Crystal Auburn Pty Ltd v I L Wollerman Pty Ltd

"(a) that attendances to the Business were as follows:

(i) in the financial year ending 30 June 1994 - 93,060; (ii) in the financial year ending 30 June 1995 - 96,100; (iii) in the financial year ending 30 June 1996 - 71,050; (iv) in the financial year ending 30 June 1997 - 58,300.

(b) that attendance figures to the Business were as follows:

(i) in the period 26 December 1993 to 30 June 1994 - 65,417; (ii) in the period 26 December 1994 to 30 June 1995 - 63,472; (iii) in the period 26 December 1995 to 30 June 1996 - 53,455; (iv) in the period 26 December 1996 to 30 June 1997 - 44,677.

(c) that the current equation to arrive at a rule of thumb profit consists of a per head revenue of $11.20 ("the per head revenue");

(d) that the Gross Income for the Business is derived by multiplying the per head revenue by the attendances;

(e) that the Gross Income from operating the Business (derived by multiplying the per head revenue by the attendances) for the financial year:

(i) 1994 was $1,042,272; (ii) 1995 was $1,076,320; (iii) 1996 was $795,760; (iv) 1997 was $652,960

(hereinafter collectively referred to as "the Business Profile Representations").

In the Particulars of the Business Profile Representations, representations (b) and (c) are said to be contained in a document called "Business Profile". Representation (a) is said to be implicit in the figures and statements in the Business Profile. Representation (d) is said to be implicit in a statement in the Business Profile ‑ "Based on 85,000 attendances @ $11.20 = $952,000". Representation (e) is said to be implicit in representations (a) and (d). The other representation is alleged to have been made by Mr Laurie on behalf of Valespring and Macleay when he told Mr Siberas and Mr Davies that the business would attract approximately 50,000 patrons in the 1998 financial year. This representation is described in the pleading as "the Oral Representation".

4 The applicants claim that the Business Profile Representations (a), (b) and (e) were false in that

· the attendance figure for the financial year ending 30 June 1994 was 26,232 (calculated by dividing Valespring's 1994 Declared Gross Income by $11.20);

· the attendance figure for the financial year ending 30 June 1995 was 25,946 (calculated by dividing Valespring's 1995 Declared Gross Income by $11.20);

· the attendance figure for the financial year ending 30 June 1996 was 21,398 (calculated by dividing Valespring's 1996 Declared Gross Income by $11.20);

· the attendance figure for the financial year ending 30 June 1997 was 19,600 (calculated by dividing the 1997 Declared Gross Income by $11.20).

The falsity of representation (e) is said to be derived from a comparison between Valespring's Declared Gross Income and the Represented Gross Income and the allegation referred to in par 15 (Valespring's public officer's declaration that the particulars in its returns are true and correct).

[The pleading in fact omits the material in the fourth dot point. The context and a comparison with earlier versions shows this to be an oversight. The attendance figure in the first dot point should be 26,169.]

5 The applicants allege that Valespring's Declared Gross Income for the financial years 1994 to 1997 was as follows:

1994 $293,089 1995 $290,602 1996 $239,659 1997 $219,512.

It is said that contrary to the Oral Representation the Business did not attract 50,000 patrons in the 1998 financial year. It is claimed that Mr Laurie had no reasonable grounds for making the Oral Representation.

FINDINGS Finding (a) 6 Mr Siberas saw from an advertisement in The Age newspaper inserted by Wollerman that the business was for sale. He contacted Mr Marlow of Wollerman who arranged for a meeting at the park on 16 October 1997. Messrs Siberas, Davies, Marlow and Laurie were present. Mr Laurie took the others on a tour of the park. Mr Siberas asked to see "the financials" of the business. Mr Laurie said they were not available, but that Mr Marlow had a Business Profile that disclosed the financial information. Mr Marlow gave Mr Siberas a copy. Finding (b) 7 The Business Profile describes Wobbies World as a well‑known theme park set in approximately seven acres of land, featuring a number of passive and mechanical attractions including a monorail, miniature trams and fire trucks, minigolf and trampolines. The park's target market is said to consist of children up to 14 years of age, though more adults than children in fact patronise it. Under the heading "Trading Profile" appear these sentences:

"A combination of paid entry including unlimited use of some attractions and some pay rides has always been maintained.

Adults $7.90 (15 years and over) Children $5.90 (4 to 14 years) Toddlers $2.00 (2 and 3 years)

Tokens are used for the pay rides, and each token currently has a face value of 70˘.

Rides have various requirements as to the number of tokens. The current schedule of charges produces an average sale per visitor of $11.20."

Under the heading "Investment Return" appears the following information:

"According to the Budget Profit and Loss Statement supplied by the vendor, the profitability of the business would be:

Net as per Budget Report $676,420.00 Less Rent $150,000.00 Approximate Net Profit per annum before owner's personal expenses $526,420.00" ========

As originally printed the asking price for the business was $980,000. In the copy given to Mr Siberas that figure has been crossed out and replaced by "mid $500,000's".

Finding (c) 8 Forming part of the Business Profile, but in Valespring's typeface, are two additional pages. The first commences with the statement:

"Net returns The current equation to arrive at a rule of thumb profit consists of a per head revenue of $11.20."

It is then stated that wages for between 10 and 20 persons per 6 hour day of opening can be calculated at a maximum of $60 per day per employee. There is set out a table of attendance including average staff requirements and gross revenue. To take an example, the table shows an attendance of 150 persons at $11.20 amounting to $1680, 7 staff at a cost of $420, and a resulting gross profit of $1260. Then appears the following information:

Advertising and Promotion $120,000 Insurance 19,000 Light and Power 7,000 Rates and Taxes 18,000 Repairs and Maintenance 11,000 Rubbish Removal 6,000 Security Cost 4,000 Superannuation 400 Telephone 1,900 Wages 86,000 Work Cover 2,280 $275,580 Based on 85,000 attendance @ $11.20 = $952,000 Less expenses @ 275,580

Does not include Management wages, rental or interest or Accounting charges."

It is then pointed out that discounts for group bookings of between $1.00 and $2.00 per person, depending on the group size, should be factored in.

Finding (d) 9 The second additional page contains a statement of expenses and attendances. It is in part as follows: 1997 1996 1995 1994 "Expenses $ $ $ $ Advertising and Promotion 58,119 68,391 82,329 80,317 Insurance 16,820 17,532 17,532 16,982 Light and Power 5,016 5,339 5,718 6,262 Postage 230 110 - 220 Rates and Taxes 7,978 1,823 3,250 2,772 Repairs and maintenance 2,571 7,688 9,704 6,759 Rubbish Removal 1,190 917 1,239 1,238 Security Costs 3,680 3,880 3,749 3,581 Superannuation 146 256 321 1,218 Telephone 1,562 1,631 1,794 1,739 Wages 46,392 58,030 64,145 76,534 Workcare 747 1,861 2,507 2,307 Total Expenses 144,451 167,458 192,288 199,929 Attendances 58,300 71,050 96,100 93,060 Opening Days 115 136 155 151"

Finding (e) 10 The schedule of charges on which the $11.20 average sale per visitor was based had not changed since at least November 1995. Finding (f) 11 Either at the 16 October meeting or a few days later Mr Marlow gave Mr Siberas attendance figures for the periods 26 December 1993 to 30 June 1994, 26 December 1994 to 30 June 1995, 26 December 1995 to 30 June 1996, and 26 December 1996 to 30 June 1997. These showed attendances for each day on which the park was open. The totals for each period were, respectively, 65,417, 63,472, 53,455 and 44,677. The attendance sheet for the 1996/1997 period contained the note: "All advertising ceased, second week in January 1997". Finding (g) 12 In reliance on the information in the Business Profile and the attendance sheets, in particular the attendances for 1997 and the average sale per person of $11.20, Mr Siberas and Mr Davies decided to purchase the business for $550,000. Finding (h) 13 On or about 23 November Mr Siberas and Mr Davies met Mr Laurie at the park. They discussed the rent payable. Mr Siberas asked Mr Laurie whether he saw any problem with the business attracting 58,000 patrons in 1998. Mr Laurie said he believed there was no reason why the business would not continue the way it had. However he qualified this response by saying that the business had not been advertised since January and that a lot of hard work was involved in securing the attendances that had been achieved. He also said the business usually lost about 10% of patrons each year as children grew up and were no longer interested in the park, but a fresh crop of children came along each year which virtually made up for the loss. Finding (i) 14 In fact Valespring advertised the park throughout January to July and in September and October 1997, at a cost of at least $41,550. Finding (j) 15 On 19 December Crystal Auburn executed the agreement, the lease and other documents (including a hire purchase agreement in relation to the Wobbies World plant and equipment), and on the next day went into possession and commenced operation of the business. Between then and the end of May Crystal Auburn spent $54,970.60 on advertising the business on television, radio and the internet. Mr Siberas and Mr Davies spent a lot of time cleaning up the premises, putting up new signs and generally making the park as attractive as possible to the public. Between February and April 1998 Mr Siberas either delivered or sent by post to hotels, motels, caravan parks, scout clubs, kindergartens, primary schools, social clubs and metropolitan councils, brochures describing Wobbies World. Finding (k) 16 Despite these efforts, it became apparent by the end of February 1998 that attendance figures were nowhere near those represented by the attendance sheets. The following chart shows the attendances from late December 1997 to April 1998 compared with those shown by the attendance sheets between late December 1996 and 20 April 1997: Month Crystal's Valespring's Difference Operation Operation December 1,703 6,743 - 5,040 January 9,664 23,602 - 13,938 February 2,135 2,986 - 851 March 1,961 3,535 - 1,574 April 2,338 6,324 - 3,986 Total 17,801 43,190 25,389

That represents a drop in attendances of just under 60 per cent. Finding (l) 17 The represented average sale per visitor of $11.20 was borne out by Crystal Auburn's actual sales. Finding (m) 18 In March Crystal Auburn put the business up for sale. It was withdrawn from sale in June 1998. Crystal Auburn ceased operating the business on 2 August 1998. During the period of its operation of the business a total of 20,033 persons attended Wobbies World. Finding (n) 19 The attendance sheets and the records on which they were based are unreliable. Finding (o) 20 Valespring's income tax returns disclose the following gross income for the years 1994 to 1997:

1994 $293,089 1995 $290,601 1996 $239,659 1997 $219,512

Finding (p) 21 The income tax returns were incorrect. They did not accurately record Valespring's gross income. Some workers were paid in cash out of daily takings; payments that were not recorded in the wages book. These included four men who worked on a regular basis. Gardening and other contractors were also paid out of daily takings. Finding (q) 22 Based on the evidence of Mr and Mrs Laurie, cash takings that were not reflected in gross income for tax purposes amounted to approximately $228,400 in the year ending 30 June 1997, made up as follows:

Robert Jell (260 days x 10 hours per day x $12.00 per hour) = $31,200 Ian Rawlings (150 days x 10 hours per day x $10.00 per hour) = $15,000 George McLure (120 days x 10 hours per day x $10.00 per hour) = $12,000 Michael Robinson ( 52 days x 10 hours per day x $10.00 per hour) = $ 5,200 Gardening contractors = $ 15,000 Other expenses = $150,000

Total gross income for the 1996‑1997 year was thus approximately $447,912. This is equivalent to about 40,000 visitors.

Finding (r) 23 Represented attendance figures for the financial year ending 30 June 1997 were 62,145. This figure can be obtained from the daily attendance figures for the first halves of 1996 and 1997 and the total figure for the 1996 calendar year. Finding (s) 24 Without allowing for group discounts, total hypothesised income for the year ending 30 June 1997 would be $696,024 (62,145 attendances x $11.20). Finding (t) 25 Allowing for discounts at the lowest rate ($1.00 off the rule of thumb for groups of 30‑50 persons) for 10% of patrons, at the mid rate ($1.50 off, for groups of 50‑100) for 5% of patrons, and at the highest rate ($2.00 off, for groups of 100 or more) for 2% of patrons, hypothesised income is $682,662.80. Finding (u) 26 The "real" gross income for 1996‑1997 is approximately $234,750.80 less than it would need to be in order for the rule of thumb and the represented attendance figures to be correct. Based upon total gross income, the total attendance for 1996/1997 financial year is 22,000 less than reported. Finding (v) 27 The attendance figures for 1997 in the Business Profile and attendance sheets were false. Finding (w) 28 Had the applicants known the attendance figures were false they would not have entered into the sale of business agreement, the lease or the guarantee. Finding (x) 29 The applicants have suffered loss and damage as a result of their reliance on the information in the Business Profile and attendance sheets.

COMMENTS ON SELECTED FINDINGS Finding (e) 30 Mr Marlow was of the opinion that the schedule of charges applicable at the time of the sale had been in force for one or two years. On the other hand, in the course of cross‑examination Mr Laurie was concerned to make the point that the word "current" in the phrase "current schedule of charges" was to be understood as a reference to charges applicable in October 1997, and that the charges "would have to have been different" earlier. It was put to him that the current charges also prevailed in 1996. He said he had "no knowledge of that". When confronted with a printed brochure showing admission prices and ride token charges for Wobbies World as at 1 November 1995, he said it was not a genuine Wobbies World document, and he had never seen it before. It was not his document. It would have been very easy for someone to have inserted a false date at the foot of the document (where 1 November appeared). This was a transparent, unconvincing lie. The notion that a third party would cause to be printed a Wobbies World schedule of charges showing prices higher than those applicable as at 1 November 1995 is bizarre. I formed a poor impression of Mr Laurie as a witness. This incident, along with others, led me to conclude that he would say anything in order to establish that the park went downhill solely through the incompetence of the applicants, and that its fate had nothing to do with any fault on his part. In the absence of documentary corroboration of Mr Laurie's evidence I have generally preferred the evidence of the applicants.

Findings (f) and (i) 31 The note on the attendance sheet for the 1996/1997 period that "All advertising ceased, second week in January 1997" is in my view false. A series of payments were made by Valespring to various television stations between February and September 1997. These included four payments to ATV‑10 totalling $15,300, five payments to GTV‑9 totalling $15,250, six payments to HSV‑7 totalling $10,000 and a $1,000 payment to Ten Victoria. Advertising payments in respect of magazines and newspapers totalled $1,767.90. When Mr Laurie was confronted with a schedule of television and newspaper advertising extending up to the end of October 1997, extracted from Valespring's cashbook, his explanation was unsatisfactory. I accept that some of the advertisements, such as the two in motor magazines, had nothing to do with Wobbies World, and that some of the print advertising may have related to the lease of the restaurant that was being sold separately from Wobbies World. But the television advertisements that extended from February through July were in my view for the theme park. Mr Laurie reluctantly conceded that some of them may have related to the park, but unconvincingly insisted that advertisements displayed prior to the second week in January may have been paid for as late as September. It is difficult to see any explanation for the making of the note other than to provide an answer to any purchaser's potential complaint that attendances were not what they had been represented to be.

Finding (h) 32 The evidence of Mr Siberas, supported by Mr Davies, was that after Mr Siberas had studied the Business Profile he prepared a budget based on 50,000 attendances per year. He chose this figure because attendances had been in decline since 1994, and he thought it realistic to assume a figure lower than that attributed to 1997 (58,300). This budget showed a small profit, even allowing for the payment of wages to Mr Siberas and Mr Davies. Mr Siberas said he showed the budget to Mr Laurie at the park on or about 23 November, and asked him whether he saw any problem with the business attracting 50,000 patrons in 1998. He said Mr Laurie replied that there was no reason why the business would not continue the way it had in the past. Mr Laurie then referred to the absence of advertising since January, and said that past attendances were the result of a lot of hard work that would have to be maintained in order to keep the numbers up. He also referred to the loss of a percentage of former patrons each year as children in the target market grew up. Although I find that Mr Siberas prepared a budget based on 50,000 attendances, I am unable to accept that he prepared it in October/November. That is because it contains a monthly mortgage payment of $8,000, a figure that was not available to him until December. A letter from Mr Siberas to Mr Marlow of 21 October suggests an expectation in October/November that borrowings to fund the purchase of the business would be in the order of $3,900 per month. The evidence does not enable me to find whether the 50,000 budget was shown to Mr Laurie at some time after 23 November. Mr Siberas and Mr Davies asserted that Mr Laurie said the business usually lost about 10% of patrons each year. Mr Laurie claims he said the loss was 15%. I do not think it matters much which percentage was used, because Mr Laurie said that with advertising and hard work a new crop virtually filled the gap each year. In any event, for the reasons given, I have preferred the applicants' 10% figure.

Finding (n) 33 Mrs Laurie was responsible for the admission of patrons to the park and selling ride tokens. She manually recorded those attending in the course of a day by use of an electronic counter. She said she noted the difference between the number on the counter at the beginning and end of each day, wrote that number on a piece of paper and entered it in an orange coloured Vana exercise book she kept at home. The attendances represented in the Business Profile and the attendance sheets were derived from the entries in the exercise book for the period December 1993 to December 1997. At or about the time of the sale the exercise book was put in a suitcase and stored in a shed at the park. The suitcase and other things were removed from the shed by some person unknown. There was thus no way of verifying the attendances in the Business Profile or the attendance sheets. In the course of cross‑examination Mrs Laurie confirmed that the attendance records were "totally accurate". However, by reference to Valespring's hours and wages record book, counsel for the applicants took her to twenty or so occasions on which the park was open for which no entries appeared in the attendance sheets. Mrs Laurie agreed that there was no doubt that on these occasions patrons attended the park, and she was unable to explain why no reference to those days appeared on the sheets. Mrs Laurie agreed that the attendance sheets were unreliable, and that as a result the attendance figures in the Business Profile were incorrect. It is true that these omissions resulted in a reduction in the number of patrons reportedly visiting the park. Counsel for the respondents sought to use this to the respondents' advantage, as showing that the attendances were understated rather than overstated. But in my view the number of respects in which it has been shown that the sheets are inaccurate casts doubt on their overall reliability. This finding makes it appropriate to attempt to establish the true attendances by another route, namely that produced by the gross income returned adjusted in the manner appearing in findings (o) to (v).

Finding (q) 34 At all times the applicants' pleading has relied on Valespring's income tax returns as the central part of its case that the represented attendances were false. The applicants' witness statements were filed in September 1999. They exhibited the income tax returns. The Lauries filed their statements in response in November 1999. The statements did not deal with the income tax returns. On or about 13 June, that is to say six days before the date fixed for hearing, Mr Laurie filed a supplementary witness statement in which he asserted for the first time that large amounts of cash received in the business were not included in the gross revenue appearing in the returns. In the course of cross‑examination, Mr Laurie agreed that he had signed the declarations that the contents of the returns were true and correct, and that in fact they were not. He said he made no effort to check the veracity of the figures, though he did not sign any return "knowing absolutely that it was not true and correct". 35 Though it surfaced late in the piece, the respondents' case was that Valespring's gross income was far greater than the amounts returned. But there was no way Mr Laurie was going to assist the Court to test his claim that the attendances were not false because Valespring's true gross income accorded with those attendances. He was obstructive and unhelpful in the extreme. Despite the fact that the relevant information was within his control, he said he had no idea what the actual gross income was. For example, when asked what the gross income was for 1997, he said:

"I can't put a figure on it because the figure that was arrived at here was not because of any intent of default or anything like that on our part, but in actual fact the net result of income at the end of the day is not out one iota. It was purely a matter of the expenses, and because … a lot of the expenses were paid out of income, then on that basis neither were put in."

"I'm putting to you that KPMG on your instructions failed to take into account further income that was derived by Valespring? --- Yes.

You can't tell his Honour how much that was? --- No, and it only represented a portion of the amount that the income was understated by.

… Can you tell his Honour what further income Valespring earnt in the financial year 1997 which wasn't declared? --- … I can't tell his Honour in terms of dollars and cents, no.

Mr Laurie was not being frank with the Court. It was his claim that the returns were false. The claim was made with a view to inflating Valespring's gross income so as to answer the applicants' case based on the tax returns. The relevant information was in his camp, and I infer from his refusal even to make an estimate of the true gross earnings, that the estimate would not have assisted him sufficiently to close the gap between the declared income and that required to defeat the applicants' case based on the returns.

Finding (t) 36 This is my own estimate of the effect of discounts on income. Mr Laurie stressed the importance of factoring in discounts, but offered no estimate of the proportion of income lost as a result of the discount policy. In the circumstances I infer from his silence that the loss would be modest.

Findings (u) and (v) 37 In attempting to ascertain the "real" gross income I have taken into account the respondents' estimates of the amounts missing from the declared income: the additional wages paid, and the additional expenses that were paid directly out of cash earnings, without being recorded. Having obtained the figure of $447,912, I then compared it with the income that would necessarily have been obtained if 62,145 people had visited the park, some of whom would have obtained the group discount. The difference is $234, 750.80, over half the total income on the Lauries' best available estimates. On the evidence it is not possible to make a precise finding as to the actual income for 1996‑1997. However, the conclusion that must be drawn from these calculations is that either the attendance figures or the rule of thumb was false. Given that under the current schedule of charges the rule of thumb was correct, the attendance figures for the 1996‑1997 financial year must be false. In the absence of evidence regarding the rule of thumb for the period before November 1995, I am not able to make an estimate of the "real" gross income for the periods preceding the 1996/1997 financial year. But that does not affect the finding that the respondents engaged in misleading conduct in the representations about that year.

Finding (x) 38 Only the question of the respondents' liability was before me. The quantum of their loss or damage will be assessed later. But in order to make out their cause of action for damages, the applicants must establish that they have suffered some loss or damage as a result of the contravening conduct. See s 86 of the Act. There is no doubt that Crystal Auburn suffered such loss or damage. The business it acquired in reliance on the respondents' representations was worth less than the amount paid for it. Cf Gould v Vaggelas (1985) 157 CLR 215 at 220 and Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494 at 512. It may have suffered additional loss. Mr Siberas and Mr Davies suffered loss in that their work for the business included work that was unremunerated by the drawing of wages or receipt of profits. See Cut Price Deli Pty Ltd v Jacques (1993) ATPR Digest 46‑102 at 53,444‑53, 445; on appeal (1994) 49 FCR 397 at 404‑405. They too may have suffered additional loss.

CONCLUSION 39 The applicants have satisfied me that

· Wollerman made the Business Profile Representations when Mr Marlow handed a copy of the Business Profile and attendance sheets to Mr Siberas

· Valespring and Macleay made the Business Profile Representations by their agents Wollerman and Mr Laurie

· the making of the Business Profile Representations constituted conduct in trade and commerce within s 52 of the Act

· the applicants entered into the sale of business agreement, the lease and the guarantee in reliance on the Business Profile Representations

· the Business Profile Representations were false in that the 1997 attendance figures were well above actual attendances

· the conduct of Wollerman, Valespring and Macleay in making the Business Profile Representations constituted misleading and deceptive conduct for the purposes of s 52

· Mr and Mrs Laurie were involved in the contravention of s 52 by Wollerman, Valespring and Macleay

· had the applicants known the attendance figures were false they would not have entered into the sale of business agreement, the lease or the guarantee

· the applicants have suffered loss and damage as a result of the contraventions.

The applicants have not satisfied me that the Oral Representation was made.

40 I will declare that Wollerman, Valespring and Macleay have engaged in misleading and deceptive conduct in contravention of s 52 of the Act and that Mr and Mrs Laurie were involved in the contravention. It was not suggested that Wollerman should not be liable to the applicants because it was merely acting as a conduit of information from the Lauries, implicitly disclaiming any belief in its truth or falsity. Cf Yorke v Lucas (1985) 158 CLR 661 at 666. Nor was it contended that Macleay was in any different position from Valespring. The applicants are entitled to damages, to be assessed by a Registrar in default of agreement. The declarations sought in the application were not the subject of any submissions by counsel. I will hear counsel as to any other relief that should be granted. I certify that the preceding forty (40) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Sundberg.

Solicitors for the Applicants: McNab McNab & Starke

Counsel for the Respondents: M Dreyfus QC and R Heath