four per cent increase. He sought a meeting with Johnston. Johnston and Simmons met twice on 16 December, in the morning and the afternoon. Simmons took notes of the meetings. Simmons' notes indicated that the men discussed the ratio. Simmons' evidence was that he recollected that Johnston said words to the effect that 'going forward you should use 58 per cent'.
24 On 16 December 2002, Horwath sent the final due diligence report to the purchaser and its bank.
25 The sale contract was completed on 23 December 2002. Under the sale contract, Shmee purchased the shareholding for $5.5 million, plus stock equipment and accrued employee leave entitlements.
26 The sale contract made the following provisions for vendors' warranties:
(a) Bresam and Melamybek as vendors, and Johnston and Whitaker as the vendors' directors, jointly and separately warrant to Shmee as purchaser, under the warranties set out in Schedule 2 to the Sale Contract (clause 19.1), that:
(i) all information which has been given by or on behalf of the vendors to the purchaser (or to any director, agent or adviser of the purchaser) with respect to the shares or Insulform's business is true and accurate in all respects (Schedule 2, clause 3.1);
(ii) all information which is known to the vendors relating to the shares or the business of Insulform or otherwise the subject matter of this agreement which is material to be known to the purchaser has been disclosed to the purchaser except where that information is in the opinion of the vendors sensitive information which may prejudice the competitiveness of Insulform if it was revealed to the purchaser prior to completion (Schedule 2, clause 3.2);
(iii) all the accounts, books, ledgers and financial and other material records of any kind of Insulform -
(iv) all taxes of any nature which Insulform has been liable to pay have been paid, except for current liabilities (Schedule 2, clause 11.10).
(b) that the warranties are given subject to -
(i) the qualification that each warranty is made by the vendors and the vendors' directors on the basis of their best knowledge, information and belief and is to be interpreted accordingly; and
(ii) the disclosures made in:
A. the agreement; or
(c) a party must not claim that any fact renders any of the warranties incorrect, inaccurate, untrue or misleading or causes the warranties to be breached if the warranty represents the best knowledge, information and belief of the vendors and the vendors' directors when it was made and applies, or was the subject of a disclosure (clause 19.3(b));
(d) that the vendors are not liable to the purchaser for any claim unless:
(i) the purchaser has given written notice to the vendors setting out specific details of the claim within two (2) years after the completion date;
(ii) the claim is agreed, compromised or settled or the purchaser has issued and served legal proceedings against the vendors in respect of the claim within six (6) months after giving notice in respect of the claim;
(iii) the amount finally adjudicated or agreed as being payable in respect of the claim exceeds $50,000; and
(iv) the aggregate amount finally adjudicated or agreed as being payable in respect of all claims which may be recovered is not less than $100,000 in which case the vendors are liable for all the claims which may be recoverable (clause 19.7).
27 Following settlement, the purchasers took possession of the Insulform business. They conducted it for about two years, before issuing the proceeding.
28 The purchasers claimed that the vendors misrepresented the future profitability of the business, alleged to be both breaches of contractual warranties under the sale contract and breaches of s 52 of the Trade Practices Act and s 9 of the Fair Trading Act, understated accrued employee entitlements by $55,658, and that the purchaser overpaid $58,390.57 for unsaleable or obsolete stock.
29 The purchaser pleaded five representations which allegedly induced them to enter and complete the sale contract, and which were allegedly repeated in conversations between Johnston and Simmons on 16 December 2002. The representations were as follows:
30 His Honour having recounted the facts, set out relevant provisions of the sale contract. He observed that the negotiations for the purchase were strained because Insulform and INC were significant competitors. Clause 3.2 of the Vendors' Warranty Schedule therefore, he said, relieved the vendors from providing the purchaser with sensitive material information which could prejudice Insulform's competitiveness if disclosed before completion. All parties were aware that certain critical information would be withheld or only progressively released. The sale contract included protective checks and balances to protect the purchaser in the event that unverified information provided by the vendors should prove inaccurate.
31 His Honour also found that only a limited due diligence was permitted, due to the competitive nature of the businesses of the trade rivals. Operational information was guarded.
32 His Honour found that the purchasers were never in a position independently to verify material costings, proposed potential savings or new potential business. They were highly dependent on the information supplied by the vendors in deciding to proceed with the purchase.
Consequently, the Purchasers were never in a position to independently verify such matters as material costings and the proposed potential savings on substitute materials, and process capability and progress of the development of new potential business for Toyota arising from the production of new products. In respect of such matters they were placed in the position of relying upon the information provided by the Vendors from time to time and the oral statements made by them in assessing the Insulform Business.
34 His Honour found that, as Johnston recognised, the most important figure to the purchaser was the cost of materials as a percentage of sales. The cost of materials was directly related to amount of gross profit.
35 His Honour found that the cost of material to sales could improve by lowering material costs, increasing profitability or introducing new business, or both. Each one per cent increase in the cost of materials to sales ratio represented $200,000 profit lost annually. He found that any cost of materials over 60 per cent of sales was unacceptable to the purchasers.
36 His Honour found that Simmons' analysis of the 18 January 2002 document, showed him that the cost of materials to sales ratio would decrease to 58 per cent. His Honour found that Coates was left with the impression that a reduction to 58 per cent was realistic and based on reasonable grounds. The projected costs savings were crucial to the purchaser.
37 His Honour found that the Woodstock substitution project had failed by late November 2002 and that Johnston thereafter had no basis for continuing to represent to the purchasers that the Woodstock material would give rise to substantial cost savings. His Honour accepted the evidence of Cain, Insulform's business development manager, that the Woodstock substitution was a complete failure and, by July 2002, he told Johnston it was doomed to failure.
38 His Honour found that it was and should have been clear to Johnston as early as August to September 2002 that the Woodstock experiment was never going to work, and his failure to inform the purchaser, either fully or at all, reflected poorly on Johnston's credit.
39 His Honour also found that the proposed substitute for the Magna Boot Trim was never developed, but the purchasers were never so advised. They had no opportunity to verify the representation in relation to the Magna Boot Trim, which had no basis.
40 His Honour found that the new business was not introduced as represented. His Honour found that by October, it was clear that the immediate difficulties of which Cain gave evidence were not just teething problems. The information in the 'Insulform Business Activity 2002' document relating to new business and potential cost savings was thus incorrect.
41 In relation to what was said at the 16 December 2002 meeting, his Honour preferred the evidence of Simmons. He found that Johnston did say words to the effect that 'going forward you should run with 58%'.
However, Simmons also recollected that Johnston said words to the effect that "going forward you should use 58%" or "58% is the figure you should use" or "going forward you should run with 58%". When it was put to Johnston in cross-examination whether it was possible that he used the words "going forward" in conveying his message that his target for the cost of materials was 58%, he said "I don't believe so". I found this response of Johnston to be unconvincing and at least admitted the possibility of the Simmons version of the conversation as being correct. In contrast, in his cross-examination about the conversation, Simmons said that the words "going forward" stuck in his mind and that the words he recalled Johnston saying were "very clear because of the phrase 'going forward' " and further "I have a very strong recollection of the words 'going forward' ". True it is that precise words to this effect were not recorded by Simmons in his notes taken of the meeting with Johnston. His notes on the subject were confined to recording "Johnston said that his target for cost of materials was 58%". Further, Simmons confirmed that Johnston did say at the meeting that his target for the cost of materials was 58%. Nevertheless, I accept Simmons as a witness of truth and that he did his best to recall events accurately. Given the circumstances of the calling of the meeting and the matters discussed, Johnston must have perceived that the Purchasers had significant concerns and that the completion of the sale of the business to them was in some jeopardy. Johnston had a motivation to save the sale. It is likely that he imparted to Simmons an overly optimistic picture when he referred to the 58% cost of materials to sales figure and this was the purpose in making mention of it. Further, Johnston chose not to make any mention of the serious problems in the business with the substitution of Woodstock for Hy-Papia and the new business to be derived from the Toyota parts. These problems were by then well known to Johnston. The success of these projects was critical in underpinning the 58% cost of materials to sales figure. Johnston's failure to mention these problems to Simmons in the context of the discussion where the central issue was the high cost of materials reflected in the four month period to 31 October 2002 and where an explanation for the apparent deterioration in position was specifically sought by Simmons, reflects poorly on Johnston's credit. In the course of this important conversation, if Johnston was prepared to withhold the true position from Simmons as to these problems in the business, it is likely that he was also prepared to overstate the reliance the Vendors could place on the 58% figure going forward. I am satisfied that additional words to the effect of what Simmons described in his evidence were in fact said by Johnston beyond what was recorded in the notes taken by Simmons at the time.
I make the further finding that as a result of the discussions on 16 December 2002 Simmons was left with a very clear impression, as was reasonable in the light of what Johnson had said, that in proceeding to complete the transaction and in their future planning for the business the Purchasers could adopt his target of 58% as the cost of materials to sales ratio going forward. Even if Johnston did not use the actual words as described by Simmons and confined his statement to saying that "my target for the cost of materials was 58%", in the context of the conversation this necessarily carried with it the meaning that the target was both achievable and realistic in the light of the facts known to Johnston at that time, and being a target having these qualities, that this was a figure which could be relied upon by the Purchasers going forward. Johnston was and appeared to the Purchasers to be a person with considerable experience in running the Insulform Business, he knew and appeared to know what he was talking about. Further, in the context of the conversation which centred on Simmons being seriously concerned as to the high cost of materials to sales ratio reflected in the management accounts for the four month period to 31 October 2002, it would have been expected that Johnston would have provided a realistic and achievable figure for the guidance of the Purchasers.
Considering the context of the 16 December discussion in the light of all of the information which had previously been provided to the Purchasers, I am satisfied that a representation was made to the Purchasers by the Vendors that, in the future, the cost of materials would be 58% of sales. Being a predictive statement, at the time when it was made, the representation conveyed to the Purchasers that there was a high probability that this would be achieved, which, expressed in arithmetical terms, would represent something in the order of a 90% chance of success of the 58% figure being attained. The corollary is that, being expressed as a forecast with a high potential of success, it also represented, in my assessment, a 10% chance of possible failure.
44 The trial judge found that in the afternoon meeting on 16 December 2002, Johnston told Simmons that the unusually high cost of materials was due to the exceptionally high cost of tooling.
45 His Honour accepted the evidence of Coates and Simmons that in entering the sale contract they relied on:
46 The trial judge found that the principal representation (that in future the cost of materials would be 58 per cent of sales) was established. He stated:
The critical representation relied upon by the plaintiffs was that in the future the cost of materials would be 58% of sales. I have found that, in the context in which the representation was made, it conveyed the meaning that there was a high probability that in the future the cost of materials would be 58% of sales (the "Principal Representation").
47 His Honour concluded that Johnston and Whitaker were knowingly concerned in making the principal representation and were personally liable under s 75B of the Trade Practices Act and s 9 of the Fair Trading Act. His Honour found that both men intentionally participated in the conduct constituting the contraventions and had actual knowledge of the essential matters constituting the contraventions.
48 His Honour found that the warranty under Schedule 2, clause 3.2 of the sale contract (that all the information the vendors knew relating to the Insulform Business and material to be known to the purchasers was disclosed to them) was also breached because the vendors did not disclose two material matters at any stage prior to completion:
1. The complete failure of the Woodstock substitution project; and
2. The problem with the production of Toyota parts.
49 Both matters were highly material to completion and achieving 58 per cent cost of materials to sales ratio. There was no evidence that they were within the exception in cl 3.2 of Schedule 2 (that is, highly sensitive information which would prejudice Insulform's competitiveness). Nor were the vendors within the cl 19.3(b) exception. They did not make a complete, full and honest disclosure of all relevant facts as they knew them, material to the information they had in fact provided.
50 The trial judge acknowledged that the purchasers delayed for approximately two years before issuing a proceeding. He found that the delay was probably due to an attempt to see how the combined business worked, although the falsity of the relevant representations must have been obvious long before action was taken.
51 The plaintiffs claimed the difference between the price paid and the true value of the company at the time of purchase.
52 The plaintiffs' expert witness, Gregory Blashki, took into account post sales information and events for an 18 month period between 1 January 2003 and 30 June 2004, to determine the value of the business at the time of sale, including a number of major differences said to have been introduced by the new owners. For example, Greaves, the managing director of ten years' standing, gave evidence that the purchasers introduced administrative changes, which had a significant impact on productivity. Greaves gave evidence that Coates and Mutimer were less effective managers than Johnston and Whittaker. Although Simmons was better, he was in attendance for only two or three days a week. The personal relationship between key stakeholders and the manufacturer was also critical. Cain gave evidence of the move of the factory from West Heidelberg to Dandenong and the different management style. He testified that many staff members left, due to the move.
53 His Honour was not satisfied that the evidence was sufficient to substantiate the factual basis of Blashki's adjustments. Blashki relied heavily on the purchasers. He did not independently verify six items, which were very significant in money terms. It was not established that the business financial and operational models were 'materially identical, both pre and post sales'.
54 In such circumstances, his Honour considered the weight of Blashki's evidence was reduced to the point where it was unreliable. He therefore rejected it. His Honour held that the purchaser did not discharge the onus of proving the quantum of their loss.
55 His Honour also rejected the evidence of the vendors' expert witness, Gary Fettes. Fettes gave evidence that the purchase price amounted to the fair value of the business at the date of sale. His Honour considered that the critical flaw in Fettes' evidence was his reliance on the material given to the purchasers, which was false.
56 Having rejected the assessments of both expert witnesses, his Honour independently assessed the purchaser's loss by reference to the probabilities of what would have been the position had the principal representation been true.
57 His Honour relied on Coates and Simmons' evidence that a one per cent increase in cost of materials would reduce gross profit by $200,000 annually. He also accepted Blashki's multiple of three (lower range) in the capitalisation of future maintainable earnings method, noting that Fettes also gave it as a mid-point in the range.
58 His Honour found that, as at 23 December 2002, the cost to sales ratio was 62 per cent.
59 His Honour concluded that after the 16 December 2002 meeting, there was a representation (which became a warranty under the sale contract) amounting to a promise that there was a high probability that 58 per cent cost of materials to sales ratio would be achieved. His Honour stated:
Expressed in arithmetical terms, this was to the effect that there was a 90% chance of success that the Insulform Business would achieve a cost of materials to sales ratio of 58% in the near future. The warranty therefore carried with it a 10% risk that this would not be achieved.
60 His Honour found that the loss and damage due to entering into the sale contract in reliance on the principal representation was the same as for the breach of contractual warranty. His Honour concluded that the business was worth $2,160,000 less than the purchasers had paid for it.
61 His Honour rejected the purchasers' claim that the employee leave entitlements (valued at $219,861) was understated by $85,658. The employee leave entitlements were to be deducted from the purchase price.
62 The sale contract set out a mechanism for the vendors to calculate the leave entitlements. The vendors provided a computer-generated report.
63 The parties exchanged correspondence on the employee leave entitlements prior to settlement. Their lawyers and accountants disagreed about the quantum. The vendors maintained that the figure to be deducted was $143,746.
64 The parties compromised on settlement a figure of $219,861.
65 His Honour acknowledged that the purchasers had trouble accessing the figures prior to settlement, but considered that they had many options at settlement if they still disagreed. They could have placed an amount in escrow, tendered an amount or paid without prejudice. Instead, they elected to split the difference and settle the employee entitlement claim.
66 The parties' agreement (reflected in Madgwicks' letter as amended on 23 December 2002) compromised the claims 'without any reservation of rights the purchasers may have had under the warranty provisions of the sale contract which were effectively extinguished' (as cl 19.7 recognises may occur).
67 His Honour therefore rejected the purchasers' claim.
68 His Honour also rejected the purchaser's claim for $58,390.57 alleged to be an overpayment for stock.
69 His Honour observed that the vendors were required to submit a list of stock. Clause 7.2 entitled the purchaser to reject any stock held for more than four months before the stocktake, or (in absence of agreement) stock that an agreed valuer determined was excess to the needs of the business as an ongoing concern.
70 On settlement day (23 December 2002), the purchasers queried the accuracy of the stocktake, but did not reject any stock. They paid $570,948 for the stock on settlement date.
71 His Honour found that Madgwicks' letter dated 20 December (which gave an estimate of $600,000 for stock value) was initialled by all parties and on 23-24 December, there was a stock take at the premises attended by Ms Fiona Hansen of the purchasers' consultants, Horwath. The parties agreed on a price of $570,948, as evidenced by Hansen's letter dated 8 January 2003.
72 The purchasers' solicitors wrote to Madgwicks requesting a $29,052.38 refund, on the basis of the agreed figure, which the vendors paid.
73 His Honour accepted that Hansen's letter was accurate. He concluded that, whatever rights the purchasers may have had under the warranty provisions of the sale contract, they were not reserved, but abandoned by the compromise.
74 As we have said, the principal question raised by this appeal is whether the appellants made the representations alleged by the purchaser.
75 The representation by the vendors, which was described in the reasons for judgment as 'the principal representation' and as 'critical', was based upon the evidence of Simmons that he was told by Johnston that 'going forward' the purchasers 'should use' or 'should run with' the figure 58 per cent, representing the ratio of the cost of materials to sales. His Honour accepted that evidence and said:
Considering the context of the 16 December discussion in the light of all of the information which had previously been provided to the Purchasers, I am satisfied that a representation was made to the Purchasers by the Vendors that, in the future, the cost of materials would be 58 per cent of sales.
The trial judge said that the representation he had found meant that 'there was a high probability that this would be achieved, which, expressed in arithmetical terms, would represent something in the order of a 90 per cent chance of success of the 58 per cent figure being attained.'
76 The representation was said to have been made in the first of the two conversations held on 16 December 2002 between Simmons and Johnston and was the essence of the case found by the trial judge. The other representations found by the trial judge apparently did not add anything to the principal representation, for they were described by the trial judge as 'sub-sets of the principal representation and inseparable from it' or 'components of, and not additional to, the principal representation' or as 'another way of expressing the essence' of the principal representation.
77 The representation emerged fully formed from the words Johnston was found to have uttered on 16 December 2002. Those words, however, were not to be examined in isolation. In Butcher v Lachlan Elder Realty Pty Ltd,[1] in a passage recently endorsed by the High Court in Campbell v Backoffice Investments Pty Ltd,[2] McHugh J said:
The question whether conduct is misleading or deceptive or is likely to mislead or deceive is a question of fact. In determining whether a contravention of s 52 has occurred, the task of the Court is to examine the relevant course of conduct as a whole. It is determined by reference to the alleged conduct in the light of the relevant surrounding facts and circumstances. It is an objective question that the Court must determine for itself. It invites error to look at isolated parts of the corporation's conduct. The effect of any relevant statements or actions or any silence or inaction occurring in the context of a single course of conduct must be deduced from the whole course of conduct.
78 In the present case the trial judge concentrated upon the document given to the purchasers in January 2002 and the meeting between Johnston and Simmons on 16 December 2002.
79 Simmons and Coates acknowledged in their evidence that the document supplied in January 2002 was by way of introduction. In response to a suggestion that the information contained in the document was not sufficient to enable a decision to be made to purchase the business, Simmons said:
[I]t was the first look see. It was the first step that we - of a long journey.[3]
He also said, 'We did require more information.' When it was put to Coates that he could not make an informed decision as to the purchase of the business on the basis of the information contained in the January document, he said: 'Well, we didn't.'[4] There is no evidence that the January document was referred to again by either purchaser or vendors. It was added to the information memorandum supplied to the purchaser in July 2002, but not as a result of a request by the purchaser to do so.
80 In the period between the supply of the January 2002 document and the 16 December 2002 meeting, a great deal of information concerning the Insulform business was given to the purchaser by the vendors in the course of a careful and detailed due diligence investigation. The nature and effect of that information for the most part was not analysed by the trial judge.
81 A matter which appears to have been integral to the conclusion that the appellants breached s 52 of the Act was his Honour's finding that the vendors denied the purchaser access to critical information about the Insulform business because the parties were competitors.
82 The trial judge referred to statements made by the vendors refusing to supply information requested by the purchaser because 'The information you seek would disadvantage Insulform in the marketplace if the acquisition fails to proceed'. His Honour said:
I accept that this remained the attitude of the Vendors throughout the transaction until completion of the Sale Agreement. As a consequence, although the Purchasers were permitted to conduct a financial due diligence in the sense of examining the financial statements prepared for the Insulform Business, they were not permitted to undertake anything in the nature of an operational due diligence in order to observe the manufacturing processes of the Insulform Business to verify whether or not they verified the costings in the quotations to customers of the business. Although the purchasers were given a guided factory tour early in the negotiations, they were never given the opportunity to closely observe the manufacturing process in operation.
83 At the outset of the negotiations the vendors were concerned to deny the purchaser access to information which might benefit it as a competitor of the appellant. Thus in an email dated 22 January 2002 Johnston said:
Unfortunately due to the competitive nature of our two companies both Peter and myself regret to advise we are unable to provide the information as requested. The information you seek would disadvantage Insulform in the market place if the acquisition fails to proceed.
84 The evidence demonstrated, however, that this state of affairs changed dramatically. The change was initiated in response to a request by Horwath for information to enable it to conduct a due diligence investigation of the vendors' business.
Further to our meeting of 17th of July we take this opportunity to set out the details of our requirements to progress the transaction. At the meeting it was agreed that Insulform would provide sufficient financial information to allow an initial review of key data so as to allow us to prepare formal submissions to the ANZ Bank.
There followed a list of 17 items, which covered all the information necessary to reveal the trading and financial position of the vendors' business, ranging from profit and loss accounts, budgets and committed capital expenditure to a breakdown of sales revenue according to products and customers. The vendors supplied each of the 17 items. Representatives of the purchaser and Horwath spent two-and-a-half weeks at the vendors' premises. Cain, who was called to give evidence at the trial by the purchaser, said that he 'was told by Johnston to give them anything they asked for'. As the sale agreement contemplated, the investigation undertaken by the purchaser went to the heart of the vendors' business. Clause 6 of the sale agreement provided that:
The parties acknowledge and agree that the parameters of the due diligence investigation are to:
(a) enable the Purchaser to confirm:
(i) the profit and loss and balance sheets of the company for the years ending 30 June 2001 and 30 June 2002; and
(ii) the information contained in the Information Memorandum relating to the Company and its business;
which have been provided to the Purchaser.
86 The terms of Horwath's retainer required the firm to investigate the business operations of the vendors as well as their financial position. Horwath undertook that it would address:
Marketing strategy
Position within the industry
Accounting policies
Customer base - size and nature
Major suppliers - price trends, ordering procedures
Products - turnover over the last three years, sales pricing, order levels, warranties
Adequacy of management information systems
87 No complaint was made by the purchaser in the course of the due diligence examination which it made of the business as to the access afforded by the vendors to the business or the information supplied by the vendors with respect to the business save for two matters, which ultimately were not relevant to any issue in the trial, namely, the failure of the vendors to locate certain insurance policies and an insurance agreement.
88 The trial judge does not appear to have given appropriate weight to the due diligence conducted by the purchaser. He did not deal with or analyse the terms of the retainer of Horwath, the enquiries made of the appellant, the vendors' responses or the report which the due diligence produced.
89 In the passage from his reasons which we have set out at paragraph [82], above, the trial judge drew a distinction between financial due diligence, which the purchaser was permitted to perform, and operational due diligence, which, he said, the purchaser was denied. The distinction drawn by his Honour was of no significance. The purchaser's case was not that the vendors misrepresented their manufacturing operations or techniques, but that they misstated the profitability of the business.
90 Accordingly, we are of the opinion that the trial judge's conclusion that the vendors withheld from the purchaser information as to its business cannot be supported having regard to the evidence. His Honour did not deal with the evidence of the large amount of data supplied to the respondent during the due diligence investigation, apparently to the purchaser's satisfaction.
91 The vendors initially foreshadowed a reduction in the cost of materials used in the business by substituting an extruded sheet material from Italy called 'Woodstock' for a Japanese material called 'Hy-Papia'. In the documents supplied to the purchaser in January 2002, it was predicted that the substitution would save $568,950.00 per annum.
92 The trial judge found that by the time the contract of sale was executed, the planned substitution had failed. He said:
Although the Woodstock substitute project had been in the process of development in the Insulform Business for some time, by late November 2002 the project had failed despite the best endeavours of the Insulform management team to rectify the problems.
His Honour said that Johnston did not disclose the failure to the purchaser and that damaged his credit. He said:
Further, I find that Johnston's conduct in allowing the Purchasers to execute the Sale Contract on 29 November 2002 without informing them either fully or at all of the failure of the Woodstock material as he informed his Italian suppliers by email on the same day, reflects poorly on his credit. This is particularly so because it had become clear, and ought to have become clear to Johnston, as early as August-September of 2002 that the Woodstock experiment was never going to work.
93 In his evidence in chief and in cross-examination, Johnston said that between 29 November and 23 December 2002, he told Coates on a visit to the factory that 'The cost reductions that I had hoped to achieve arising as a result of the Woodstock substitute had not gone ahead due to processing difficulties. I told Coates that I had, nevertheless, re-negotiated the price of the existing Hy-Papia substrate producing an annual saving of approximately $100,000'. In his evidence Coates denied the conversation. In the light of his ultimate conclusions, it appears that the trial judge preferred the evidence of Coates to that of Johnston. Unfortunately, his Honour did not refer to Johnston's evidence and gave no reasons for rejecting it.
94 The principal representation concerning the ratio of the cost of materials to sales in the future depended upon cost savings, such as the substitution of Woodstock material for Hy-Papia material. The trial judge proceeded upon the basis that it also depended upon the introduction of new business. He said that the reduction in the ratio of cost of materials to sales to 58 per cent 'was not only founded on the cost savings, but also in part upon the new business being successfully introduced into the Insulform Business'. In concluding that the principal representation was false, the trial judge relied, inter alia, upon the finding that 'as things stood at the date of the execution of the Sale Contract on 29 November 2002 and the date of completion on 23 December 2002, there was no realistic likelihood of profits from the new business being achieved'. The 'new business' was the manufacture of interior trim parts for the Toyota Camry.
95 It is difficult to see how a reduction in the ratio of the cost of materials to sales was to be effected by the introduction of new business. The evidence did not establish, and indeed his Honour did not say, that the cost of the materials for the new business struck a new relationship with sales. In his evidence Johnston explained that the contribution to overhead 'which the document dated 18 January 2002 ascribed to the introduction of new business was calculated on the basis that the Insulform business was absorbed into the INC business and took into account the synergies that would result from that amalgamation'. The trial judge did not refer to this evidence in his reasons.
96 In any event, by December 2002 the parties knew what the effect of the new business was. The prediction of new business was made before the middle of 2002. In the first four months of the financial year which commenced on 1 July 2002, when the introduction of the new business occurred, the parties were supplied with management accounts which showed a blow out in the cost of materials as a ratio to sales. In his testimony Cain said that during the due diligence he told the purchaser's solicitor that the contract for the Toyota business 'was running a bit out of control'. He gave the solicitor folders of documents disclosing 'the costing information and all of the order books'. The solicitor did not give evidence.
Whether the principal representation was made or relied upon
97 The due diligence report supplied to the purchaser revealed an increase in the ratio of the cost of materials to sales to 65 per cent. On 16 December 2002 Simmons spoke to Johnston and enquired as to the reason for the increase. Johnston said that he would make enquiries. Later that day, he told Simmons that there had been an increase in the tooling costs for the new business and produced a spreadsheet analysing the data. The cost of the tooling was to be reimbursed to the vendors by Toyota. When that cost was deducted, the ratio of the cost of materials to sales was 60.3 per cent.
98 In the light of this detailed information, it is hardly likely that on 16 December 2002 Johnston said to Simmons words which conveyed the meaning, or Simmons understood, that there was a 90 per cent chance that henceforth the ratio of the cost of materials to sales would be 58 per cent. The trial judge did not address this evidence. In our opinion, it was a critical part of the context against which the making of the principal representation and the belief of the purchaser as to the ratio of the cost of materials to sales were to be evaluated. The representation, which was at the heart of the case found by the trial judge, was at odds with the facts known to the purchaser.
99 Counsel for the appellant accepted that in December 2002 Johnston had as a target the 58 per cent ratio of the cost of materials to sales and communicated his ambition to Simmons. Whether the ambition could be achieved was another matter. It appears that the purchaser understood the true position and the uncertainty of achieving the ratio of 58 per cent. In a memorandum to Coates dated 16 December 2002, Simmons stated:
The concern from the Due Diligence Report was that Insulform's previous FY 03 profit estimate ... of $2,662,759 had been revised downward by Horwath to $1,774,989 ... The initial estimate had been based on a GP estimate of 43 per cent sales despite GP's being 41 per cent (FY 00), 40 per cent (FY 01), 39 per cent (FY 02), whereas four months to 31 Oct 02 indicated a GP of 35 per cent ... Dennis was not able to provide hard data to resolve this issue until late in the day, despite several calls to Fred.
The primary reason for the low GP is tooling - tooling cost for four months to 31 Oct 02 was $723,149 and this was invoiced at $814,046. When Sales and Purchases are corrected for these values, the GP increases to 38 per cent. After talking to a few people independently, I can accept that a further one per cent + material cost was incurred in this period from high scrap grade on new Toyota parts (Est. Underbonnet insulator). It appears the GP figure of 39 per cent is sustainable - and the difference of four per cent equates to about $950k profit. The Horwath Forex rates ... seem high for Euro, but do not appear to have been used in the Cost of Materials calculations.
The above correction is really a bit of subterfuge, because tooling was also included in the all the past figures - it is just that $814k was an abnormally high figure for four months - tooling might typically be $1m per year.
Tellingly, there was no statement that the purchaser could rely upon a ratio of cost of materials to sales of 58 per cent. The memorandum was not referred to by the trial judge in his reasons.
100 The memorandum by Simmons displayed no concern on his part as to the profitability of the business revealed by the due diligence report. It does not appear that the purchaser made any enquiries or voiced any disquiet as to the trading results of the Insulform business in the four months after June 2002 or evinced any interest in the progress of the substitution of Woodstock for Hy-Papia material. The reason for this indifference was that the purchaser planned to substitute a material known as 'Deci-Tex' for the materials used by the vendors. The trial judge observed that 'the purchasers had an incentive to buy the Insulform business to provide an expansion of the sales of their own product Deci-Tex.' His Honour did not deal, however, with the evidence which showed the importance of the substitution of the new material to the purchaser.
101 Under the heading 'Business Development and Future Growth', the due diligence report stated:
The use of INC's developed materials in place of Insulform's imported materials may bring considerable cost savings to the combined business; the acquisition of Insulform will assist INC in achieving its goal of floating in 2007 since Insulform will more than double the size of INC's business by adding $23 million to its automotive sales and $1.8 million to EBIT.
In a proposal to a bank in relation to the acquisition of the business of Insulform, Coates said:
Insulform is dependent on outside sources for materials resulting in a high cost of materials. With INC's material technology, Cost of Materials will reduce by up to 15 - 20 per cent over time, resulting in significant cost savings and improved profitability.
In an email to Mitsubishi motors dated 10 February 2003, Coates said that the 'introduction of our Deci-Tex ... and replacement of fibreglass, is our top priority at Insulform'.
102 In his oral testimony, Coates confirmed that a large number of products of the Insulform business were manufactured from fibreglass and said that Deci-Tex was an effective substitute for fibreglass. He said that 'part of our plan' was to replace fibreglass with Deci-Tex which would change the cost of manufacture. In answer to the question 'The strategic imperative that underlay the acquisition by you of the Insulform business was the potential to replace the fibreglass products with your Deci-Tex product?' Coates said, 'Yes'.
103 Simmons gave evidence that in 2001 the purchaser sought to sell Deci-Tex to the vendors, who resisted the attempt. Simmons said: 'Therefore, in the second half of 2001 we slowly turned our thoughts to the possible purchase of the Insulform business'. He said that the purchaser intended to convert 'fairly rapidly within a span of say six months' to the use of Deci-Tex materials.
104 The respondent made no complaint about the profitability of the business for some two years after completion of the sale. Nothing was said about any misrepresentation of the cost of sales or profitability although the parties were in frequent communication and complaints were made by the purchaser about minor matters. His Honour considered that the purchaser's failure to complain was because 'the purchasers decided to see how the combined businesses would work out before entering upon litigation, and for this reason delayed in making complaint'. The delay may equally be explained by the purchaser's intention to acquire a business it could transform and the belated ultimate complaint may be due to the failure of the attempted transformation. In addition, we think that it is reasonable to suppose that the purchaser was influenced by the synergies that could be exploited by combining its business with the Insulform business.
105 The trial judge accepted the evidence of Coates and Simmons that they relied upon the vendor's representations as to the cost of materials as a percentage of sales as 'the most important figure in the accounts' and as a 'matter of primary interest'. When the principal representation is set in its context, however, and in particular regard is had to the purchaser's intentions expressed in 2002 and its reaction to the trading figures of Insulform and the due diligence report, the later professions of reliance upon Johnston's remark on 16 December 2002 appear contrived.
106 In our opinion, the evidence established that the purchaser looked upon the Insulform business as a basis upon which significant improvements could be effected to create the profitable enterprise the purchaser foresaw. In important respects the purchaser never intended to conduct the business in the manner in which the vendors had done so. The January 2002 document and the December 2002 conversation were not isolated events, but took their colour from the events, documents and conversations in which they were set. In our opinion the evidence fell short of establishing the principal representation found by the trial judge or the purchaser's reliance upon it.
107 Counsel for the respondents pointed out that his Honour found, in terms, that the vendors represented that in future the cost of materials would be 58 per cent of sales. His Honour went on to say that what was conveyed by the representation was a 90 per cent chance of the represented percentage of cost of materials to sales being achieved. Counsel for the respondent submitted that the finding as to the meaning of the representation was irrelevant. It did not affect the question of breach of s 52 of the Trade Practices Act or breach of the contractual warranty. In our opinion, however, the very high probability of the representation being achieved did materially influence the findings that the representation was made, that the purchaser relied upon it and that it was false. As a consequence, the trial judge did not determine whether there were reasonable grounds for the prediction or whether it was inconsistent with the information supplied to the purchaser in the course of its due diligence investigation.
108 Counsel for the respondent emphasised the advantage which the trial judge possessed of seeing and hearing the witnesses give their evidence. If a finding of fact by a trial judge depends to any substantial degree on the credibility of a witness, the finding must stand unless it can be shown that the judge has failed to use or palpably misused his advantage.[5] In the present case, the trial judge did not rely upon the demeanour of witnesses or the manner in which they gave their evidence. This was not a case in which the nature of the issues or the trial judge's findings involved elements of nuance, degree, opinion or judgment where the trial judge's findings were elevated to the protected position of findings based on credit. Further, the trial judge's conclusions were substantially undermined by a large amount of evidence with which he did not deal and was not disproved or weakened by other evidence. The trial judge's views must be given appropriate weight, but we are satisfied in this case that the conclusions of misrepresentation and breach of warranty cannot be sustained.
109 The case which the vendors sought to meet was that they had made predictions as to the future profitability of the Insulform business which had no reasonable basis. Counsel for the purchaser in his final address said that 'our case stands or falls by whether these projections had a reasonable basis.' In an amended statement of claim filed at the conclusion of the evidence, the purchaser pleaded five representations as to future matters:
• That in the future the profitability of the business would be increased by likely reductions in costs;
• That in the future the profitability of the business would be increased by the acquisition of new business;
• That in the future the gross profit of the business would be 43 per cent of sales;
• That in the future the cost of materials would be 58 per cent of sales;
• That in the future the cost of materials would decrease from 65 per cent of sales to 58 per cent of sales.
The trial judge, however, found that the vendors represented that there was a 90 per cent chance that the cost of materials would be 58 per cent of sales, a representation akin to a contractual warranty. No warning of the new case was given to the appellants. It was only revealed when the reasons for judgment were published.
110 In our opinion, the new case found by the trial judge may well have occasioned injustice. Faced with a claim to which s 51A of the Trade Practices Act applied, the vendors were in a dilemma. As they denied making the alleged representations, it was difficult to establish that the representations were based upon reasonable grounds. If the principal representation had been pleaded as a near certainty, however, the vendors could have drawn attention to the nature of the industry, variations in exchange rates and labour costs, the history of the Insulform business, the profitability it had achieved and the uncertainties inherent in the amalgamation of two hitherto separate businesses to invite the conclusion that the representation had not been made. To have fought the case on that basis, however, would have been likely to have materially assisted the respondent's case of lack of reasonable grounds for the future representations which the respondent advanced.
111 The facts found by the trial judge from which he concluded that the representations were made also established the claim of breach of warranty. The trial judge said:
The principal representation was not a mere expression of opinion. In the circumstances, the representation constituted information which was given by or on behalf of the vendors to the purchasers with respect to the Insulform business pursuant to Schedule 2, clause 3.1 of the sale contract. Consequently, a warranty was given that the representation was true and accurate in all respects. respect to the Insulform
The warranty set out in cl 3.1 of the Schedule was:
3.1 All information which has been given by or on behalf of the Vendors to the Purchaser (or to any director, agent or advisor of the Purchaser) with respect to the Shares or the Company's business is true and accurate in all respects.
112 For the reasons we have stated, we are of the opinion that the warranties found by the trial judge were not made. There is a further point. Clause 19.3 of the contract of sale qualified the warranties. It provided, so far as is presently relevant:
The warranties are given subject to:
...
(ii) the disclosures made in:
...
(B) the course of the Purchaser's due diligence investigations; or
(C) the Information Memorandum relating to the company and its business provided to the Purchaser; or
(D) any other document (including, but not limited to any Business Record) which, or a copy of which, is given to the Purchaser or made available to the Purchaser for inspection before Completion.
A party must not claim that any fact renders any of the Warranties incorrect, inaccurate, untrue or misleading or cause the Warranties to be breached if the Warranty represents the best knowledge, information and belief that the Vendors and the Vendors' Directors when it was made and applies, or was the subject of a disclosure.
As we have said, the warranties found by the trial judge were fundamentally at odds with the information supplied to the purchaser in the course of its due diligence investigation.
113 Accordingly, in our opinion, the evidence did not establish the case found by the trial judge either in misleading or deceptive conduct or in contractual warranty.
114 In the course of the trial the respondent sought to tender a witness statement by Phillip McIvor. McIvor was employed by the vendor as manufacturing manager in 2002. After the sale of the business, he was employed by the purchaser as customer alignment manager. The proceedings commenced on 26 May 2005. On 19 December 2006, McIvor signed a witness statement prepared by the solicitors for the purchaser. McIvor died shortly before the commencement of the trial.
115 The respondents contended that his statement was admissible as it satisfied the requirements of s 55 of the Evidence Act 1958, which provided for the admission in evidence of statements by persons who had died and who had personal knowledge of the matters dealt with in the statement. The trial judge ruled that McIvor's statement was caught by s 55(4), which provided:
(4) Nothing in this section shall render admissible as evidence in any legal proceedings any statement made by a person interested at a time when the proceedings were pending or anticipated involving a dispute as to any fact which the statement might tend to establish.
116 In his ruling his Honour said that McIvor was being asked to give evidence which was critical to the case of his current employer about events which occurred under the management of his previous employer. He said:
As a senior manager employed by INC, he had an interest in cementing rather than potentially compromising his relationship with his then current employer. This was not unlikely to have been a matter of indifference to him. Further, the material interest was such that it was reasonably likely it would have acted upon him to adversely compromise the impartiality of the evidence comprised in the statement.
His Honour went on to also reject the tender of the statement pursuant to the provisions of s 55(9), which conferred upon him a discretion to reject the admission of the statement notwithstanding that the provisions of the section had otherwise been satisfied where it appeared to be inexpedient in the interests of justice that the statement should be admitted. His Honour pointed out that McIvor's statement covered events which occurred after Johnston had left the business and there was no other witness in the camp of the vendors who could give evidence of the matters canvassed by McIvor.
117 By notice of contention the respondents sought to overturn his Honour's ruling. Counsel for the respondents in this Court submitted that McIvor had no personal stake or interest in the outcome of the litigation, and was merely an employee giving evidence as part of the case of his employer, a prosaic and commonly encountered situation. Accordingly, so it was said, McIvor did not have a material interest which was substantial and real. As to the exercise of discretion, counsel for the respondents submitted that the trial judge's ruling deprived the respondents of what was unusually powerful testimony and in seeking to relieve the appellants of an injustice, he imposed a greater injustice upon the respondents.
118 In our opinion, his Honour applied the correct test in asking whether McIvor was shown to have been affected by any material interest which was substantial and real and which was reasonably calculated in the sense of being reasonably likely to affect the impartiality of McIvor.[6]
119 In our opinion, McIvor was a person interested in the proceedings within the meaning of s 55(4) of the Act. McIvor's future prospects of retaining his employment and achieving promotion and benefits such as bonuses were dependent upon the goodwill of the purchaser. He was not detached or independent, for his material welfare in terms of his employment might be jeopardised if he refused to give evidence which suited the interests of the purchaser in its dispute with the vendors. Further, we consider that it has not been shown that the exercise of his Honour's discretion miscarried in refusing to admit evidence which could not be countered by the vendors.
120 For the foregoing reasons, we are of the opinion that the respondents did not establish liability on the part of the appellants. That is sufficient to dispose of the appeal. As the question of quantum was fully argued, however, we will state our reasons on the issue.
121 There also remains the purchaser's claims relating to employee entitlements and obsolete stock.
122 The trial judge summarised the purchaser's claims as follows:
(a) The defendants significantly misrepresented the profitability of the Insulform Business in the future, a misrepresentation relied upon by Shmee and which induced it to enter into and complete the Sale Contract. These claims were founded in alleged breaches of contractual warranties under the Sale Contract ("Vendors' Warranties") and in breaches of s.52 of the Trade Practices Act 1974 (Cth), and s.9 of the Fair Trading Act 1999 (Vic), breaches in respect of which it alleged both Johnston and Whitaker were knowingly involved and hence were personally liable;
(b) The amount of the accrued employee entitlements was understated, and the acquisition price was thereby inflated, by $85,658; and
(c) Shmee overpaid for stock by $58,390.57 in respect of unsaleable or obsolete stock which should have been excluded from the sale.
123 The purchaser's statement of claim concluded with a claim that the purchaser had suffered loss and damage, which was particularised as follows:
(a) Shmee has suffered loss calculated as that sum which is required to place it in the position it would have enjoyed had it not entered into and completed the agreement. That loss and damage is calculated at the difference between the price paid for the acquisition of the business and the actual value of the business.
(b) The valuation of the business required the calculation of the capitalised value of future maintainable earnings. It is necessary to determine the appropriate income stream to apply. In this case, earnings are assessed by reference to earnings before interest, tax, depreciation and amortization (EBITDA), rather than earnings before interest and tax (EBIT), as in the present situation the capital expenditure pattern and changes in depreciation resulting from asset revaluations can lead to significant distortions in the determination of a reasonable depreciation charge. Shmee calculates the adjusted earnings before interest, tax depreciation and amortization for 2002, as the sum of $785,000. This sum represents the future maintainable earnings of the business.
(c) In this case an earnings multiple of either 3.0 or 4.0 is appropriate. The figure is to be determined to be appropriate in the light of the general economic conditions that may impact upon the business, industry related factors and factors relating to the business itself. Bearing those matters in mind, a prudent investor in the business would require a return on earnings before tax in the range of 25% and 33%. This produces an EBITDA multiple of 3.0 to 4.0 times.
(d) Based on maintainable earnings of $785,000, this would indicate the unadjusted value of the business to be a sum between $2,355,000 and $3,140.000.
(e) Adjustments for working capital retained by the vendor and the income tax benefit of leave provisions must be made, as set forth hereunder.
(f) The purchase price paid by Shmee is calculated as follows:
Therefore, the loss suffered by Shmee, calculated as the difference between the purchase price and the actual value of the business, is a sum between $3,912,000 and $4,697,000."
124 It is important to observe that by these particulars the purchaser's claim was identified not merely in a general sense by reference to a money sum but with precision as to the basis upon which the damages were to be calculated, and that was on the well known basis of the capitalised value of future maintainable earnings. That basis is of course commonly used in cases concerning the sale of a business, with which para (a) of the particulars equated the present case. It is to be noted that in their defence the appellants, in addition to denying the allegation of loss and damage, specifically contended that 'the loss and damage pleaded is not the proper measure of loss and damage recoverable because Shmee did not acquire a business'. We think that contention is without substance. It was correct to approach the case, as the trial judge did, on the basis that the case was akin to the acquisition of a business, for that was the purpose and effect of the agreement.
125 Indeed at the trial the parties relied upon expert evidence to establish the fair value of the business at the date of completion of the agreement. The respondents relied upon Blashki while the appellants relied on Fettes. In summary, without elaborating upon their respective reasoning, Blashki and Fettes concluded as follows:
(a) Blashki estimated the future maintainable earnings at $785,000 and by applying a multiple of 3 or a multiple of 4 estimated the value of the company at either $1,573,000 or $2,358,000. He concluded that the purchase price exceeded the market value of the company by between $3,912,000 and $4,697,000. That was on the basis that the purchaser had paid -
In addition, he assessed that the purchaser had paid $113,477 in excess of the agreed amount in respect of actual employee entitlements.
(b) Fettes was of the opinion that the purchase price paid by the purchaser represented the value of the business on the basis of the price being struck between willing but not anxious sellers and purchasers.
126 The trial judge agreed with the respondent's approach. He said that in a case such as the present, involving in essence the purchase of a business induced by misleading or deceptive representations, the usual method to determine the measure of damages was to compare the amount paid for the business with the true value of the business as it was at the time of the sale, and referred to HTW Valuers (Central Qld) Pty Ltd v Aston Land Pty Ltd[7].
127 The trial judge then considered the evidence of Blashki and Fettes as to the value of the business at completion. The difficulty with Blashki was that he had taken into account post-sale events when a number of major differences had been introduced into the business by the new owners, which rendered the comparison between the pre-sale and post-sale business unreliable. Further, Blashki had made adjustments that he had not verified or were not substantiated by evidence, relying upon instructions from the respondents as the facts to be used in undertaking the adjustments. For these reasons, which were developed at some length in the judgment, his Honour rejected the evidence of Blashki as to the value of the business at completion of the sale. He was 'not satisfied that the plaintiff has discharged its onus of proving the quantum of its loss through the evidence of Blashki provided in his expert report'.
128 As to Fettes, the trial judge considered that the critical flaw in his assessment that the agreed price represented the fair value of the business was that the material available to the respondents was false and, hence, it could not be said that they acted with full knowledge in the sense of being a willing but not anxious buyer. For this reason it was not open to conclude that the agreed purchase price represented the value of the business at the time. Furthermore, in adopting this approach Fettes necessarily accepted the accuracy of the representations as to costs savings and the value of the new business as stated by Johnston in his 22 January document. The trial judge concluded that having rejected the accuracy of that document, he must also reject the accuracy of the Fettes analysis of the future profitability of the Insulform business which, in part, was founded upon it. Accordingly, he rejected the evidence of Fettes as to the value of the business at the time of completion of the sale.
129 The trial judge concluded that he was accordingly 'unable to arrive at the true value of the Insulform Business as it was at the end of 2002 on the basis of the expert reports of Blashki and Fettes'. However, his Honour then stated that he accepted 'the evidence of Fettes to this extent: had the Principal Representation in fact been true, the price paid by the Purchaser for the Insulform Business, represented the fair value of the business at the time of completion of the sale'. It is to be noted that Fettes' evidence was given in response to a question (in the judgment called 'The Judge's Question') formulated by the trial judge in the course of the trial.
130 His Honour described the genesis of the Judge's Question as follows:
During the course of the trial I asked both Blashki and Fettes to undertake a calculation in answer to the following question:
On the assumption that the purchase price paid for the purchase of the company Insulform Pty Ltd as specified in the Share Sale Agreement dated 29 November 2002 (being $5,500,000 plus stock value plus additional equipment cost less accrued employee leave entitlements) as at 23 December 2002 represented the fair market value for the company and that this was based upon a ratio of costs of materials to sales (the cost of materials ratio) of 58%, what would the fair market value have been had the cost of materials ratio been:
(a) 60%; or
(b) 60.9%
on the further assumption that each % point of the cost of materials ratio represents approximately $200,000 of gross profit per annum?
In response to this question, Blashki calculated a reduction in value for the Insulform Business of $1.76 million if the cost of materials to sales ratio adopted was 60% or $2.552 million if 60.9% was adopted. However, in undertaking this analysis he adopted a multiplier of 4.4, which was above the range he had used previously of 3 or 4. Fettes on the other hand used my parameters to calculate a reduction in value for the Insulform Business of $ 1.2 million if the cost of materials to sales ratio adopted was 60% or $ 1.74 million if 60.9% was adopted. In undertaking his analysis Fettes used a multiplier of 3.
On further reflection, however, I am not satisfied that the cost of materials to sales ratios described by Simmons for the Insulform Business which were achieved during the first four months of 2003 did in fact reflect the value of the business as it was at the end of 2002. I am not satisfied that the figures achieved for the Insulform Business under the new management for the four month period to April 2003, as reflected in the management accounts for that period, accurately reflected the true position as at the end of 2002. The figures are derived from management accounts over a limited period of time. Further, the range is vulnerable to distortion by the very low figure achieved over the January period of 57.7% immediately after completion of the sale, when the stock as valued for the purposes of the settlement was likely to have been taken into account. Further, the cost of materials to sales ratio reflected in the management accounts of the business for the post-sale four month period appear to have excluded any component for labour costs.
Damages may be awarded for the loss of any chance or opportunity which may be causally linked to a breach of contract. Such damages are appropriate where a breach of a contractual promise to provide a chance occurs.[8] In Commonwealth v Amann Aviation Pty Ltd[9] Brennan J said:
The measure of damages prescribed by Robinson v Harman ensures that the parties to the contract are kept to the benefits and the burdens of the contract they have made: the plaintiff recovers no more than the net benefit he would have received under the contract; the defendant acquires no right to profit by his breach. The measure of damages for breach of contract is governed by the contract itself. As the contract determines the measure of damages for losses caused by its breach, there is a difference between the measure of damages in contract and the measure of damages in tort, though the purpose of damages in both is the award of compensation. The general principle on which compensatory damages are assessed was stated by Taylor and Owen JJ in Butler v Egg and Egg Pulp Marketing Board [1966] HCA 38; (1966) 114 CLR 185 at 191:
"That principle is that the injured party should receive compensation in a sum which, so far as money can do so, will put him in the same position as he would have been in if the contract had been performed or the tort had not been committed." (Emphasis added.)
132 The trial judge then stated that the breach of warranty which he had found 'amounted to a breach of contractual promises to provide the Purchasers with an opportunity to derive the commercial benefit as it was promised to them', and referred to passages in Sellars[10]. We interpolate that the passages in Sellars were concerned with damages for the loss of a chance or opportunity under a contract.
In undertaking my assessment of the Purchasers' loss arising from the breach of the contractual warranty, I assess the position by reference to the probabilities of what would have been the position had the Principal Representation, as warranted in the Sale Contract, been true. My assessment results from the following findings:
(a) I accept the evidence of Coates and Simmons that a 1% increase in the cost of materials would result in a reduction in the gross profit by about $200,000 annually. This also translates directly to the "bottom line" or the net annual profit.
(b) I accept the evidence of Blashki that the most common method of valuing a business is by applying the capitalisation of future maintainable earnings method, and that it is an appropriate method to apply in this case. For this purpose, I find that the multiple to be applied to future maintainable earnings to determine value according to the capitalisation of future maintainable earnings method is 3. This multiple was within, but at the lower end of, the range of 3 and 4 used by Blashki in his initial report. Blashki concluded:
I consider that a prudent investor in this business would require a return on earnings before tax in the range of 25% and 33% which equates to an EBITDA multiple of 3.0 to 4.0 times.
In further evidence given at the trial in response to my question, Blashki sought to rely on a higher multiplier of 4.4. This figure was said to be derived from "The actual earnings multiple implicit in the Share sale agreement". I do not accept this as an appropriate multiplier to apply in the light of his earlier evidence that the appropriate range was 3 to 4. Fettes in his expert report made reference to the plaintiffs using earning multiples of 3 to 3.5 times earnings, and to the more conservative figure of 2.5 suggested by the plaintiffs' financiers. In doing so, Fettes did not dismiss the multiplier range suggested by figures of between 2.5 to 3.5 and in effect conceded that this provided a reasonable range. The mid-point of the range referred to by Fettes is 3, which coincides with the lower end of the range initially provided by Blashki. Further, it is to be noted that in his response to my question during the trial, Fettes selected 3 as the appropriate multiplier. For these reasons, I accept the earning multiple of 3 as being an appropriate multiplier to apply in this case.
(c) Having considered the evidence I am of the opinion that, as at the time of completion of the sale on 23 December 2002, the appropriate figure to accept as the cost of materials to sales ratio was 62%, which Simmons and Johnston both arrived at by calculations carried out in the course of their discussions on the afternoon of 16 December 2002.
(d) By the time the Purchasers decided to proceed to completion of the transaction, following the meetings which took place on 16 December 2002, the representation I have found, which became a warranty under the Sale Contract, amounted to a promise that there was a high probability that the 58% cost of materials to sales ratio would be achieved. Expressed in arithmetical terms, this was to the effect that there was a 90% chance of success that the Insulform Business would achieve a cost of materials to sales ratio of 58% in the near future. The warranty therefore carried with it a 10% risk that this would not be achieved.
In undertaking my assessment of the loss arising from the breach of the contractual warranty, I have applied the methodology used by Blashki and Fettes in answering the Judge's question. Applying the parameters which I have found, I calculate the loss arising from the breach of the contractual warranty in the following steps:
Accordingly, I assess the loss and damage directly caused to the first plaintiff Shmee, arising from the making of the Principal Representation and the consequential breach of the contractual warranty which occurred, at $2,160,000.
Alternatively, I assess the loss and damage of Shmee, caused by it entering into the Contract of Sale in reliance upon the Principal Representation, with the same result. The damages which I have assessed on this basis are an alternative to, and not in addition to, the damages which I have assessed for breach of the contractual warranty. This is so because both categories of loss and damage arise from the same source, namely the making of the Principal Representation.
The Purchasers paid the following sums to complete the purchase following the January 2003 adjustment payment for stock:
Stock at valuation ($600,000 - $29,052 being the January 2003 adjustment payment for stock)
Less employee leave entitlements (70% of $314,087 to account for tax benefit on employee leave @ 30%)
However, at the time of completion, the value of the Insulform Business was considerably less than the sum allowed for in the base purchase price, which I assess amounted to a decrease in value by $2,160,000. The Purchasers overpaid on the purchase price by this amount in paying for the benefit of unfulfilled promises. On this analysis, the loss and damage caused by the making of the Principal Representation in breach of s.52 Trade Practices Act 1974, s.9 Fair Trading Act 1999 and the contractual warranties was therefore also $2,160,000.
134 Finally, his Honour dealt with the matters of employee entitlements and the stock claim. Each claim was rejected on the basis that at settlement a figure had been agreed in respect of each item.
135 In their notice of appeal the appellants contended that having correctly rejected Blashki's evidence, the trial judge should have found that the respondents had not proved they had suffered loss, and dismissed the claim accordingly, and erred in adopting 'his own idiosyncratic approach' and in rejecting Fettes' evidence as he (the judge) overlooked and did not consider two further bases on which Fettes supported his opinion of the fair value of the business at the date of completion of the sale.
By a notice of cross-appeal the respondents seek the setting aside of the order for payment to Shmee of $2,160,000 and in lieu thereof an order for an amount between $3,997,658 and $4,782,658 being Shmee's loss and damage suffered by reason of the appellants' misleading or deceptive conduct (based upon acceptance of Blashki's evidence) and $79,344 being the amount owed for employee entitlements.
136 It is convenient to commence by considering the position on the basis that the trial judge was correct in rejecting the evidence of Blashki and Fettes. That left his Honour with no expert opinion on the pleaded issue upon which the case on damages (on each basis of claim) was conducted, which was whether there was any, and if so what, difference between the agreed price and the fair value of Insulform or, more accurately, its business at the date of completion. Of course the absence of the expert opinions did not preclude the judge from otherwise arriving at his own conclusion upon the issue, having regard to the case pleaded and conducted, relevant principle and the evidence.
137 The first question is, upon what basis in principle did the trial judge determine damages?
138 It is apparent from the reasons that his Honour acted on two distinct and conflicting bases.
139 The first, which produced the figure of $2,400,000 as the reduction in value of the business, was an attempt to value the business for the purpose of determining damages for breach of warranty or loss under the Trade Practices and Fair Trading Acts. It seems apparent that the trial judge considered that he was assessing the purchaser's loss or damage on the capitalisation of future maintainable earnings basis. That is a conventional basis, in a case such as the present, on which to assess damages and is the basis on which the purchaser sought damages.
140 The second, which produced the discount of 10%, was made on the basis that damages were being awarded for loss of a chance or opportunity on contractual breach, and the amount thus derived was found as appropriate for damages under the Trade Practices and Fair Trading Acts. The foundation for this approach was the finding of the principal representation and what it represented. Various passages in the reasons make this clear. They commence with the finding that the representation as to the cost of materials ratio of 58% conveyed a high probability that it would be achieved, in the order of a 90% chance of success and 10% of possible failure. Then there are the subsequent passages in the reasons where reference is made to the award of damages for breach of contract causing loss of a chance or opportunity. They are immediately followed by the assessment of damages for breach of warranty, and the acceptance of the sum thus produced as the appropriate damages under the legislation.
141 Counsel for the respondents conceded, correctly in our view, that the predictive finding of 'a high probability' in the order of a 90/10% chance of success was not a relevant consideration in the determination of the breach of warranty or the Trade Practices and Fair Trading Acts case. It could, he stated, have been 'perhaps necessary if there was a claim for damages for loss of a chance, to identify it in those terms'. But that was not this case. Counsel submitted that the finding was 'no more than his Honour's characterisation of the effect of what the representation conveyed'. We consider, however, that the finding cannot be explained in this way. The fact is that the trial judge discounted the damages by 10%, hence making apparent the critical nature of the finding and disclosing its purpose.
142 Further, the fact is that the purchaser did acquire that which it contracted to purchase and obtained benefit from it although (on its case) not to the extent it expected; hence the present was not a case of a lost chance or opportunity. In determining damages on that basis the trial judge misdirected himself and, moreover, proceeded contrary to the case as pleaded and conducted.
143 It is thus apparent that the trial judge approached the assessment on a sort of two pronged basis, and that the principles concerned with the award of damages for loss of a chance or opportunity shaped the judgment. In other words, the loss of chance element and the 10% discount, cannot simply be ignored and set aside, leaving what remains.
144 Of course a primary point made by the appellants was that the rejection of Blashki's evidence should have led to the failure of the claim, on the basis that without it the claim for damages lacked an evidentiary foundation. While the rejection left the judge without the advantage of Blashki's opinion, it was open to him to form his own view on damages on the basis of the evidence consistently with principle and in the light of the case as pleaded and conducted.
145 The trial judge said that he accepted the evidence of Fettes that had the principal representation been true, the price paid by the purchaser represented the fair value of the Insulform business. The appellants complain that Fettes did not say what the judge stated. But, even if there were a basis for the finding, what was the point of the evidence, and what role, if any, did it play in the ultimate conclusion? Counsel for the appellants speculated that the judge might have considered the evidence provided an evidentiary foundation for the purpose of his consideration of what the fair value was if the cost of materials ratio was 58%, bearing in mind his rejection of the experts' opinions. The evidence appeared to be a building block for the judge's own methodology. We agree with the appellants as to the purpose and effect of the acceptance of the stated evidence of Fettes. It was, we consider, a foundation for the way in which the trial judge used the material cost ratio of 58% for the purpose of assessing the purchaser's loss and damage.
146 The trial judge said that he assessed the damages arising from the breach of warranty by reference to the probabilities of what would have been the position had the principal representation been true. He stated that his assessment resulted from four findings. As to these findings we note the following:
(a) the first finding, that a 1% increase in the cost of materials would reduce gross (and net) profit by about $200,000, related to the business as it was conducted at the date of completion. It was a static concept, in contrast to the predictive nature of the principal representation. As a matter of logic it would not necessarily be the case that a 1% increase in the cost of materials would ipso facto reduce profit by $200,000.
(b) The second finding, that the appropriate multiplier was 3, was adopted for the purpose of capitalising future maintainable earnings. This was the pleaded basis of valuation, and the basis addressed by Blashki and Fettes. But that was not the methodology his Honour applied; rather, the methodology was his own.
(c) The third finding was that in fact the cost of materials ratio at completion was 62%.
(d) The fourth finding was that the principal representation amounted to a promise that there was a high probability that the 58% material cost ratio would be achieved, to the extent of a 90/10% chance of success. This was the basis of the 10% reduction.
147 The trial judge then proceeded to assess the purchaser's loss arising from breach of the contractual warranty. Applying 'the methodology used by Blashki and Fettes in answering the Judge's question [and ...] the parameters' he had found, he calculated the loss by taking the following steps. The first was that a 1% increase in the cost of materials to sales ratio represented an increase in annual costs of $200,000. The second was that the difference between the cost of materials to sales ratio of 58% and 62% was 4%. The third was that a 4% increase reduced the value of the Insulform business by $200,000 x 4, applying the 4% difference in the cost of materials ratio x 3, with equalled $2,400,000. The fourth was that a deduction of 10% was made to reflect the warranty as the trial judge had found it, which carried with it a 10% risk that the cost of materials to sales ratio would not be achieved. His Honour deducted $240,000 from $2,400,000, producing a loss of $2,160,000.
148 Certain things are important to note about the Judge's Question and the evidence in response. First, the question did not seek to ascertain the value of the business on the same basis as the experts had done, by ascertaining and capitalising future maintainable earnings.
149 Secondly, the question was based on three assumed factual premises, namely:
(a) that the purchase price represented the fair market value of the company,
(b) that this value was based upon the 58% cost of materials ratio, and
(c) that each 1% of the cost of materials ratio represented approximately $200,000 of gross profit per annum.
Upon these assumptions Blashki and Fettes were asked what the fair market value would have been had the cost of materials ratio been 60% or 60.9%. The trial judge concluded that in fact at the date of completion the cost of materials ratio was 62%.
150 The assumed fact (a) is critical to understanding the question. It assumed that the purchase price (including stock and other adjustments) represented the fair value of the company (or business) on a cost of material to sales ratio of 58%. But, with respect, that assumed the answer to the question with which the case was concerned, and left the experts to seek an answer by reasoning from the assumed basis. The respondents' case was that the purchase price did not represent the fair value of the business and they sought to establish what that value was. Once ascertained, it was to be compared to the purchase price. And it was to be ascertained on the usual basis of ascertaining and then capitalising future maintainable earnings.
151 In his answer to the Judge's Question Blashki calculated a multiplier of 4.4 by reasoning backwards from the purchase price and dividing it by the predicted earnings. On the other hand, Fettes chose an earnings multiple of 3 which, on the basis that the purchase price represented the fair value, gave a future maintainable earnings figure of $1.833M. Blashki and Fettes applied their respective multiplier to the increase in the cost of material ratio.
152 It is thus seen that when the trial judge said that he applied the methodology used by Blashki and Fettes in answering the Judge's Question, he was referring to calculations they made in response to the question with the assumptions mentioned.
153 We can deal shortly with the respondents' attack on the selection of a multiplier of 3. They submitted that the trial judge should have selected the multiplier of 4.4 which Blashki referred to in dealing with the Judge's Question. In our view, the decision to adopt a multiplier of 3 was open in the circumstances and is not shown to have been affected by any error or omission to take any relevant consideration into account. In this case, and generally, if a multiplier has to be selected, the task is one for the judge to determine in the light of all the relevant circumstances.
154 On the matter of principle and method, we have already pointed out that the assessed loss of $2,160,000 is the product of the application of two distinct principles which cannot be applied together. And, as we have noted, the respondents conceded error in the trial judge treating, insofar as he did, the task as assessing damages for the loss of a chance or opportunity. As we have said, this error is seen to affect the finding of the principal representation.
155 This error is compounded by a fundamental error in the third step that produced the figure of $2,400,000. The error is this. Blashki and Fettes had essayed upon the task of determining future maintainable earnings in their attempt to value the business on the pleaded and conventional basis, but their evidence was rejected. Rather than seek a figure on that method his Honour turned the exercise on its head by employing an assumption that the purchase price represented fair value. He then used the 1% finding to produce $800,000 which he regarded as future maintainable earnings, and applied the multiplier of 3 to $800,000 to produce the figure of $2,400,000. It is apparent that the trial judge considered that he was capitalising a sum which represented future maintainable earnings. But $800,000 did not represent a calculation of future maintainable earnings. It was no more than the dollar amount representing the difference between cost of materials to sales ratios of 58% and 62%. And while the figures based on the cost of materials to sales ratios[11] would be relevant to consider when calculating future maintainable earnings, the trial judge did not demonstrate how it was that the figure of $800,000 could be taken to be future maintainable earnings. Rather, he assumed that the $800,000 figure was future maintainable earnings. As we have pointed out the figures derived from the cost of materials to sales ratios were static, whereas future maintainable earnings are inherently dynamic, which tells against the correctness of the trial judge's assumption that the $800,000 figure was equivalent to future maintainable earnings.
156 In our view, this was not an appropriate basis on which to award damages. It was not a satisfactory substitute for the conventional method. It produced a figure, based on an assumption the correctness of which - whether the purchase price did represent fair value - was the fundamental issue for determination.
157 Regarding the matter overall, in the light of the above reasons we consider that the assessment is so affected by error of principle and method that it should be set aside.
158 It remains to mention some matters that we have deferred to this point.
159 The respondents sought to save the assessment. They submitted that, while the assessment was the product of the trial judge's own approach, it was a method by which the purchaser's loss could appropriately be measured. They emphasised that the loss flowed from the false representation of the 58% material cost ratio being applicable at completion. They submitted that by applying the multiplier the trial judge had arrived at a figure which represented both expectation loss and reliance loss. But the fact is that the trial judge treated the $800,000 figure as though it were a calculation of future maintainable earnings and capitalised it as though he were valuing the business on the basis of a capitalisation of future maintainable earnings. The assessment was flawed as $800,000 was not a calculation of future maintainable earnings.
160 For their part, the appellants submitted, and the respondents denied, that in assessing loss the trial judge should have had regard to sales and profit in the following year. He regarded prediction on the one hand but ignored what happened on the other hand. The appellants submitted that the allegedly forecast 58% cost of materials figure assumed constant sales of $20M and hence equated to a gross profit of $8M. The actual sales in the 2003 financial year were $22,956,215; applying a cost of materials ratio of 62% resulted in a gross profit of $8.7M which exceeded that which underpinned the trial judge's calculation. These figures are correct, as we understand it. The respondents' contention is that the subsequent performance was irrelevant as the calculation was one of over payment at the date of sale. That is to put it simply but sufficiently.
161 In our view it was open and would have been appropriate for the trial judge to have regard to the post-sale performance in determining damages, at least in aid of determining whether loss had actually been suffered, and in calculating future maintainable earnings. As to the propriety of having regard to subsequent events, and also as to how damages are assessed according to the particular circumstances, see HTW Valuers (Central Qld) Pty Ltd v Aston Land Pty Ltd[12]. However, in view of our prior discussion and the fact that the appeal is to be allowed it is not necessary to say more on this point.
162 Nor, in our view, is it necessary to fully explore the question whether the evidence of Blashki and Fettes was correctly rejected. We merely note that in our view it was open to the trial judge, for the reasons he stated, to reject Blashki's evidence. In relation to Fettes, and as articulated in the appellants' written submissions, the trial judge unfortunately omitted to refer to two further bases on which he (Fettes) supported his opinion. In consequence the consideration of his evidence was incomplete. In the circumstances, however, it is unnecessary to deal further with these aspects.
163 Our conclusion on this aspect can be expressed shortly. The trial judge rejected the claim after closely considering the relevant facts. He concluded that the parties had dealt with the matter by agreement. In our view, having considered the reasons, the evidence and all that counsel said, the conclusion was open and, we consider, correct for the reasons he gave.
164 For the foregoing reasons the appeal should be allowed, paragraphs 1 to 6 of the orders below set aside, and an order made that the proceeding be dismissed. The cross-appeal should be dismissed.
[1] [2004] HCA 60; (2004) 218 CLR 592, 625.
[2] [2009] HCA 25, [102], (Gummow, Hayne, Heydon and Kiefel JJ).
[5] Devries v Australian National Railways Commission (1993) 177 CLR 472; Fox v Percy [2003] HCA 22; (2003) 214 CLR 118.
[6] See Tobias v Allen (No 2) [1957] VicRp 32; [1957] VR 221, 223 (Sholl J).
[7] [2004] HCA 54; (2004) 217 CLR 640, 656-658.
[8] Cheshire and Fifoot's Law of Contract, 9th Australian edition (2008) 1091 para [23.14].
[10] [1994] HCA 4; (1992) 179 CLR 332, 349 (Mason CJ, Dawson, Toohey and Gaudron JJ) and 359 (Brennan J).
[11] Which form the basis of the $800,000 figure.
Bresam Investments Pty Ltd & Ors
Shmee Pty Ltd & Anor [2009] VSCA 315
(1966) 114 CLR 185
(2004) 218 CLR 592
(1993) 177 CLR 472
(2003) 214 CLR 118
(2004) 217 CLR 640
(1991) 174 CLR 64
(1992) 179 CLR 332