[3] The fact that there were occurring regular impediments to securing home owner's warranty insurance, without which at least a number of contracts could not proceed lawfully, and otherwise promptly and efficiently.
77 The Commissioner contends that all three of these factors were inter-related, and that they were interacting in fact, and to the knowledge of the second and third defendants, to such an extent as to entail the "systemic breaches" upon which the Commissioner bases the section 53 part of his case.
78 In considering each of the foregoing factors, as I propose now to do, I bear in mind what I understand by the expression "systemic breach": that is to say, that the contravention of section 53 permeated the whole conduct of the company's business. It was submitted more than once during oral submissions by learned counsel for the Commissioner, and I accept, that were the Commissioner to establish even a single breach of a kind particularised in his case, he would be entitled to approach the Court for relief. It would not follow, of course, that the Commissioner could fairly expect, the most exceptional case apart, that he would be granted, as a remedy for a single breach of the Fair Trading Act, the sort of draconian injunctions that he is now actually pressing to have. It is, I imagine, a recognition of that proposition which explains the Commissioner's present emphasis upon the allegedly "systemic" breach of section 53.
79 Before looking at the allegedly systemic features nominated by the Commissioner, it is time to take note of the fact that neither the second nor the third defendant gave evidence, either oral or by affidavit. Insofar as adverse inferences are available to be drawn against them, or either of them, upon the basis of the evidence in hand, the question whether any such available inference should be drawn in fact, will have to be answered in the absence of evidence from either of those defendants.
80 It is convenient to begin the present canvass by reference to a document issued on 14 October 2002 on the letterhead of Prouds Home Improvements and over the signature of the second defendant. The document is a memo addressed to "All Shelter Personnel". It reads:
"It has come to my notice that undue delays are occurring in every aspect of the operation.
Please be advised that under no circumstances should a job take any longer than 14 days from the date of sale.
Time frames are as follows:
1. Salesmen to have job into the office within 48 hours.
2. Check measure to do the check measuring within 72 hours.
3. Costing and commissions within 48 hours.
4. Plans to be drawn and into council within 1 week.
It is hard enough to get the business let allow losing it because people are not doing their job on time. We are receiving numerous complaints due to delays.
Get it done and get it done on time. Maximum time of 14 days from sale date to into council."
81 That memorandum is part of a collection of company documents which are to be found at tab 8 of Exhibit DRR-A1. The documents are, broadly speaking, copies of minutes kept of management meetings held, and copies of management memoranda issued, between 8 January 2002 and 8 July 2004. A fair reading of this documentation suggests to me that throughout the period the operations of the company were constantly encountering problems of delay, and problems about the efficient supply of needed building materials and labour. It is fair to add that the documentation records ongoing attempts to grapple effectively with the problems; but the existence of the problems as constantly recurring operational headaches is made crystal clear. Both the second and third defendants are throughout active in connection with the attempted rectification of the various operational problems.
82 There is, next, a body of evidence, in part oral and in part documentary, coming from three men who had particular connections of various kinds with the operations of the company: Messrs. Loveday, Wicks and Martinez.
83 Mr. Loveday first had contact with the company and with the second and third defendants through a certain business mentoring scheme. He became gradually more and more involved in attempting to advise the company and the second and third defendants about what practical problems they were facing; and about what, in his view, needed to be done in order to deal properly with those problems.
84 In paragraph 15 of an affidavit sworn on 1 November 2004 Mr. Loveday says, under a heading: "Customer complaints about delay":
"Almost all the customer complaints were complaints about delays. There were very few complaints about the quality of the building work. It became apparent to me that there was no consolidated information readily available for the management of customers' situations (in particular delays), even though individual records were held on the computer and in customer folders."
85 Mr. Loveday goes on to explain particular recommendations made thereupon by him. His analysis, (see paragraph 17 of his affidavit), was that "as at October 2003, a huge number of jobs involved unacceptable delay". He was cross-examined about this statement; and he conceded that he could not quantify the description "huge"; but he said that the total number of jobs in the company's system was about 500; and that of those "quite a number were unacceptable delay", but, again, with no quantification of "quite a number". At paragraphs 18 through 20 of his affidavit, and under the heading: "Short deliveries", Mr. Loveday deposes:
"18. The term 'short deliveries' refers to the delivery to a customer's premises of insufficient materials. Most materials were supplied by the materials suppliers to Prouds and passed through Prouds' premises at Wetherill Park. Some materials were delivered directly to the customer by the materials supplier. The standard customer contract contained a requirement for a payment at the time materials were delivered to the customer's premises. Thereafter, a fitter (a tradesman) would attend to begin work, and would at that time collect a further payment. If the materials delivered were not complete the building work would often (often could not) begin, but the fitter would nonetheless take the further payment.
19. I therefore established - that is, after appropriate planning and consultation, I documented and secured management approval for - a process designed to ensure that there would not be further short deliveries. The essential point of that process was that deliveries had to be checked for completeness before being despatched and no despatch would proceed unless it was complete or, in exceptional cases, Michael had approved a documented decision to despatch an incomplete delivery.
20. Unfortunately, at subsequent management meetings those responsible for the building work (e.g. Mark Waters and Rod Rogers) continued repeatedly to raise the issue that short deliveries were causing problems. I repeatedly asked why deliveries were being despatched contrary to the process I had established. Repeatedly it was said (typically, e.g. by Mark Waters) that the issue would be examined, but the problem was never fixed."
86 Later, under a heading "Prouds' financial difficulties, 2003-2004", Mr. Loveday deposes:
"25. In late 2003 I completed an analysis that showed that whilst sales were increasing dramatically the business's revenue was increasing only marginally. Prouds were getting the deposit due at time of contract and at time of check measure, but not getting the subsequent payments due under each contract. The reasons Prouds were not getting the subsequent payments included Prouds' inability to obtain home owners' warranty insurance (in part because they did not have the funds to pay the premiums), councils' refusal to approve unacceptable designs, the check measurers' inability to design more difficult jobs (for more difficult jobs the check measurers would leave to someone else the design and measuring work which they would ordinarily do, but the work would not get done by anyone) and Prouds' inability to secure delivery of materials (in part because of their inability to pay for them)."
87 Mr. Loveday presented as a man who was confident in his business judgments based upon his own business qualifications and experience. The picture that emerges from the whole of the evidence in the case is one of the second and third defendants, but especially the second defendant, as businessmen with no less confidence in their very different approaches to running what was, essentially, a family business. It cannot have been always a comfortable relationship; and it is easy to criticise Mr. Loveday as now expressing views that are coloured by the fact that so many of his recommendations were either rejected, or were accepted but never implemented. Having seen and heard Mr. Loveday, and especially having seen and heard him carefully and closely cross-examined, I accept the general thrust of his evidence.
88 Mr. Wicks became associated with the company's business as part of an attempted management shake-up resulting from Mr. Loveday's activities. He describes his retainer as having been, at least initially, "to assist with the Computer system, information management, and to manage complicated jobs and general assistance to customers if they contacted".
89 In a statement given to investigators from the Office of Fair Trading, Mr. Wicks makes these observations:
"12. In my time with Prouds it became obvious to me, based on my experience in the building industry, that jobs were often sold for too low a price. That is the job was done for a price, which meant the company could not possibly make a profit. The facts were a lot of prices were looked at and it was obvious we could not do the jobs for the quoted price. It was considered or suggested both by me and others including Michael Pobjie that we should give the customer back their money but that simply didn't happen because in most cases the money was simply not available so we were forced to battle on. Tom was well aware of this inability to pay suppliers, I raised many times, but Tom simply would not discuss that . I probably should say here that I never thought the business would fail, they were very good at generating leads, they simply needed a strategy to turn it around which I could have put in place had I been allowed to do it. I believe the business could have been turned around but it would have needed time and for Tom to put in some extra funds.
14. ………. Had I had the opportunity to put in place the appropriate strategies this may never have happened. Even when I pointed out the unprofitable jobs which would not make money they still continued to take on new work at the same selling prices.
15. One of the other reasons this happened was Prouds couldn't start jobs was because they couldn't get the plans out of Council because they couldn't get Home Owner's Warranty Insurance. It was just a vicious circle."
90 Mr. Wicks, in his cross-examination, expanded as follows on some of those themes:
"Q. Did the relative location of those offices give you the opportunity in a general way to observe what was going on in the other two offices?
A. Yes, it did and I was involved in quite a lot of the discussions as to what's happening, what's good, what's bad, what needs to be changed et cetera. So I was involved in the discussions directly and I was also involved in the discussions because I was sitting right beside the offices.
Q. Were those discussions, discussions in addition to, and distinct from, the meetings that were happening on a weekly basis that you mentioned?
A. I would say discussions to do with problems and issues and things that had to happen, took place two or three times every day. Not in a formal meeting situation though.
Q. What were some of the main topics of those discussions?
A. Main topics were initially number 1 was responding to customer complaints and customers who were taking their complaints further, because they figured they weren't having a response. Then the discussions were always: well, we are resolving those complaints but how can we resolve them better and then the discussion moved to what things do we have to do to resolve the issue, as opposed to just ringing the customer back. Initially it was calling the customer back and keeping them involved. Then after that, it was more, having rung the customer, what can we do to make the customer happy? So the discussions later were to do with that.
Q. What were the types of things that needed to be done to make the customer happy?
A. Just slow actions on jobs; jobs that maybe weren't quite complete; people who were waiting for materials, people who were waiting just a long time to have their job done.
Q. Was that, what you just said, a description of the problems that were being faced?
A. Mm.
Q. The jobs were being too slow, the delivery of materials wasn't done properly and the other things you mentioned were problems?
A. The problems that we identified as being the things that had to be fixed.
Q. What were the solutions to those problems that were being advanced in the early period of your time at Prouds?
A. The solution, we were trying to keep more stock, so the stock was available to send to jobs when the deliveries were ready. We tried to have fitters trained more regularly so that the fitters weren't having problems on jobs, et cetera. One of the big ones was deliveries being short delivered to jobs, so there was a pretty big exercise in trying to make sure that the materials that were delivered to jobs were never delivered, unless there was - unless the complete order was there. I guess attending to people's work earlier. We had situations where there were jobs that were not terribly desirable to fitters, so they would choose the desirable jobs and the undesirable job would sit there for another couple of months and those customers became more aggravated. A lot to do with timing and a lot to do with the provision of materials to the site.
Q. Taking some of those issues one at a time, was the proposed solution for short delivery of materials, or inadequate delivery of materials, carried out?
A. Not really. The stock level didn't change. We had - we went through an exercise of trying to eliminate stock that was in the factory that was redundant, would never be used, but the levels of stock didn't really increase to the point where the complete delivery could be made to a job. So the issue of fitters being short of materials was never really resolved.
Q. Did you ascertain why that problem was never resolved?
A. In keeping stock, the problem was the suppliers, we could never get the suppliers to commit to provide enough product to put it in the factory. The suppliers were generally saying to us "Well, we can't supply at the moment, we need the previous cheque and then we will supply the next job" et cetera. So there really wasn't enough capacity in the place to be able to order stock to keep it in the factory and have, maybe you know a month or two worth of stock.
Q. What did you mean by your reference to the "previous cheque"?
A. If a supplier was supplying gutters, for example, and we had orders in to the supplier for six more job lots of gutter, they were saying "Well, give us, pay us four our previous lot or previous invoice" or whatever and then we will supply it and that was creating problems. We identified that as being some issues early in the piece, I guess, where we couldn't simply order and have product delivered and be confident that the supplier was going to supply, because in a lot of cases we were on hold.
Q. Apart from the failure to pay previous bills to suppliers, did you identify any other reasons why suppliers were not delivering the products or supplying products to Prouds?
A. No, I don't believe.
Q. Apart from the failure of suppliers to deliver to Prouds, did you identify any other reason why materials weren't being delivered to the customers?
A. Some problems occurred with ordering materials. Some items weren't ordered correctly. Some items were non-standard items that were complicated and had to come from suppliers who weren't known to the company. I suppose there was probably a range of those things. Not being able to get stock, there were mistakes sometimes made where white posts were ordered and cream posts were required. Those problems were - they were problems but they weren't many of them, there weren't many of them.
Q. Another problem was to get the jobs moving. I think you indicated that some of the jobs were being done too slowly?
A. (No verbal reply)
Q. What solution was put in place, if any, to deal with that?
A. Increasing the number of fitters; that there were a couple of supervisors were trying their best to increase the number of fitters. The problem associated with that was that finding fitters who were experienced who you could leave and manage the work and get the job done. They just didn't exist. So there was quite a lot of work done to increase the number of fitters who weren't trained but then train them. Now, the problem then is I guess the training the fitters on-site meant that the supervisor had to be there with them so that took them off the availability if you like of being able to look after other jobs."
91 It is true that Mr. Wicks, when cross-examined, agreed, in my paraphrase, that it was not necessarily the fault of the company that there were serious delays in obtaining insurance cover without which particular contract work could not lawfully be carried out; and that, again in my paraphrase, there were practical business considerations needing to be balanced in connection with the supplies of materials: e.g. the need not to hold for lengthy periods store-room stock which was effectively costing money while it lay idle. I do not see, however, that those qualifications weaken the essential thrust of Mr. Wicks' evidence, that there were in fact problems of delay, of supply, and of essential insurance cover; that the problems were known to exist and to be causing project delays which were accepted as requiring correction; that the company nevertheless went on undertaking large numbers of new jobs, and accepting advance payments in connection with them.
92 Mr. Martinez is a draftsman who was employed for a time as such by the company. Mr. Martinez said in cross-examination, and concerning the problems of delay:
"Q. In terms of the ordinary cycle of work through Prouds, it would be right that you would expect a job to be within Prouds for at least up to three or four months?
A. Yeah, that sounds right, yes.
Q. In the cycle through the initial processing period, council application and approval, any re-submission or clearing up difficulties with council and then getting the work done could take between three and four months?
A. That's right.
Q. So that I take it, it would simply be an ordinary circumstance of the business that the work on hand at any given point in time would be in the order of about 400 contracts?
A. Yes, that's right, yeah.
Q. And that's leaving aside of course the problem that emerged in relation to the large scale contracts where insurance was required where the difficulty in getting insurance certificates emerged?
A. Yeah, that was a big problem for us, with the council as well. They always asked for the insurance before they could approve the job."
"Q. When you arrived full-time at the office in January 2004 there was a hold up for a body of contracts in relation to insurance at that time, is that your memory?
A. I don't remember to be honest.
Q. In any event, after you'd been there a relatively short time I take it, it became apparent that there was a problem with getting certificates issued?
A. That's right.
Q. And that problem persisted then through until the administrator was appointed?
A. That's right, all the way through.
Q. Is it right that all that happened in your observation was either customers cancelled and the contracts became irrelevant for one group of customers where home warranty insurance was a problem?
A. Yeah, a lot of them did try to cancel because it just took too long.
Q. Another group persisted and policy certificates did issue in clumps from time to time?
A. I never saw any insurance certificate.
Q. I see. Did you see some of the files that had been held up waiting for insurance certificates then start to move on through the system? Was that something you observed?
A. I did see a few jobs built, but I never saw an insurance certificate."
93 A consideration of the whole of the foregoing evidence leaves me comfortably persuaded that the company, under the effective direction of the second and third defendants, did contravene on a number of occasions the prohibition established by section 53(b) of the Fair Trading Act. It is not to that point to object that it might be thought not to have been entirely the fault of the second and third defendants that problems of delay, of supply and of insurance kept cropping up. The fact is that those related problems did keep cropping up; and they entailed that there were reasonable grounds for believing that the company, by continuing to accept new jobs and new advance payments for those jobs, would be unable to deliver, whether within an agreed time or within a reasonable time, some at least of the works and services that it was thus contracting to provide.
94 That the second and third defendants are involved in any such section 53 contravention seems to me to be plainly established upon the basis provided by section 62(c) of the Fair Trading Act. The defendants, but especially the second defendant, were in every practical sense the hands-on managers of the affairs of the company's relevant business. They cannot be heard to say, on any sensible appraisal of the evidence, that they did not know, or cannot be expected reasonably to have known, of the problems which I have been discussing; or of the likely practical consequences of those problems in connection with new business commitments undertaken while those problems persisted.
95 That there were contraventions of section 53 as alleged by the Commissioner is, in my opinion, established. That the second and third defendants are answerable for them is also, in my opinion, established. How serious the contraventions should be held to have been is not so readily determined.
96 It can be found fairly on the probabilities that there was a number of such contraventions. Exactly how many, it is impossible to say on the evidence as it stands. It is clear that in many cases the company did fulfil its contractual obligations; but it is, again, impossible to say in any precise way what percentage of its jobs in hand at any given time were jobs involving a contravention of section 53.
97 The evidence does not establish, and the plaintiff does not in any event allege, fraud. The real kernel of any section 53 contravention was obstinacy, especially on the part of the second defendant. A period of patient reconstruction could have, and probably would have, overcome the problems which were causing persistent delays in carrying out contracted works, and in providing contracted services. In July 2004, but far too late in the day, the second defendant himself actually suggested how things might be properly rearranged: see at tab 32, Exhibit DRR 1 - Vol 1.
98 How all of those considerations should be factored into appropriate orders must abide the resolution of the remaining questions for present decision.