Firstnamed Plaintiff v Firstnamed Defendant

1 Insulform Pty Ltd ("Insulform") was the proprietor of a business which manufactured and supplied automotive acoustic insulation and automotive trim components to major automobile manufacturers in Australia ("the Insulform Business"). The third defendant Dennis Johnston ("Johnston") and the fourth defendant Peter Ronald Whitaker ("Whitaker") were the directors and principals of Insulform. They owned Insulform through two companies which they each controlled, namely the first defendant Bresam Pty Ltd ("Bresam") which was under the control of Johnston, and the second defendant Melamybek Pty Ltd ("Melamybek") which was under the control of Whitaker. Bresam and Melamybek were each the registered holders and beneficial owners of one share in Insulform which constituted the entire issued share capital in Insulform.

2 Insulform had long-standing and established sales arrangements for its products with automobile manufacturers in Australia.

3 The second plaintiff Industrial Noise Control Pty Ltd ("INC") was founded on 30 March 1977. It was under the control of Michael William Coates ("Coates") and John Campbell Simmons ("Simmons"). Coates and Simmons were the directors of INC. Anne Monica Mutimer ("Mutimer") was married to Coates. She was a key employee of INC and was a director of that company until 22 September 2005. Coates, Mutimer and Simmons are all engineers. Coates was managing director and in charge of product engineering at INC. Simmons was the general manager of the INC business, in charge of manufacturing, sales and financial operations. Mutimer's duties involved the maintenance of data and computer systems, in particular the maintenance of the manufacturing computer system and the costing system.

4 INC was a major manufacturer and supplier of acoustic material supplied to markets in Australia. From its inception, INC manufactured noise control systems for tractors and heavy earthmoving equipment. During the late-1980s and early-1990s the company began to supply acoustic material products to the automotive industry, an enterprise which expanded throughout the 1990s.

5 From 2000, INC undertook research which lead to the development of a new range of vertically lapped fibre-based products which it called and trademarked "DECI-TEX". It subsequently released the DECI-TEX products onto the Australian market.

6 Australian automotive manufacturers, particularly Toyota, became increasingly interested in INC's DECI-TEX products. In July 2002, pursuant to supply contracts entered into with Toyota, INC began manufacturing parts using DECI-TEX for a new Toyota Camry model automobile which was launched in September 2002.

7 Thereafter, INC became a significant Australian manufacturer of technical textiles and non-woven acoustic materials, with the majority of its sales being made to the automotive industry in this country.

8 The first plaintiff Shmee Pty Ltd ("Shmee") was registered as a company on 28 November 2002. Shmee was a wholly owned subsidiary of INC. Coates was appointed a director of Shmee on 28 November 2002 and Simmons was appointed a director on 11 June 2003.

9 By a contract dated 29 November 2003 (the "Sale Contract"), the first plaintiff Shmee acquired Insulform Pty Ltd and the Insulform Business from the first and second defendants, Bresam and Melamybek. It achieved this following the completion of the Sale Contract on 23 December 2002 pursuant to which it purchased the shareholding of Bresam and Melamybek in Insulform for a consideration of $5,500,000 plus stock, equipment, and accrued employee leave entitlements.

10 In these reasons I shall for convenience refer to Coates, Simmons, INC and Shmee collectively as the "Purchasers". Each person in the group of Purchasers was the agent of the other for the purpose of negotiating towards the execution and completion of the Sale Contract and in particular each received information from the Vendors on behalf of the other for this purpose. Although Coates was the principal negotiator on behalf of the Purchasers, he kept Simmons well informed of progress, including the outcome of his various meetings with Johnston and Whitaker.

11 Also for convenience, Johnston, Whitaker, Bresam and Melamybek will collectively be referred to in this judgment as the "Vendors". Each person in the group of Vendors was the agent of the other for the purpose of negotiating towards execution and completion of the Sale Contract and in particular each provided information to the Purchasers on behalf of the other for this purpose.

12 The negotiations leading to the purchase of Insulform by Shmee were somewhat strained. The parties in control of INC, being the Purchasers Coates and Simmons, also controlled the INC subsidiary Shmee, which was the prospective purchaser. INC had become a significant competitor of Insulform in Australia.

13 This difficulty found expression in the Sale Contract which, under the Vendors' Warranties Schedule 2, clause 3.2, relieved the Vendors from the obligation to provide information which was "material to be known to the Purchaser" where that information was "in the opinion of the Vendors sensitive information which may prejudice the competitiveness of the Company [Insulform Pty Ltd] if it was revealed to the Purchaser prior to Completion".

14 Consequently, and as understood by all parties, certain critical information was withheld by the defendants in the course of negotiations towards the sale of the Insulform Business or was only made available progressively as the negotiations towards the sale advanced. In some cases information relating to the Insulform Business was not released to the Purchasers until the sale was completed. For the Purchasers, this gave rise to a high degree of dependence upon the information actually supplied by the Vendors in making the decision to proceed with the purchase and enter into and complete the Sale Contract.

15 The plaintiff, Shmee, has made claims for loss and damage arising out of the acquisition of the Insulform Business. The claims made by Shmee in summary form were:

(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.

Vendors Withheld Information about the Insulform Business

16 The Vendors jealously guarded their operational information from their trade rivals, the Purchasers, during negotiations towards entry into and completion of the Sale Contract.

17 On 22 January 2002 Johnston provided by email some further information to Coates. The email was prefaced with the statement that:

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.

18 On 4 April 2002 Whitaker and Johnston wrote a letter to Coates in which they stated that they would permit only a limited due diligence process prior to entry into any contract of sale. They said in the letter:

We recognise the there are issues in relation to verification of part costing, process capability, material costs and potential savings which INC Corporation wants to address. We are not prepared to provide information in relation to those issues as part of due diligence. We would include appropriate warranties to address those issues in the legal documentation for the sale of the shares.

19 The Vendors' position in relation to the provision of information was reiterated in a letter dated 11 November 2002 from the solicitors then acting for the Vendors of the Insulform Business to the solicitors acting for the Purchasers. The letter said in part:

However our client will not, under any circumstances agree to your client and its representatives having full and free access to the premises during normal business hours to observe the conduct of the business and consult with the key employees. As your client should be aware, this is a highly confidential and sensitive transaction and will remain as such until it is completed in accordance with the provisions of the Share Sale Agreement.

20 Further, in the course of his cross-examination, Johnston said:

And it was always maintained from day one that because of the competitive nature of the two businesses that we were restricting that information and it was raised as you are aware many, many, many times and we stuck by that.

21 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.

22 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.

23 Because of the approach taken by the Vendors to keep to themselves information which may be used to the advantage of a trade rival INC if the sale transaction did not proceed, the Sale Contract included important checks and balances in favour of the Purchasers. These were provided by provisions to protect the Purchasers in the event that the unverified information provided to them by the Vendors proved to be inaccurate.

24 For this purpose, the Sale Contract contained a number of vendors' warranties relating to the accuracy of the information supplied by the Vendors to the Purchasers with respect to the shares in Insulform and the Insulform Business. These were set out in clause 19 ("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 -

1. have been fully, properly and accurately kept and completed;
2. contain no material, inaccuracies or discrepancies; and

1. give a true and fair view of the financial, contractual and trading position of the company, its plant and machinery, fixed and current assets and liabilities (actual, prospective and contingent), debtors, creditors and stock-in-trade, except for items of plant and machinery, tooling and stock separately identified to the purchaser (Schedule 2, clause 5.5);

(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).

(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

1. the agreement; or
2. the course of the purchaser's due diligence investigations; or

1. the Information Memorandum relating to Insulform and its business provided to the purchaser; or

1. any other documents, 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 (clause 19.3(a)); and

(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).

26 Relevant terms used in the Sale Contract were defined as follows:

"Vendors' Directors" comprised both Johnston and Whitaker;

27 At first glance there appears to be an inconsistency in the warranty provisions of the Sale Contract. Schedule 2 provides in its first sentence that "The Vendors make the Warranties set out in this Schedule", but no reference is made to the liability of the Vendors' Directors as defined in the Sale Agreement being Johnston and Whitaker. However, the opening sentence of Schedule 2 is qualified by its second, which provides that all Warranties are subject to the "qualifications, limitations, exclusions and other provisions of clause 19" of the Sale Contract. It is clear that clause 19 extends joint and separate liability for performance of the Warranties to both Johnston and Whitaker as the Vendors' Directors when it says:

The Vendors and the Vendors' Directors jointly and separately warrant to the Purchaser in terms of the Warranties set out in Schedule 2.

Further, a reference to the "Vendors' Directors" in the exemption clause 19.3(b) confirms this construction. Accordingly, I find that the Vendors Johnston, Whitaker, Bresam and Melamybek were all bound by the Vendors' Warranties in the Sale Contract.

28 Clause 19.7 of the Sale Contract provided a time regime for notice to be given of any warranty claim as a pre-condition of liability. Although an issue of the timing of the Purchasers' notice of a warranty claim was opened by the defendants, no point was ultimately pressed based on this time provision following counsel for the defendants expressly abandoning reliance upon it.

29 The Sale Contract was conditional upon the purchaser Shmee conducting satisfactory due diligence investigations into the Insulform Business. The relevant clauses of the Sale Contract which provided for this were 5.1(a), 5.3 and 6(a):

The parties acknowledge and agree that the following conditions are conditions that must be satisfied by the time and dates specified in clause 5.2 ("Conditions"):

(a) the Purchaser being satisfied in accordance with clause 5.3 with the information that it receives as a result of its due diligence investigation conducted in accordance with clause 6.

The Parties acknowledge and agree that unless the Purchaser can reasonably demonstrate in writing to the Vendors by reference to actual information and data obtained during its due diligence investigations that the due diligence information obtained by the Purchaser is materially inconsistent with information provided by the Vendors or the Vendors' Directors prior to the signing of this Agreement by no later that 5:00 pm on 13 December 2002 the Condition set out at clause 5.1(a) will be regarded as satisfied.

The parties acknowledge and agree that the parameters of the due diligence investigations are to:

(i) the profit and loss and balance sheets of the Company for financial 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;

(b) enable the Purchaser to review and confirm key terms of significant legal documentation relating to the business of the Company; and

(c) assist the Purchaser to obtain an unconditional offer of finance from the ANZ Bank by satisfying the conditions of the Letter of Offer made to the Purchaser by the ANZ Bank.

30 However, the Purchasers' due diligence report was not completed until 16 December 2002.

31 The defendants nevertheless conceded that as from the signing of the Sale Contract on 29 November 2002 Shmee was not bound by it in the sense that if anything of concern emerged in the course of the conduct of its investigation into the Insulform Business after the time of signing even if that concern arose at any time after the 13 December 2002 date referred to in clauses 5.2(a) and 5.3 of the Sale Contract, the defendants would not have insisted upon Shmee being bound by the contract. The parties proceeded on the basis that Shmee was in a position to rely upon any representation made to it by the defendants as to the performance of the Insulform Business in the course of its investigations after the signing of the Sale Contract in determining to complete the sale and any contractual provision to the contrary was waived.

32 For the purposes of assisting them to investigate and conduct due diligence into the Insulform Business, the Purchasers engaged Horwath, an accountancy and financial advisory firm with a branch based in Melbourne ("Horwath"). Horwath was engaged by the Purchasers some time prior to 29 July 2002. By letter dated 29 July 2002 Horwath, on behalf of the Purchasers detailed a list of requirements to progress the proposed transaction. On 9 August 2002 the Vendors' accountants, Colville Williams, provided an Information Memorandum to Horwath for the Purchasers and between September to October 2002 Horwath prepared a series of cash flow projections for the Purchasers based on information provided by the Vendors in the Information Memorandum.

33 By letter from Horwath to the directors of INC dated 8 November 2002 a retainer to conduct a due diligence financial investigation into the Insulform Business on behalf of the Purchasers was confirmed. The terms of the retainer were set out in the letter.

34 From about 26 November 2002 until about 16 December 2002, representatives of Horwath and INC's directors from time to time attended at the Insulform premises for the purposes of carrying out a financial due diligence investigation. Fiona Hansen of Horwath ("Hansen") conducted the financial due diligence. A legal due diligence was conducted by the Purchasers' solicitors, JA Fillmore & Co

35 On about 12 December 2002, Horwath prepared a draft of a due diligence report for the Purchasers. The draft due diligence report was provided to a director of INC, Simmons, on either 13 or 14 December 2002. The draft due diligence report set out an analysis of the financial performance of the Insulform Business as assessed from the financial material made available to Horwath by the Vendors. The analysis covered the financial years ending 30 June 2001 and 30 June 2002 and the four months to the end of October 2002.

36 The final due diligence report prepared by Horwath extended to some 55 pages.

37 The final due diligence report was also delivered by Horwath to the Purchasers on 16 December 2002. Also on 16 December 2002 Horwath sent a copy of its final due diligence report to the ANZ Bank, which was the Purchasers' proposed financier for the transaction if it was to proceed.

38 In the course of negotiations towards the purchase of the Insulform Business, the most important figure to the Purchasers in reflecting the operation of the business was the cost of materials as a percentage of sales. Johnston also recognised the cost of materials to sales ratio was a critically important figure in the operation of the Insulform Business. The cost of materials figure was directly related to annual gross profit which could be generated from the business and could be used to calculate the annual gross profit margin and vice versa. The cost of materials to sales ratio could be improved, as reflected in a lower percentage, by lowering costs such as the costs of materials, or by increasing profitability, for example by the introduction of profitable new business, or both. Thus an annual cost of materials to sales ratio of 58% translated to a gross annual profit margin of 42%. Further, each 1% upward movement in the cost of materials to sales ratio represented close to $200,000 lost annual net profit for the Insulform Business.

39 The cost of materials figure in respect of the Insulform Business provided to the Purchasers from time to time in the course of the negotiations was used by the Purchasers to substantiate the financial forecasts they relied upon and to satisfy themselves that the borrowings used to purchase the business could be serviced.

40 A cost of materials figure of over 60% of sales was unacceptable to the Purchasers. Anything over 60% was regarded by Coates as very uneconomical to manufacture and a figure of 63% or above indicated to Coates a business which was unlikely to be viable.

41 From an early stage in the negotiations towards the purchase, Coates and Simmons expressed concern from time to time to Johnston about the cost of materials to sales figure.

42 At a meeting on either 10 October or 13 November 2001 Coates became aware of the actual cost of materials ratio after he was provided with the accounts for the Insulform Business for the period ended 30 September 2001. The accounts revealed a cost of materials to sales ratio of 63%. Following this disclosure, Coates advised Johnston that he was not interested in proceeding with the purchase. At a meeting on 13 November 2001 Coates asked Johnston what the reason was for the percentage of cost of goods to sales going from 58.6% in 1999 to 63% in September 2001. Johnston said in response that the figure would revert to a target of 55% with changes that were underway, principally in the nature of cost reductions.

43 Following the 13 November meeting, on 21 November 2001 Johnston sent an email to Coates providing some additional information which had been requested by Coates. The email noted "As your company is a direct competitor in the market place we are very reluctant to impart detailed information pertaining to the operation of our business." Nevertheless, Johnston did advise in the email that for the current financial year to 30 June 2002, a figure of 56% of costs of materials to sales was projected.

44 A further meeting between Johnston and Coates was held at the home of Coates on 17 January 2002. The meeting took between one and a half to two hours. During the meeting, Johnston discussed with Coates a document he had prepared and showed to Coates entitled: "Additional Information for Justification of Acquisition Price". Johnston repeated to Coates at the meeting held on 17 January that he was not willing to give him detailed information until such time as he entered into an agreement to purchase the company because his company was a direct competitor of the Insulform Business. He said that if an agreement was entered into for the purchase of the Insulform Business he would be able to verify the information set out in the document as part of any due diligence process. In this way Johnston confirmed to Coates that the information contained in the document was true.

45 On the following day, 18 January 2002, Johnston emailed a copy of the document he had shown to Coates on the previous day (the "18 January Document"). The 18 January Document included information under the heading: "Potential Major Cost Reduction Opportunities 2002". Under this heading, Johnston listed five products which were then sold by the Insulform Business, namely Bulkhead, Commodore SWB Parcel Shelf, Commodore LWB Parcel Shelf, Commodore Coupe Parcel Shelf and Magna Boot Trim. In relation to each of the first four products, Johnston set out what he said were calculations of the potential cost reductions associated with the manufacture of the products described in the document as "Substrate Alternative".

46 In his evidence at the trial, Johnston explained the cost reductions as arising from the sourcing of a new raw material from an Italian manufacturer which he hoped to be able to secure and incorporate into the Insulform manufacturing process. The Italian product was known as "Woodstock". Johnston hoped to substitute the Woodstock product for the raw material sourced from Japan known as "Hy-Papia" which was then in use. In his evidence he said that he was hopeful of achieving the raw material substitution by about mid-2002. The reduction in the costs of materials hoped to be achieved by this means was set out in the 18 January Document as an "Annual Cost Saving" which, in respect of the first four products totalled $568,950.

47 A further potential cost saving with the introduction of another alternative raw material related to the fifth listed product in the 18 January Document, namely the Magna Boot Trim. The reduction in the costs of materials hoped to be achieved by this means was set out in the 18 January Document as an "Annual Cost Saving" and was said to have amounted to "$98,000 (Min)". A summary of the total potential annual cost savings was set out on the third page of the document. In his evidence at the trial, this was described by Johnston as a saving to be achieved by the possible introduction of an alternative product sourced from the Smith Family, which they were working on at the time. Johnston said in his evidence that when he gave a copy of the 18 January Document to Coates he told Coates that the cost of materials identified in this section of the document were potential cost reductions only and were dependent, for the most part, upon the replacement of the Hy-Papia raw material with the Woodstock raw material sourced from Italy which he had been working on.

48 The 18 January Document provided by Johnston to Coates also included information under the headings "New Business 2002 " and "Loss of Business 2002".

49 Under the heading "New Business 2002 " in the 18 January Document, Johnston listed a total of four Toyota parts and two Holden parts. For each part said to comprise the "New Business" Johnston provided his calculations and a figure which appeared to be the result of the calculations described as "Total Annual Contribution". This was later explained in evidence as the total contribution which the part was projected to contribute annually to the profit of the Insulform Business. It is to be noted that the calculations were provided without any express reservations or qualifications in the document. For each listed part the "Total Annual Contribution" was expressed as follows: Toyota Camry Rear Shelf Insulator $255,600.00; Toyota Camry Tunnel Insulator $169,344.00; Toyota Camry Bonnet Insulator $583,002.00; Toyota Camry Firewall Insulator $211,680.00; Holden New Insulation Component $353,100.00; and another Holden New Insulation Component $463,050.00. The total figure for the annual contribution to profit from the new business was calculated in the 18 January Document to be $2,035,776.00.

50 Under the heading "Loss of Business 2002" in the 18 January Document, Johnston listed two Ford parts. Again for each part in this category Johnston provided his calculations and a figure which appeared to be the result of the calculations described as "Total Annual Contribution". This was later explained in evidence as the total annual contribution which was projected to be lost from the profit of the Insulform Business arising from the loss of the business. For each part in this category the "Total Annual Contribution" was as follows: Ford Rear parcel Shelf SWB & LWB $152,918.00; and Ford Firewall Insulators - All Vehicles $ 396,000.00. The total figure lost to profit from the loss of business was calculated to be $548,918.00.

51 The 18 January Document under the heading "Potential Major Cost Reduction Opportunities 2002" also set out the proposed time frames for the introduction of the new raw materials which was stated to be as follows in relation to each of the five named products: Bulkhead - "Proposed Introduction March/April 2002"; Commodore SWB Parcel Shelf - "Proposed Introduction May/June 2002"; Commodore LWB Parcel Shelf - "Proposed Introduction June/July 2002"; Commodore Coupe Parcel Shelf - "Proposed Introduction June/July 2002"; and Magna Boot Trim - "Proposed Introduction April/May 2002". The time frames as expressed in the document created an impression, which I find was in all likelihood conveyed to Coates, that the potential cost savings were more than mere hopes on the part of Johnston, but were part of a plan to introduce and achieve the cost savings which had a realistic and carefully assessed prospect of success with a consequent reduction in the ratio of cost of materials to sales being achieved.

52 When he received the 18 January Document, Simmons carried out an analysis of the information contained in the document. Simmons received some comfort from his analysis that the cost of materials to sales ratio in the Insulform Business would decrease to 58%. In the spreadsheets he prepared for the January-February 2002 period he used what he described as a conservative figure of 58.3 %.

53 I find that when he had received and read the 18 January Document, Coates was left with the impression that there was a realistic prospect of the cost savings referred to in the document totalling $666,950 annually being achieved, with a consequent reduction in the ratio of 63% of the cost of materials to sales reflected in the accounts for the Insulform Business for the period ended 30 September 2001 to about 58%. Further, I find that Coates was left with the impression that there were reasonable grounds for making such a representation.

54 I accept the evidence of Coates when he said that the projected cost savings were crucial to the transaction from his point of view and that without those savings, the cost of materials to sales percentage would remain unacceptably high.

55 Following the intervening weekend, on 22 January 2002 Johnston provided by an email of that date further information to Coates consisting of an attached document entitled "Insulform Business Activity 2002 (Prepared by D. Johnston 20 July 2002)". This document was a revision of the 18 January Document provided earlier on Friday 18 January, with some relatively minor amendments to the "Potential Major Cost Reduction Opportunities 2002" section. This section in the 22 January Document was materially identical to the same section in the earlier document provided on 18 January 2002 with one exception - the "Raw Material Cost Reduction" which appeared under the "Commodore Coupe Parcel Shelf" item was noted in the 18 January Document as "$3.50 (Est)" whereas it was noted in the 22 January Document merely as "$3.50".

56 However, there were substantially greater amendments to the section entitled "New Business 2002" in the 20 January Document contrasted with the contents of this section provided in the earlier 18 January Document. Over the intervening weekend, the following changes were introduced in relation to the projected profit from the parts said to comprise the new business: Toyota Camry Rear Shelf Insulator was increased from $255,600.00 to $307,930.00; Toyota Camry Tunnel Insulator was increased from $169,344.00 to $195,700.00; Toyota Camry Bonnet Insulator 650 GSM was reduced from $583,002.00 to $338,580.00; Toyota Camry Firewall Insulator 1600 GSM was reduced from $211,680.00 to $85,470.00; two new items, Toyota Camry Firewall Insulator 1000GSM $375,920.00 and Toyota Camry Firewall Insulator 1600GSM $266,000.00, were added to the list; while the Holden New Insulation Component at $353,100.00; and the other Holden New Insulation component at $463,050.00 remained unaltered. The total figure for the annual contribution to profit from the new business was re-calculated by Johnston over the weekend from $2,035,776.00 as it appeared in the 18 January Document to $2,385,575.00 in the 22 January Document, an increase of $349,799.00 and the parts in the "New Business 2002" section expanded from four Toyota parts to six.

57 The items of "Lost Business", originally referred to in the 18 January Document, remained the same in the 22 January document, except that an additional item of lost business was added, being a part described as "Holden SWB Parcel Shelf Insulation Replacement" for which $52,000.00 was said to be the annual contribution. The total sum for lost business therefore totalled $699,918.00 ($548,918.00 plus $52,000.00).

58 Thereafter negotiations continued at a slow pace.

59 On 17 July 2002 a meeting was conducted at the office of Mr John Fillmore the solicitor for the Purchasers. Present at the meeting were Coates, Johnston, and Whitaker, along with other representatives of the Vendors. The meeting addressed the question of the provision of information. The representatives of the Insulform Business agreed to provide further information to the Purchasers. Further to the agreement, a folder entitled "Information Memorandum" dated 9 August 2002 was eventually provided to the Purchasers on about 22 August 2002 (the "Information Memorandum").

60 The Information Memorandum was an extensive document. It contained what purported to be the actual cost of materials to sales for the year ended 2000 (57.96% of sales), the year ended 2000 (59.98% of sales) and the year ended 2002 (58.72% of sales). It also purported to project the cost of materials to sales for the financial years ended 2003 and 2004, which was expressed in the following way:

2003 57.50% (Based on achieving 50% of potential cost reduction opportunities)

2004 56.50 (Based on achieving 100% of potential cost reduction opportunities).

Thus the projected cost reduction opportunities expressed in the Information Memorandum were based on achieving half of the reductions in the 2003 year and subsequently the whole of the reductions in the 2004 year.

61 Included in the Information Memorandum was a document headed "Insulform Business Activity 2002". This was a restatement with relatively minor variations of the earlier 22 January Document. Accordingly, through the contents of the Information Memorandum the Purchasers were informed that the cost reduction opportunities and the new business contributions for 2002 stood in the same position as they were in January 2002. Given, first, the time that had elapsed since the provision of the 18 January and the 22 January Documents; second, the express time frames for the implementation of the cost reductions stated in the earlier documents, which in all cases were projected to be introduced by the end of July 2002 or before; and third, that the "New Business" section of the documents continued to be expressed without qualification or reservation, the Purchasers were provided with additional confidence that the reduction in the cost of materials to sales ratio would be achieved. I accept what Coates said in his evidence:

Because this information had now been provided for the third time, with minor revision, we felt that it must have had a good basis in fact.

62 I also accept the evidence of Simmons that the Information Memorandum was broadly consistent with what the Purchasers had been told about the ongoing figure for the cost of materials to sales. The material in the Information Memorandum indicated to Simmons that for the financial years 2003 and 2004 the budgeted cost of materials after the potential cost reductions would be close to 57%, or around 59% before the potential reductions.

63 On 25 October 2002 Coates had a further meeting with Johnston. Coates explained that the purpose of the meeting was to provide the Purchasers with an update on the Insulform Business. Coates, amongst other things, wanted information on the potential cost reduction opportunities mentioned in the three documents which had been prepared earlier by Johnston and previously made available to Coates. At the meeting Johnston referred to the Holden Commodore parcel tray product. He said that he was changing the material used to produce the item from a Japanese substrate material to another material sourced from Italy which he said was "very similar to Woodstock". Coates interpreted this to mean that Johnston was in the process of changing over the materials at that very time. Johnston said further that the new material would be much cheaper and would add $500,000 to the net profit for the year.

Alleged Miscalculations in Insulform's Documents

64 The "Insulform Business Activity 2002" contained in the Information Memorandum and the earlier documents provided to Coates on 18 January 2002 and on 22 January 2002 were also said by the plaintiffs to have been incorrectly calculated by Johnston insofar as the documents related to the potential for new business.

65 Mutimer undertook an analysis of these calculations based on quotation forms which became available to her after settlement. When Mutimer's exercise is compared to the assessment of annual contribution of the new business calculated by Johnston a significant discrepancy emerges. The application of Mutimer's calculations appears to demonstrate that Johnston had overstated the annual contribution of new business in his documents by $1,264,735.

66 Although Johnston conceded that Mutimer's approach was a way of calculating the annual contribution of the potential new business, I am not satisfied that the methodology employed by Johnston was not open for him to use.

67 The negotiations for the acquisition of the Insulform Business which took place in the latter half of 2001 and throughout 2002 were largely handled on behalf of the Purchasers by Coates. However, shortly prior to 13 December 2002, Coates' wife Anne Mutimer became severely ill. On 13 December her condition was diagnosed as a brain tumour. This required surgery on 15 December to remove the tumour. These events understandably distracted Coates from the sale and he was required to leave the final negotiations for the transaction to Simmons.

68 In the week commencing 9 December 2002 the Purchasers received working papers from Hansen of Horwath. Hansen was conducting the financial due diligence for the Purchasers. Simmons collected the draft due diligence report from Hansen and read it over the weekend 14-15 December 2002. He particularly noted the contents of sections 7 and 8 which referred to a gross profit of 35% for the four month period to 30 October 2002. This translated into a cost of materials to sales ratio of 65%. This demonstrated a deterioration in profit from 39% to 35% in the four months from 30 June 2002 to 30 October 2002 which he saw as a serious problem. These figures also demonstrated an increase in the cost of materials to sales ratio from 61% to 65% over the same period. Simmons knew that for the Insulform Business each 1% upward movement in the cost of materials to sales ratio meant a potential lost annual profit from the business of approximately $200,000. Simmons determined to raise the issue with Johnston and with this in mind arranged to meet with him on Monday 16 December 2002.

69 Following receipt of this information Simmons immediately arranged to meet with Johnston on Monday 16 December 2002, a week before the proposed completion of the Sale Contract on 23 December 2002. Simmons in fact had two meetings with Johnston on 16 December, one in the morning and one in the mid-afternoon.

70 Although the meeting occurred after the signing of the Sale Contract and shortly prior to the date of the proposed settlement on 23 December 2002, Johnston was not confident that the transaction would settle at all. During the morning meeting with Simmons, Johnston telephoned his accountant, Kevin Mead of the firm Colville Williams, and obtained information relating to the gross margins for the period 1 July to 31 October 2002 which he related to Simmons. Simmons took handwritten notes of his conversation with Johnston, however, the notes taken by Simmons did not seek to provide a transcript of all that was said at the meeting. Simmons' notes record amongst other things, all of which I accept, that there was discussion about the deterioration in the gross profit for the following periods: financial year ending 30 June 2001 (being 40%, representing a cost of goods to sales ratio of 60%); 30 June 2002 (being 39%, representing a cost of goods to sales ratio of 61%); and the four month period to 30 October 2002 (being 35%, representing a cost of goods to sales ratio of 65%). The performance of the Insulform Business in this last period was said by Simmons to be a particular problem. Simmons also recorded in his notes that Johnston said his target for cost of materials to sales ratio was 58% compared with what appeared to be the actual position averaged out over the period of about 63%. In essence, this accords with what Johnston recollected of the conversation.

71 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.

72 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.

73 Further, Johnston said nothing to qualify the potential for his stated target to be achieved. Rather, the target was put forward as something which the Purchasers could place reliance upon. It was therefore open to the Purchasers to accept that 58% was a realistic figure to use going forward, which they did. I find that during this meeting, in the course of a discussion about the deteriorating gross profit and the high cost of materials revealed by the Horwath investigation, Johnston by his conduct in saying that his target for the cost of materials to sales ratio was 58% meant and conveyed to the Purchasers that this was the figure that they could use in their decision to proceed to complete the transaction and in their future planning for the business and for these purposes the Purchasers could accept his target for the cost of materials being 58% of sales as being both realistic and achievable.

74 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.

75 The meeting on 16 December reconvened in the mid-afternoon. By this time Johnston had obtained further information from his accountant Kevin Mead. Johnston told Simmons that the unusually high cost of materials was attributable to the exceptionally high cost of tooling between them during the period in question. After Johnston had given Simmons figures for the costs of tooling, they were able to work out that the effect of tooling was about 3% of gross profit, and when this was added to Horwath projected gross profit figure of 35%, a projected annualised figure of 38% was arrived at by Johnston and Simmons to produce a cost of materials to sales ratio of 62%. Having independently undertaken some other investigations of his own, Simmons was able to deduct a further 1% arising from the elimination of a 1% scrap rate which applied to some of the manufactured parts. In this way Simmons believed that the 65% cost of materials to sales ratio could be reduced to at least 61%. Importantly, Simmons was also able to accept that the Purchasers could in fact use the 58% cost of materials to sale ratio provided by Johnston in going forward, which translated to a 42% gross profit.

76 Johnston had pursued the idea of introducing the Woodstock material in place of the Hy-Papia material for at least a year as at July 2002. Woodstock was an extruded sheet material with similar properties to but cheaper than Hy-Papia. In particular the Woodstock material was supplied without scrim, and Johnston proposed to maximise the cost savings of the material by introducing Woodstock without scrim.

77 The use of the Woodstock substitute as a cost saving strategy was reflected in the three Johnston documents given to Coates on 18 and 22 January 2002 an in the Information Memorandum provided on 9 August 2002. Under the heading "Potential Major Cost Reduction Opportunities 2002" in each of those documents Johnston listed five products which were then sold by the Insulform Business, namely Bulkhead, Commodore SWB Parcel Shelf, Commodore LWB Parcel Shelf, Commodore Coupe Parcel Shelf and Magna Boot Trim. In relation to each of the first four products it was proposed to achieve cost savings by substituting the Italian Woodstock material for the Japanese Hy-Papia material. This represented a total annual cost saving according the documents of $568,950 per annum. Thus the plan to introduce the substitute Woodstock material was by far the main saving to be achieved.

78 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.

79 John Cain ("Cain") was employed as the Business Development Manager of the Insulform Business prior to its sale to the Purchasers. This was a senior executive position in the business. He was responsible for all sales activities and was reported to by the Quality Manager and the Engineering Manager. Cain had long experience in the automotive parts industry, and had worked in the automotive trim supply industry for nearly 28 years. Following the sale to the Purchasers he remained with the business and gave evidence at the trial of the proceeding on behalf of the plaintiffs.

80 Cain described Johnston's experiment with the Woodstock material as a "complete failure". He said that by July of 2002, Johnston had obtained a supply of material from a supplier, G.O.R. in Italy, and tried to make it work. However, it was Cain's belief that the project was "doomed to failure" and he advised Johnston of this. He said in his evidence that the Insulform machinery, which was designed to process the Hy-Papia product, was not suitable for the production of Woodstock sheets. I accept Cain's evidence as an accurate description of the failed attempt by Johnston to substitute the Woodstock material for the Hy-Papia material.

81 By late November 2002 Johnston himself accepted that the proposal to substitute the Woodstock material for the Hy-Papia material would not work with the Insulform machinery. The position was well described by Johnston in the email he sent on 29 November 2002 to G.O.R. his Italian suppliers of the Woodstock material. It is to be noted that this was on the very day the Sale Contract with the Purchasers was executed. Johnston said in his email:

Regarding our position with ordering Woodstock please be advised as follows:

I We recently processed Holden SWB Parcel Shelves and bulkhead trims and unfortunately had difficulties with the automatic feeding of the reactivated sheets to forming tools.

2 Each time we process the Woodstock on our equipment we have not been successful in eliminating this problem.

3 We have 2 continuing problems relative to the automatic feeding of the sheet to form tool. Firstly, the Woodstock compresses when the sheet travels down the slide which is located on the end of the conveyor slide. Secondly, the sheet has the potential to adhere to itself when feeding to the form tool and when being laid on the tool which is due to the three dimensional shape of the component.

Unfortunately at this time my management team are not prepared to change away from the current material. Despite Woodstock giving us a financial advantage the potential cost penalties at this time far outweigh this advantage. The problems with handling Woodstock come from our equipment and process which has been specially developed for the Hy-Papia material. I need to investigate the processing side of Woodstock in more detail and would greatly appreciate your assistance in doing so. Early in the new year I would like to revisit GOR to discuss these problems further and seek your assistance in finding a solution. In the mean time I will be concentrating on the Boot Trim material you sent me and hopefully I will have more success.

82 Following his email of 29 November 2002 sent to the Italian suppliers, Johnston did not proceed with any further experimentation with the Woodstock material prior to completion of the transaction with the Purchasers. Critically, neither Johnston, Whitaker, nor anyone else from the Insulform Business ever advised the Purchasers about the failed attempts to process the Woodstock material as things stood by the end of November 2002 when they signed the Sale Contract. Nor did the Purchasers have any opportunity during their due diligence investigations to investigate or discover the true position with regard to the Woodstock material at any time prior to completion of the Sale Contract, a matter which was well known to Johnston and Whitaker.

83 Given the failure of the product to that time, after months of attempting to rectify the problems, Johnston had no basis for continuing to represent to the Purchasers that the Woodstock material had the potential to give rise to substantial cost savings in the order of $568,950 annually for the Insulform Business and that this was both achievable and realistic in the light of the facts known to him at that time.

84 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. In this respect I accept the evidence of Cain on the matter.

85 In relation to the proposed substitute material for the Magna Boot Trim, to be sourced from the Smith Family, I am satisfied that the proposal was never developed during Johnston's time in the Insulform Business. Cain said in his evidence, which I accept, that by July of 2002 the reference in the information supplied to the Purchasers by Johnston to the alternative material for the Magna Boot Trim part as a "potential major cost reduction opportunity" was incorrect. According to the Insulform documents supplied to the Purchasers, this item represented a potential cost saving of at least $98,000 per annum. The Purchasers were never advised of the lack of development of this substitute product, nor did they have any opportunity during the due diligence investigations to verify the matter because operational and process investigations were denied to them by the Vendors. Again, Johnston had no basis for continuing to represent to the Purchasers that the Smith Family material had the potential to give rise to cost savings for the Insulform Business and that this was both achievable and realistic in the light of the facts known to Johnston at that time.

86 Thus, as things stood prior to the date of execution of the Sale Contract on 29 November 2002 and prior to the date of completion on 23 December 2002 the two critical elements of the cost savings in materials had no substance and I find that there was no basis for representing that they had. The information supplied to the Purchasers under the heading "Potential Major Costs Reduction Opportunities 2002" was incorrect. In fact the so-called costs reduction opportunities had no prospect of succeeding and as such could not properly have been described in the Johnston material supplied to the Purchasers as having "potential". Further, the reduction of the cost of materials to sales ratio, which relied heavily on achievement of cost savings by these means, also had no proper basis and, it follows, there was no basis for representing that the forecasted reduction in the cost of materials to sales ratio could be achieved.

87 Cain was responsible for the preparation of Quotation Forms in the Insulform Business. The Quotation Forms used in the Insulform Business, amongst other things, provided information about the materials to be used in the production of manufactured parts and the cost of acquisition of those materials. The Quotation Forms also provided an estimate of labour costs for the production of manufactured parts. Johnston said that he used Insulform Quotation Forms as a source for the calculations of potential cost savings and new business in the three documents he prepared and provided to the Purchasers in January and July of 2002, being the 18 January Document, the 22 January Document and the Information Memorandum.

88 Cain said in his evidence about the production of the new business parts:

The production of the new business parts "F" to "K" (inclusive) [the six parts for Toyota] commenced in July 2002. Production difficulties were immediately experienced, particularly in the cases of items marked "H" to "K", the fibreglass parts [items "H" to "K" consisted of: the Toyota Camry Bonnet Insulator 650 GSM - said by Johnston to provide an annual contribution of $338,580.00 to the Insulform Business; Toyota Camry Firewall Insulator 1600 GSM - said by Johnston to provide an annual contribution of $85,470.00 to the Insulform Business; a new item was added to the list Toyota Camry Firewall Insulator 1000GSM - said by Johnston to provide an annual contribution of $375,920.00 to the Insulform Business; and a further new item was added to the list Toyota Camry Firewall Insulator 1600GSM - said by Johnston to provide an annual contribution of $266,000.00 to the Insulform Business, which in all amounted to $1,065,970.00, or about 45% of the total annual contribution to "New Business 2002" of $2,238,750.00 specified by Johnston in his 22 January Document].

(b) it was proving impossible to process the products according to costings.

In an effort to meet the volume required by Toyota, we were running over time, running three shifts and employing extra people, but despite all our efforts we were never able to achieve the volumes necessary. The processing of fibreglass parts involved the allocation of a greater number of persons than had been anticipated and more hours worked. By October, it was clear to me that these problems were not temporary or teething problems experienced typically with new production, but were ongoing problems which were going to affect the business indefinitely.

With the exception of the parts marked "F" and "G", whether before or after the acquisition in December 2002, none of the parts was able to be produced according to the costings. Despite the best efforts of all of the new management, efforts to produce the parts according to the costings in the quotation sheets were never successful. The scrap rates remained high, as were the labour and material costs.

Further, the problems outlined [above] continued to be experienced after the changeover on 23 December 2002. The problems which the new owners experienced were those which had been experienced by the old owners during then latter part of 2002.

Had the documents entitled "Insulform Business Activity 2002" been placed in front of me in December 2002, I would have said that the references to new business and potential cost savings were blatantly incorrect.

90 I find that, as things stood as at the date of execution of the Sale Contract on 29 November 2002 and at the date of completion on 23 December 2002, there was no realistic likelihood of profits from the new business being achieved as represented in Johnston's 22 January Document or the Information Memorandum of 9 August 2002. Consequently, and for this further reason, there was no realistic prospect of the reduction in the cost of materials to sales ratio achieving 58% because the achievement of this reduction was not only founded on the costs savings, but also in part upon the new business being successfully introduced into the Insulform Business.

91 The plaintiffs relied upon 5 representations which they alleged induced them to enter into and complete the Sale Contract. The representations are contained in paragraph 18 of the Second Further Amended Statement of Claim which was amended by leave of the Court given on 19 June 2008. It was also alleged that after entering into and prior to completion of the Sale Agreement, the defendants orally confirmed and repeated the five representations in the conversations between Johnston and Simmons held on 16 December 2002.

The Principal Representation - 58% Cost of Materials to Sales

92 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").

93 This was a representation as to a future matter. Section 51A of the Trade Practices Act 1974 (Cth) provides that, in these circumstances, where a corporation makes such a representation and the corporation does not have reasonable grounds for making the representation, the representation shall be taken to be misleading. Further, unless the corporation adduces evidence to the contrary, it will be deemed not to have had reasonable grounds for making the representation.

94 I find that, insofar as the representation was made by and on behalf of the corporations Bresam and Melamybek, those corporations did not have reasonable grounds for making the representation and the deeming provision in s. 51A of the Trade Practices Act 1974 (Cth) is applicable. However, it is unnecessary to rely upon s. 51A because, as I have found, the evidence positively establishes the misleading and deceptive quality of the Principal Representation.

95 Accordingly, the Principal Representation has been established.

96 I find that the making of the Principal Representation amounted to conduct in trade or commerce that was misleading or deceptive or likely to mislead or deceive in breach of s.52 Trade Practices Act 1974 (Cth). It also constituted conduct in breach of s.9 Fair Trading Act 1999 (Vic).

97 The plaintiffs also alleged that the defendants represented to them that in the future the profitability of the Insulform Business would be increased by likely reductions in costs, in particular reductions in the cost of raw materials in the order of $666,950 per annum, and ongoing ("the Reduction in Materials Costs Representation").

98 The plaintiffs further alleged that the defendants made a representation to them to the effect that in the future the profitability of the Insulform Business would be increased by the acquisition of new business producing an increase in annual contribution or gross profit in excess of $2,000,000 per year and ongoing ("the New Business Representation").

99 These representations have also been established. Being representations as to future matters, insofar as the representations were made by and on behalf of the corporations Bresam and Melamybek, those corporations did not have reasonable grounds for making the representations.

100 I find that the Reduction in Raw Materials Costs Representation and the New Business Representation were misleading or deceptive or likely to mislead or deceive and amounted to conduct in trade and commerce in breach of s.52 Trade Practices Act 1974 (Cth) and s.9 Fair Trading Act 1999 (Vic).

101 However, there was no evidence that the Reduction in Materials Costs Representation and the New Business Representation, as discreet representations, were directly relied upon by the plaintiffs. They were subsets of the Principal Representation and inseparable from it. The cost savings to be achieved by the introduction of replacement materials and the additional profit to be generated by the proposed new business would in all likelihood have reduced the cost of materials to sales ratio to 58% in the future. As such, these related representations, although I find they were made, are components of, and not additional to, the Principal Representation, and are subsumed by it for the purpose of assessing loss and damage.

102 The plaintiffs also alleged that the defendants made a representation to them to the effect that a cost of materials figure of 65% of sales would revert to a more profitable figure of 58% of sales, alternatively would revert from 65% to 58% as a result of the likely reduction in costs and the profitability of the said new business ("the cost of materials 65% reversion to 58% representation").

103 The "65% reversion to 58%" representation was simply another way of expressing the essence of the Principal Representation and adds nothing of substance to it. Again it is inseparable from, but not additional to, the Principal Representation for the purposes of assessing loss and damage.

104 The plaintiffs further alleged that the defendants made a representation to them to the effect that in the future the gross profit of the business would be 43% of sales ("the 43% of Sales - Gross Profit Representation").

105 I find that the 43% of Sales - Gross Profit Representation has not been made out as conduct that was misleading or deceptive or was likely to mislead or deceive in trade and commerce in breach of s.52 Trade Practices Act 1974 or its equivalent in the State Act. Having found that a representation was made that in the future the cost of materials would be 58% of sales, it would follow from this finding that in the future the gross profit of the business would be 42% of sales, not 43% of sales as alleged in this representation.

106 From an early stage in the negotiations, the Purchasers placed considerable reliance on the additional information provided by Johnston in his documents of 18 and 22 January 2002 and the Information Memorandum of 9 August 2002 with regard to cost savings and new business as critical inputs in achieving a satisfactory cost of materials to sales ratio to justify the purchase price. In a letter to the Vendors expressing an early interest in the acquisition of the Insulform Business dated 12 February 2002 the Purchasers said:

The sale price is highly dependent on the additional information provided by you with regard to new business, lost business and cost savings. Prima facie, the information supports the asking price rather than the$5,000,000previously indicated. That is of course based on the forecasts provided being achieved.

At all stages the most important figure in the accounts was the cost of materials as a percentage of sales, closely followed by the percentage that the cost of labour represented to sales.

... A primary interest for us was to have an accurate cost of materials figure so that the financial forecasts could be substantiated and the borrowings could be therefore serviced.

Well when you're talking about very important factors such as the cost of materials where every 1 per cent represents a net profit of $200,000, you'd certainly want to be confident that that was going to come true. We relied on the 58 percent cost of materials that "we can go on with".

Coates recalls that on 16 December 2002 Simmons "was discussing this 58 per cent cost of materials" and that:

The transaction proceeded on the basis of Johnston's representation of 58 per cent cost of materials. That's the only thing that let it go through. It wouldn't have gone through but for that, and I guess if that was 16 December, if John Simmons hadn't had that conversation with Dennis Johnston then, I probably would have said - and I probably should have said, "Barley Charley, this is all too complicated right now".

Well, if Johnston hadn't reaffirmed 58 per cent as a cost of materials to go on, and if he'd said, "Sorry, you're quite right. We actually haven't introduced those cost savings and the Toyota parts don't make any money", well, we certainly wouldn't have proceeded, because the cost of materials would have remained at 63 per cent and only got worse.

108 Simmons confirmed the importance of the cost of materials figure when he said that:

[E]ach 1% change in the cost of materials represented almost $200,000 potential lost annual profit from the Insulform Business.

109 I accept that the Purchasers had an incentive to buy the Insulform Business to provide an expansion of the sales of their own product, "Deci-Tex". When the Purchasers assumed possession of the Insulform Business after 23 December 2002 they devoted some time to the trialling of the product "Deci-Tex" in the business as a replacement for the fibreglass product and devoted particular attention to the development of the "Deci-Tex" product for use in Mitsubishi motor vehicles as an under bonnet noise insulator.

110 Further, I accept that the Purchasers delayed in making any complaint to the Vendors until some two years after they took the business over. The falsity of the representations made to them, which induced them to enter into the Sale Contract for the price and on the terms they did, in all likelihood must have become plain to them well before the two year period had elapsed. I find that the most likely reason for the delay was that the Purchasers decided to see how the combined businesses would work out before entering upon litigation, and for this reason delayed in making complaint.

111 However, I do not accept the submission advanced by the defendants that the incentive of the Purchasers in pursuing this contact and their conduct in delaying making any complaint about the falsity of the representations prior to the passing of the two year period evidenced a lack of reliance on the representations I have found at the time when they entered into and completed the Sale Contract.

112 I conclude that the Purchasers entered into and completed the Sale Contract and paid the price they did in reliance upon the representations which I have found were made by and on behalf of the Vendors.

113 The Principal Representation I have found gave rise to a breach of s.52 Trade Practices Act 1974 (Cth) by the corporate defendants Bresam and Melamybek in trade and commerce, and a breach of s.9 Fair Trading Act 1999 (Vic) by all defendants. The representation was made by Johnston in the course of negotiations for entry into and completion of the Sale Contract by, amongst others, the two vendor companies. In making the representation, Johnston acted as an agent on behalf of the vendor companies, Bresam and Melamybek, such that the representation made by him was made on behalf of the companies with the consequence that the representation was made by Bresam and Melamybek.

114 Given his intimate knowledge of the subject matter of the sale, being the Insulform Business, and being the chief negotiator for the sale of the business to the Purchasers on behalf of the Vendors and indeed the author of the Principal Representation which I have found, Johnston was knowingly concerned in the making of the representation and is personally liable pursuant to s.75B Trade Practices Act 1974. He was also personally liable pursuant to s.9 Fair Trading Act 1999.

115 I find that Whitaker was also knowingly concerned in the making of the Principal Representation and is personally liable pursuant to s.75B Trade Practices Act 1974 and s.9 Fair Trading Act 1999. He was a director of Melamybek. Along with Johnston he established the Insulform Business in 1987. He was a director and secretary of Insulform until the completion of the sale to the Purchasers on 23 December 2002. Although most of the negotiations for the sale were conducted by Johnston on behalf of the Vendors, Whitaker was kept up to date with developments and was provided with key documents which had been prepared by Johnston for the purposes of the negotiations. I accept Johnston's evidence when he said in relation to the 18 January Document that he went through the content of it with Whitaker, although not in great detail. When this was put to Whitaker in cross examination, Whitaker accepted this as being correct.

116 Whitaker's role in the Insulform Business was in the field of manufacturing systems and processes relating to manufacturing production with people who worked directly in that area reporting to him. Whitaker denied being aware of the difficulties of the new fibreglass products for Toyota in the second half of 2002, apart from a problem he described that related to equipment for the disbursement of resin at the correct percentages. However, he was in a position to know, ought to have known and I find did know of the difficulties of the new fibreglass products for Toyota in the second half of 2002. Whitaker did, however, concede that the production trials involving the substitution of Hy-Papia by Woodstock in 2002 were unsuccessful in processing through the Insulform equipment. In providing his answers in cross-examination as to when it was that he knew of the proposal to discontinue the Woodstock project, he said the he was "not sure when it was, but, yes, it was eventually". Whitaker was evasive in his answers on this issue. He was in a position to know, ought to have known and I find did know that a decision had been made and communicated to the Italian suppliers by at latest towards the end of 2002 and prior to settlement of the Sale Contract that Insulform would not be proceeding with the Woodstock substitution project.

117 Whitaker participated at all key stages of the negotiations. On 12 February 2002 a formal letter of offer for the acquisition on Insulform by INC was sent to both Johnston and Whitaker by Coates. On 4 April 2002 Johnston and Whitaker sent a counter offer by letter of that date to Coates. Paragraph 5 of that letter responded to the request for further information by Coates. The letter said in part:

We recognise that there are issues in relation to verification of part costing, process capability, material costs and potential savings which INC Corporation wants to address. We are not prepared to provide information in relation to those matters as part of due diligence.

Johnston said that he would have discussed the contents of this part of the letter with Whitaker, a discussion which I accept took place. On about 12 June 2002 Coates made a verbal offer to both Johnston and Whitaker to purchase the Insulform Business. On 18 June 2002 Johnston confirmed by email to Coates that both he and Whitaker would be prepared to accept an offer of $5.5 million plus stock plus additional equipment costs less accrued employee leave entitlements. Finally on 9 November 2002 Whitaker executed the Sale Contract on his own behalf and on behalf of his company Melamybek as vendors.

118 Key documents were provided to Whitaker by Johnston in the course of negotiations. These included the document headed "Additional Information for Justification of Purchase Price" provided in the 18 January Document which Whitaker conceded that he went through with Johnston at the time, "although not in great detail". Whitaker was also provided with the Information Memorandum which included the document entitled "Insulform Business Activity 2002" derived from the 22 January Document. He said that he "believed that the information contained in those documents was accurate and ... that the estimates or potential outcomes were based on reasonable grounds." To have arrived at such conclusions, Whitaker must have read the documents and in the context, must have known that they were to be provided to, or had been provided to the Purchasers well prior to entry into the Sale Contract. Further, he received a copy of the "Summary of Trading/Profit and Loss Statement" included in the Information Memorandum which had been or was to be provided to the Purchasers. He said that the Summary document for the years 2003 and 2004 stated that the costs of goods sold for each of 2003 and 2004 years was to be set at 57.70% and 56.50 of sales respectively. He said that:

As the document stated, those figures were "based on achieving 50% of potential cost reduction opportunities and 100% of potential cost reduction opportunities". I believed that the figures referred to in the Summary document were accurately calculated on those assumptions and I was aware that Mr Johnston was exploring opportunities to reduce costs via the introduction of new raw materials.

This evidences a close involvement with the progress of the negotiations and an understanding of the material which was being supplied to the Purchasers by Johnston in the course of those negotiations. Whitaker also knew that the due diligence which the Vendors permitted the Purchasers to undertake was very limited. It did not enable them to undertake verification of part costing, process capability, material costs and potential savings. Consequently, Whitaker knew that the material supplied by Johnston to the Purchasers on these matters was likely to be the only source of such information for the Purchasers and was therefore material which in all likelihood they would have relied upon.

119 I find that Whitaker was also a person who was knowingly concerned in the making of the Principal Representation and is personally liable pursuant to s.75B Trade Practices Act 1974 and s.9 Fair Trading Act 1999.

120 In arriving at my conclusions as to the liability of Johnston and Whitaker under s.75B Trade Practices Act 1974, I have regard to and apply the well settled principles in Yorke v Lucas.[1] Both Johnston and Whitaker intentionally participated in the conduct amounting to contraventions of s.52 of the Trade Practices Act 1974 (Cth) and s.9 of the Fair Trading Act 1999 (Vic) which I have found and had actual knowledge of the essential matters which constituted those contraventions.

121 I have found that the Principal Representation amounted to a forecast made by the Vendors, principally through Johnston who was a person with detailed knowledge about the Insulform business, that there was a high probability that in the future the cost of materials would be 58% of sales. This was not a representation that the forecast was guaranteed to be achieved. In Esso Petroleum Co Ltd v Mardon [1976] EWCA Civ 4; [1976] QB 801 at 818, Lord Denning MR said in relation to a forecast of this nature:

Now I would quite agree with Mr. Ross-Munro that it was not a warranty - in this sense - that it did not guarantee that the throughput would be 200,000 gallons. But, nevertheless, it was a forecast made by a party - Esso - who had special knowledge and skill. It was the yardstick (the e.a.c.) by which they measured the worth of a filling station. They knew the facts. They knew the traffic in the town. They knew the throughput of comparable stations. They had much experience and expertise at their disposal. They were in a much better position than Mr. Mardon to make a forecast. It seems to me that if such a person makes a forecast, intending that the other should act upon it - and he does act upon it, it can well be interpreted as a warranty that the forecast is sound and reliable in the sense that they made it with reasonable care and skill. It is just as if Esso said to Mr. Mardon: 'Our forecast of throughput is 200,000 gallons. You can rely upon it as being a sound forecast of what the service station should do. The rent is calculated on that footing.' If the forecast turned out to be an unsound forecast such as no person of skill or experience should have made, there is a breach of warranty.

122 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. I find that this contractual warranty was breached by the Vendors because the forecast contained in the representation did not have any realistic prospect of achievement.

123 The Vendors also warranted that all information which was known to the Vendors relating to the Insulform Business which was material to be known to the Purchasers was disclosed to the Purchasers pursuant to Schedule 2, clause 3.2 of the Sale Contract. I find that this warranty was also breached by the Vendors. The Vendors did not disclose to the Purchasers at any stage prior to completion of the Sale Contract the fact of the complete failure of the "Woodstock" substitution project, or the problems in the production of the Toyota parts. Both matters were highly material to the deliberations of the Purchasers in the course of negotiations towards the sale and its completion and the prospect of the business achieving a 58% cost of materials to sales ratio in the future. Further, there was no evidence that this subject matter was in the opinion of the Vendors "sensitive information" which may have prejudiced the competitiveness of Insulform if the matters had been revealed to the Purchasers prior to completion. Accordingly, I find that the Vendors do not bring themselves within the contractual exception found in clause 3.2 of Schedule 2 of the Sale Agreement.

124 I find further that the Vendors have not brought themselves within the exception found in clause 19.3(b) of the Sale Contract. The warranty given by the Vendors which I have found, did not represent the best knowledge, information or belief of the Vendors and the Vendors' directors, Johnston and Whitaker, as things stood at the time when the representations were made, at least as and from the time when Johnston delivered the Information Memorandum to the Purchasers in August 2002, when the relevant information was the subject of disclosure in part. What the defendants failed to do, but ought to have done, was make a complete, full and honest disclosure of all of the relevant facts as they knew them which were material to the information which they had in fact provided to the Purchasers.

125 The plaintiffs primarily put their case in assessing the measure of loss and damage claimed pursuant to s.82 Trade Practices Act 1974 as the difference between the price paid by Shmee for the purchase of the company Insulform Pty Ltd and the true value of the company consisting of the Insulform Business, at the time of the purchase.

126 As the majority said in Sellars v Adelaide Petroleum NL:[2]

In the context of contraventions of s 52(1) in the form of misleading conduct constituted by misrepresentations, acts done by the representee in reliance upon the misrepresentations amount to a sufficient connexion to satisfy the concept of causation. And, if those acts result in economic or financial loss, it will ordinarily be recoverable under s 82(1). So, in a case such as the present, the applicant is entitled to recover "a sum representing the prejudice or disadvantage [the applicant] has suffered in consequence of his altering his position under the inducement".

When conduct done in contravention of s 52 of the Act consists in the making of false representations inducing a person to act or to refrain from acting, the relevant loss or damage may flow from that person's own act or omission and only indirectly from the other person's contravening conduct. In such a case, the person's own act or omission is a link - not a break - in the chain of causation which stretches from the contravening conduct to the loss thus produced and the amount of the loss is recoverable by the person who has suffered it. The existence of a compensable loss and the amount of compensation is ascertained by inquiring whether and by how much that person is worse off as a result of acting or refraining from acting on the inducement of false representations by the other person.

127 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 is to compare the amount paid for the asset with the true value of the property as it was at the time of the sale (HTW Valuers Pty Ltd v Astonland Pty Ltd[4]).

128 The plaintiffs called an expert accountant Gregory Blashki ("Blashki") to establish the measure of Shmee's loss in accordance with this approach. Blashki's methodology was to assess the value of the business and then deduct the working capital items that were not included in the sale. He valued the business by determining a figure which he assessed would represent future maintainable earnings to which he applied a capitalisation rate (or earnings multiple) which he determined to be a multiple of 3 or 4. Blashki concluded that the appropriate figure for future maintainable earnings was $785,000 and the cost of materials to sale ratio was 63%. In arriving at these figures, Blashki took into account the operation and costings of the business in the hands of the new proprietors in calculating the value of the company at the end of 2002.

129 In assessing future maintainable earnings Blashki adjusted the earnings of Insulform to take into account "post sale" information. Blashki's analysis of earnings was based on a comparison of the projected contribution in relation to the "new business" (as prepared by Johnston) compared with the actual results achieved by the Purchasers in relation to the new business after they had taken over the business. As he said in his expert report:

To assess the real value of the business at the day of sale, it is therefore necessary to consider the actual impact of the new business and whether the estimated changes as represented in the Johnston document were reasonable.

My approach to considering the impact of the changes in the Johnston document has been as follows: Obtain details of actual sales and costs for each item noted as new business in the Johnston document.

(a) Review methodology adopted by INC for compilation of actual sales values, costs and contribution for each item.

(b) Analyse actual results achieved for the periods ended 30 June 2003 and 30 June 2004.

(c) Adjust the reported results for any items that did not appear to relate to the operations of the business up to the date of sale.

(d) Adjust the reported results for inconsistencies in classification of expenses between the financial statements prepared by the Vendor and the subsequent statements prepared by INC.

(e) Determine whether there was a correlation between the actual profit achieved post sale and the profit prior to the sale as adjusted for the actual revenue and costs of the new business as advised by INC. A reasonable correlation of such profits would indicate that the INC costings were reasonably accurate and should therefore be considered in lieu of the Johnston document to assess the business value. (Note that no attempt has been made beyond this procedure to analyse the reasons for individual differences in each new product's costing.

130 In the appropriate case it is legitimate to look at post acquisition events as an aid to determining the value of the thing sold as at the time of the sale. The methodology was approved by the High Court in HTW Valuers Pty Ltd v Astonland Pty Ltd.[5] In that case, the High Court considered a number of methods of assessing loss and damage in a case where the plaintiffs, acting on the representations found by the trial Judge, acquired a shopping arcade consisting of eight shops. The Court concluded that an acceptable approach to the measure of general damages in such a case was to deduct the value of the arcade at the date of acquisition from the purchase price, and in assessing the value it was permissible in the appropriate case to have regard to post acquisition events. The High Court cited Potts v Miller,[6] Gould v Vaggelas[7] and Kizbeau Pty Ltd v W.G. & B. Pty Ltd[8] with approval. In Gould v Vaggelas Gibbs CJ said[9]:

Events that happen after the time of the purchase may throw light on the real value of the property at that time: Potts v Miller. Where the property has depreciated in value after the purchase, and the depreciation was due to some cause inherent in the property itself, the depreciation must be considered in determining the real value of the property at the relevant time ...

Of course the court must be satisfied that the loss did result directly from the fraud and not from some supervening cause such as the folly, error or misfortune of the purchaser himself, and must ensure that no additional compensation is given for losses when those losses, or the probability of their occurrence, has already been taken into account in determining the value of the business.

131 However, post sale events which in part result from a change in circumstances may also fall within the ambit of the exception contemplated by the High Court in Gould v Vaggelas. Such a change in circumstances could result for example from a change in management style, the loss of experienced executives or employees and other such events which bring about changes which are of such significance that a valid comparison between the business pre-sale and the business post sale is no longer possible, or at least attended with sufficient doubt as to render the comparison unreliable as an indicator of value of the business at the time of the sale.

132 In this case, Blashki takes into account the post sale performance of the Insulform Business in the hands of the new owners for an 18 month period between 1 January 2003 to 30 June 2004. A number of major differences were introduced into the business by the new owners over this period.

133 Matthew Greaves ("Greaves") prior to his current employment as an operations manager with a major processing company in Australia, was the managing accountant the Insulform Business. He had worked at Insulform in this position for a period of almost 10 years prior to the sale to the Purchasers, and remained in the business for nine months after the sale. Greaves described a number of administrative changes to the business by Coates early in 2003, such as changes to the telephone system, the computer system, the email system and the engagement of an IT contractor. These changes were described by Greaves as follows:

Whilst the change of these systems may sound like they are of a relatively small nature, to my observation they had a significant impact on productivity.

Greaves also described the impact of the departure of Johnston and Whitaker from the Insulform Business. Although Johnston remained to assist in the Insulform Business as a consultant manager, he departed from the business not long after the sale completion in mid-February 2003. He said that:

In the period after Mr Johnston's departure, machinery breakdowns increased and as a consequence, in order to meet delivery times, greater overtime expenses were incurred. In addition, Mr Whitaker's departure also to my observation impacted adversely on the business. Whilst Mr Johnston's primary interest and responsibility lay in the manufacturing side of the operation, Mr Whitaker's skills to my observation lay in the management of people. During the course of the Whitaker/Johnston period, there were approximately 100 employees and Mr Whitaker to my observation had a great capacity to oversee the employees generally and identify those who were not pulling their weight.

In contrast, Greaves described the management style of Coates and Mutimer as being less effective, and Simmons, although he "generally appeared to have a reasonable understanding of the company's affairs and worked generally with employees" spent "perhaps 2 to 3 days per week at the factory premises". Greaves also made this observation:

It was also my experience and observation that the automotive manufacturing business was something of a closed industry where personal relationships between key stakeholders were critical. The relationship between car manufacturers and component manufactures is slightly unusual in the sense that the tooling utilized by component manufacturers for the purpose of making components for the motor vehicles is owned by the car manufacturer, not the component manufacturer. This leads to a level of vulnerability in the component manufacturer's business such that if quality and delivery issues are experienced in relation to the supply of component parts on a regular basis, the car manufacturer may well threaten to take the tooling out at any point in time.

134 I accept all the evidence of Greaves referred to in the preceding paragraph.

135 Cain said in relation to the post sale operation of the Insulform Business that the new management effectively took over management of the business in early 2003, after the Christmas break. He said that it "differed in substance and style from the earlier management", although he was not prepared to say that one management style was better than the other. Cain noted that "the style of the new managers was more directed to sophisticated information systems and understanding where profits and losses derived from". He confirmed that the Insulform factory was moved from West Heidelberg, where it had previously operated under the management of Johnston and Whitaker, to premises in Dandenong. The move was announced by Coates in late 2003 or early 2004 and was carried out prior to 30 June 2004. He further confirmed that from then on, the Insulform Business was conducted under the same roof as the INC business. The move caused a number of persons who had previously worked in the Insulform Business to leave and be replaced by new personnel, either from the INC business or as new employees to both businesses. The physical merger of the two businesses also, in my view, gave rise to likely changes in the Insulform component of the combined business.

136 Further, I am not satisfied that there was sufficient evidence to substantiate the factual basis underlying the adjustments undertaken by Blashki. He appears to have relied heavily upon instructions from the Purchasers for the facts to be used in undertaking these adjustments. Part of the factual basis was verified by Mutimer who provided the information to Blashki referred to on page 12 of his expert report. However, in calculating the adjustments necessary to attempt his comparison between the pre-sale business and its post-sale performance Blashki said in his expert report both that "[m]y analysis of the operating results identified a number of adjustments that should be made for valuation purposes" and, "[t]he amounts of all adjustments were as advised by the INC accounting staff". The adjustments included six very significant items in money terms. However, no independent verification of this information was undertaken by Blashki nor was the information the subject of any other evidence put on by the plaintiffs. For example, the Blashki adjustments in respect of the 30 June 2004 financial year included a significant adjustment reducing annual profit by $966,533 in respect of three items: special pricing discounts ($532,902); salaries incurred by INC which should have been recharged ($252,000); and research and development expenditure incurred by INC ($181,631). Blashki conceded that the directors of INC had given him this information and that these expenses were expenses incurred by INC. However, it was not something which he had personally investigated prior to giving his evidence. Further, it would be essential in my view to have established that the new business financial and operational model as developed by the Purchasers post-sale was materially identical to the new business financial and method of operation as it was prior to completion of the sale. I am not satisfied that Blashki was in a position to satisfy himself of these matters prior to him giving his evidence. Although the Blashki expert report was not the subject of any objection by the defendant, the evidentiary weight of the document and its opinions and conclusions, is greatly reduced to the point of being unreliable.

137 For these reasons, I reject the evidence of Blashki as to the value of the business as at the time of completion of the sale on 23 December 2002. As Brennan J observed in Commonwealth v Amann Aviation Pty Ltd:[10]

A plaintiff (as I shall call the party not in breach) seeking damages from a defendant (as I shall call the party in breach) bears the onus of proving both the loss sustained by reason of the breach and the damages for the loss.

I am 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 in this case.

138 The expert accountant called by the defendants, Gary Fettes ("Fettes"), relied on historical financial data, in particular the bank proposals of Coates containing financial data prepared in February and then September of 2002 and the Due Diligence Report which included the Johnston 22 January 2002 Document prepared for the Purchasers. He concluded that the actual purchase price was the fair value of the Insulform Business at the date of sale. However, in undertaking this exercise, Fettes founded his expert report on the following proposition:

The value of the business of Insulform as at the 23 December 2002 is the value at which the business would be exchanged, between a willing buyer and a willing vendor in an arms length transaction, where the parties had each acted knowledgeably, prudently and without compulsion.

In my opinion, based on the material available to the purchaser, the purchase price was fair and represents the best indicator of the value of the Insulform Business.

139 The critical flaw in this assessment of Fettes was that, as I have found, the material available to the Purchasers was false and it could not be said that they acted with full knowledge. It was not open therefore to conclude that the purchase price that they agreed to and paid was the value of the Insulform Business at the time. The Purchasers acted upon a false assumptions as to the performance of the business as had been represented to them.

140 Further, in adopting this approach Fettes necessarily accepted the accuracy of the representations as to cost savings and the value of the new business as stated by Johnston in his 22 January Document. For example, Fettes said in his report that "[t]he extent and detail of the Horwath Due Diligence Report is important in considering the value of the Insulform Business to INC". In Appendix F to his report of expert evidence, Fettes lists "Relevant Issues" arising from the Horwath's Due Diligence Report. Fettes said in cross-examination that he relied upon the historical performance of the Insulform Business "plus the fact that there was future work that was profitable which helped me in my determination of the capitalisation rate". He conceded that he relied upon Johnston's "Additional Information Document" which suggested that the business was profitable and didn't go beyond that in his enquiries. Having rejected the accuracy of Johnston's "Additional Information Document" (being the 22 January Document), it follows that I 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, I also reject the evidence of Fettes as to the value of the Insulform Business at the time of completion of the sale in late 2002.

141 Accordingly, I am 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.

142 However, I accept the evidence of Fettes to this extent: had the Principal Representation in fact been true, the price paid by the Purchasers for the Insulform Business, represented the fair value of the business at the time of completion of the sale.

143 By mid-June the Purchasers were able to obtain profit and loss statements from their accounting system which was then integrated between the two businesses, INC and Insulform. These accounts showed costs of materials as a percentage of sales for the Insulform Business during the four months immediately after the takeover on 23 December 2002 as follows: January 2003 57.7%; February 2003 66.4%; March 2003 $55.8%; and April 2003 $62.5%, with the average for the four month period calculated by Simmons at 60.9% [which ought to have been calculated at 60.6%].

144 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:

on the further assumption that each % point of the cost of materials ratio represents approximately $200,000 of gross profit per annum?

145 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.

146 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.

147 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.[11] In Commonwealth v Amann Aviation Pty Ltd[12] 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.)

148 In this case, the breach of the warranty contained in the Sale Contract which I have 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. As to this, Brennan J said in Sellars v Adelaide Petroleum NL:[13]

The cases where a plaintiff seeks damages only for breach of a contractual promise to afford the plaintiff an opportunity to acquire a benefit are in a different category from cases under s 82(1) and cases in tort where damage is the gist of the cause of action. In a case like Chaplin v Hicks [1911] 2 KB 786, the relevant loss is identified by the contractual promise to afford the plaintiff an opportunity to acquire a benefit or to avoid a detriment. McRae v Commonwealth Disposals Commission [1951] HCA 79; (1951) 84 CLR 377 at p412. A breach of the promise to afford that opportunity necessarily establishes that the loss flows from the breach.

149 The majority in Sellars[14] said this in relation to the assessment of damages in contract for loss of a chance:

In the realm of contract law, the loss of a chance to win a prize in a competition resulting from breach of a contract to provide the chance is compensable, notwithstanding that, on the balance of probabilities, it is more likely than not that the plaintiff would not win the competition.[15] As the contract contained a promise to provide the chance, the breach of the contract resulted in the loss of the chance and that loss was for relevant purposes an actual loss, in the sense in which Dixon and McTiernan JJ used that expression in Fink v Fink.[16] And, where there has been an actual loss of some sort, the common law does not permit difficulties of estimating the loss in money to defeat an award of damages.[17] The damages will then be ascertained by reference to the degree of probabilities, or possibilities, inherent in the plaintiff's succeeding had the plaintiff been given the chance which the contract promised.

This approach is not confined to contracts relating to games of chance, sporting contests or other competitions. Fink v Fink concerned a contract to provide an opportunity for a reconciliation, breach of which was held to entitle the wife to damages. And there can be no doubt that a contract to provide a commercial advantage or opportunity, if breached, enables the innocent party to bring an action for damages for the loss of that advantage or opportunity.[18] So, in The Commonwealth v Amann Aviation Pty Ltd, Mason CJ and Dawson J[19], Brennan J[20] and Deane J[21] concluded that a lost commercial advantage or opportunity was a compensable loss, even though there was a less than 50 per cent likelihood that the commercial advantage would be realized. Damages for breach of contract were assessed by reference to the probabilities or possibilities of what would have happened.

150 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.

151 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:

1. a 1% increase in the cost of materials to sales ratio represents an increase in annual costs by $200,000;
2. the difference between the cost of materials to sales ratio of 58% (as represented) and 62% is 4%;
3. a 4% increase reduces the value of the Insulform Business by $200,000 x 4 (applying the 4% difference in the cost of materials ratio) x 3 (applying the multiplier) = $2,400,000;
4. a deduction of 10% is made to reflect the warranty as I have found it, which carried with it a 10% risk that the cost of materials to sales ratio would not be achieved, resulting in following calculation: $2,400,000 - $240,000 = $2,160,000.

152 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.

153 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.

154 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%)

155 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.

156 The Sale Contract provided by clause 4.1 that the accrued employee leave entitlements for employees in the Insulform Business were to be deducted from the purchase price. A mechanism was provided in the Sale Contract for this to be achieved, as follows:

(a) pursuant to clause 1, "Accrued Employee Leave Entitlements Amount" was defined to mean an amount equal to 70% of the accrued employee leave entitlements for -

(i) long service leave for the five (5) employees of Insulform who have qualified for a pro rata long-service leave pay-out;

(ii) annual leave for all employees of Insulform; and

(iii) entitlements for Rostered Days Off for all employees of Insulform;

(b) pursuant to clause 13.3, the accrued employee leave entitlement amount was to have been determined by the Vendors and notified in writing to the Purchasers on completion. An estimate of the accrued employee leave entitlements amount was to have been provided to the Purchasers by the Vendors no later than seven days prior to the completion date.

157 In the week prior to the completion date, which was 23 December 2002, the Vendors provided the Purchasers with a calculation of the accrued employee leave entitlements amount for the purpose of calculation of the purchase price. This was provided in the form of a computer generated report from the wage records of the Insulform Business listing hourly rates and all leave entitlements for all weekly paid personnel, and a separate table with pay rates for monthly office personnel.

158 The claim made by the plaintiffs is that the Vendors' calculation of the accrued employee leave entitlements amount understated the correct amount by a total of $85,658.

159 Prior to the settlement of the sale on 23 December 2002, the parties exchanged correspondence in relation to the question of accrued employee leave entitlements. The parties took different positions in relation to the sums due, principally through their financial and legal advisers, Horwath and JA Fillmore & Co acting for the Purchasers and Colville Williams and Madgwicks who acted on behalf of the Vendors. The parties were in disagreement over the correct sum due until the day of settlement.

160 On 20 December 2002 the Vendors' solicitors Madgwicks wrote to the Purchasers' solicitors, JA Fillmore & Co. The letter proposed completing the sale with payment of a total sum at settlement of $5,832,988, which was calculated with an adjustment sum deducted for employee entitlements of $143,746.

161 On the day of settlement, Johnston and Whitaker on behalf of the Vendors agreed to compromise on the question of the disputed issue of employee entitlements and agreed to a revised amount to be paid by the Purchasers at settlement of $5,748,720. The Madgwicks' letter was altered and initialled by Johnston and Whitaker on behalf of the Vendors and by Coates and Simmons on behalf of the Purchasers. The most significant adjustment to the purchase price arose from amending the accrued employee leave entitlements from $143,746, as it appeared in the original Madgwicks' letter, to $219,861 as it appeared in the amended and initialled Madgwicks' letter. The matter was settled on 23 December 2002 on the basis of the payment by the Purchasers of cheques totalling $5,748,720 as reflected in the amended Madgwicks' letter.

162 I accept that prior to settlement the Purchasers did have difficulty in obtaining accurate figures from the Vendors as to employee entitlements. However, the Purchasers at settlement had a number of options open to them if they still took exception to the amount proposed to be deducted for employee entitlements. They could have refused to settle at all; they could have attempted to settle by tendering the sum which they asserted was due; they could have settled "without prejudice" to their right to make a further claim in respect of employee entitlements after the settlement. However, the Purchasers pursued none of these option. They instead elected to settle the employee entitlement claim. Simmons said in his evidence:

In the days before completion, an issue had arisen as to the calculation of sick leave accrued entitlements of employees, and the rights of Shmee to a reduction in the purchase price accordingly. A few days before settlement, Coates had suggested that an amount be placed [in] escrow to cover sick leave accruals as clearly no-one could say in advance whether employees would eventually take all or none of their entitlements. In the end, at settlement on 23 December 2002 for simplicity and finality we instead "split the difference" and it was agreed that we would be entitled to a reduction in the purchase price in respect of 50% of the accrued sick leave entitlements of employees. At completion, the final figure which the parties agreed to carry forward, for the purposes of settlement, therefore included an element of accrued sick leave entitlement.

163 I accept this evidence of Simmons. Simmons describes an agreement to settle the employee leave entitlement issue in relation to accrued sick leave entitlements. I infer that the agreement arrived at, as reflected in the Madgwicks' letter which was amended on 23 December 2002, also settled all other leave entitlement claims, including long-service leave entitlements, and that this agreement to compromise their claims was undertaken without any reservation of any rights the Purchasers may have had under the warranty provisions of the Sale Contract which were effectively extinguished by the compromise agreement in relation to employee leave entitlements. In this respect it is to be noted that, pursuant to clause 19.7 of the Sale Contract, the fact that a warranty claim may be resolved and therefore extinguished by agreement, compromise or settlement, is given express contractual recognition.

164 I am therefore compelled to reject this claim in spite of further investigation having been undertaken by the Purchasers on the matter "post settlement" and in spite of further evidence on the matter which may have been unearthed which questions the figure for employee entitlements which they settled upon.

165 The plaintiffs also make a claim for $58,390.57 in respect of an alleged overpayment for stock.

166 In relation to stock the Sale Agreement provided:

(a) Pursuant to clause 1, "Stock" was defined to mean all the goods and saleable stock-in-trade of the business of Insulform owned by the Vendors at the stock-take date (including all raw materials, factory supplies, work in progress and finished goods relating to the business of Insulform) whether on hand or in transit; and "Stock-take date" means 22 December 2002.

(b) Pursuant to clause 7.2, the value of the stock was to be calculated at the completion date according to the provisions of clause 8. Upon completion of the stock-take, the Vendors were required to:

If the parties agreed as to the content of the list, the list was to be initialled by the parties following which it was deemed to form part of the Sale Agreement.

(c) Pursuant to clause 8.1, the value of the stock must be determined according to the following provisions:

(i) the values to be ascribed to each item of stock were required to be calculated according to the accounting practice and principles set out in Approved Accounting Standard AASB 1019 or as otherwise agreed between the parties;

(ii) the purchaser was entitled to reject, and the sale and purchase under the Sale Agreement was not to include, any stock which had been held by the Vendors for more than four (4) months before the stocktake unless the Vendors and the Purchasers otherwise agreed, or in the absence of agreement a valuer agreed on by the parties determines (in accordance with the accounting practices and principles set out in Approved Accounting Standard AASB 1019), that the stock was not excessive to the needs of the business of the company as an ongoing concern in the ordinary course.

167 On completion date, being 23 December 2002, Shmee paid a sum of $600,000 pursuant to the Sale Agreement. This comprised the estimated stock value due to Bresam and Melamybek as part of the total purchase price of the business. Pursuant to clause 7.2 of the agreement, the defendants submitted a stock list to Shmee. However, the Purchasers allege that the stock list contained references to items that should not have been listed. Those items were raw materials and finished products which had been held by the Vendors for a period of more than four months prior to the date of the stocktake. The total value of such items which should not have been listed was $58,390.57. Details of the alleged Stock Value errors were contained in a document entitled "Insulform Stock Valuation Errors as at 24 December, 2002", a copy of which was provided to Madgwicks, solicitors for the Vendors by facsimile from the solicitors for the Purchasers on the 10 December 2004.

168 On completion date, 23 December 2002, the Purchasers allege that the Vendors represented that the stock list which had been submitted to the Purchasers was accurate and did not contain stock which had been held by the Vendors for a period of more than four months before the date of stock date. The question of the accuracy of the stock-take performed under the Sale Agreement, was raised by Coates at a meeting on that day at the board room at Insulform. Johnston, Whitaker, Fred Gerardson and Matt Greaves were present at the meeting on behalf of the Vendors. The Purchasers allege that one or other of such persons, in the hearing of the others responded to Coates that he could be assured that there were no redundant parts, that P & A Parts were made to order and not stocked, and that all stock was saleable.

169 The Sale Agreement provided a facility for stock to be "rejected" by the Purchasers. This did not occur. The Purchasers, however, seek to make their claim under the "non-disclosure" clauses of the Sale Contract.

170 On the day of settlement, Johnston and Whitaker on behalf of the Purchasers initialled a copy of the Madgwicks' letter dated 20 December 2002. The letter was also initialled by Johnston and Whitaker on behalf of the Vendors. The letter included the following item: "Estimated Stock Value $600,000". On 23 December and 24 December a stocktake was conducted at the Insulform premises pursuant to clauses 7 and 8 of the Sale Agreement. This exercise was conducted while representatives of the Purchasers' consultants Horwath, including Fiona Hansen, were present. An agreement for the final stock figure was arrived at in the sum of $570,948. The figure was agreed between Mr Gerardson and Mr Greaves of Insulform on the one hand and representatives of Horwath, including Fiona Hansen on behalf of the Purchasers on the other.

171 The agreement arrived at in relation to stock was evidenced by a letter from Hansen of Horwath to the directors of INC dated 8 January 2003 in the following terms:

As you are aware, we planned to conduct our stocktake on 23 December 2002 based on notification from Insulform that final stock count would occur on this date. Upon our arrival, however, we were advised that although Insulform had conducted the physical stock take on 22 December 2002 and early morning 23 December 2002, the final stock sheets have not been compiled. We were therefore advised to return on 24 December 2002 to complete our stock test counts and stock valuation procedures.

We conducted our stock on a random sample basis in the warehouse and the production floor on 23 December 2002 and then counted additional items on a random sample basis on the 24 December 2002 to determine whether all stock counted has been accurately recorded on the stock sheets that were produced by Insulform. We also finalised the stock valuation testing on 24 December 2002 with assistance of Insulform's personnel.

Based on our observations and enquires, we conclude that Insulform's physical stock count procedures were adequate.

The following is the summary of the stock value that was determined as a result of the physical stock take and valuation procedures conducted on 24 December 2002. The final stock value was agreed with Mr Fred Gerardson and Mr Matthew Greaves of Insulform.

Variances between Horwath's count and Insulform's count

During our random sample test counts, we noted that quantity of certain items counted by Insulform's personnel did not agree to our count. A summary of the stock items counted and variances noted is attached as Appendix A. These variances, however, were not material to warrant an amendment to the final stock value.

We performed stock valuation of certain stock items on a random sample basis. We noted that the raw materials were valued at the last purchase price.

Imported raw materials were valued at the last purchase invoice price converted at the rates as per the bill of lading, excluding the import duty component. At the instance of Mr Fred Gerardson the import duty component as per the last purchase invoice was included in the valuation of raw materials. This is in accordance with AASB 1019 "Inventories" which states that inventory must be measured at the lower of cost and net realisable value on an item by item basis. A summary of raw materials stock is attached in Annexure B.

We understand that it was agreed between the parties that finished goods were to be valued at 90 per cent of the selling price. On a random sample basis we selected finished goods items and compared the stock item value to the sales invoices to determine whether the valuation of finished goods was accurate. A summary of the finished goods stock is attached in Annexure C.

Should you have any queries please do not hesitate to contact us.

172 On 21 January 2003 Madgwicks, the solicitors for the Vendors, received a letter from JA Fillmore & Co, solicitors for the Purchaser stating that the total stock agreed at the settlement date was $570,947.62. The letter requested a cheque in the sum of $29,052.38 representing the difference between the estimated stock figure of $600,000 (which had been paid at settlement) and the agreed stock figure of $570,947.62. In response, on 31 January 2003, a cheque was drawn by the vendors in favour of Shmee for the sum of $29,052 and paid to Shmee.

173 I accept that the circumstances surrounding the undertaking of the stocktake were accurately described in the letter from Hansen of Horwath to the directors of INC dated 8 January 2003. Given what followed, being the request for payment of the agreed amount from the Purchasers' solicitors, followed by payment of the agreed sum, I am of the view that, whatever rights the Purchasers may have had under the warranty provisions of the Sale Contract, these were abandoned by the agreement to compromise the stock claim in the manner described. Further, there was no reservation of any rights under the warranty provisions of the Sale Contract preserved for the Purchasers in the compromise agreement in respect of stock. Again it is to be noted that, pursuant to clause 19.7 of the Sale Contract, the fact that a warranty claim may be resolved and therefore extinguished by agreement, compromise or settlement, is given express contractual recognition.

174 For these reasons, I reject the claim of the plaintiffs for $58,390.57 in respect of the alleged overpayment for stock.

[1] [1985] HCA 65; (1985) 158 CLR 661.

[2] [1994] HCA 4; (1992) 179 CLR 332 at 348 per Mason CJ, Dawson, Toohey and Gaudron JJ.

[4] [2004] HCA 54; (2004) 217 CLR 640.

[6] [1940] HCA 43; (1940) 64 CLR 282.

[7] [1984] HCA 68; (1984) 157 CLR 215.

[8] [1995] HCA 4; (1995) 184 CLR 281.

[10] [1991] HCA 54; (1991) 174 CLR 64 at 99.

[11] Cheshire and Fifoot's Law of Contract, 9th Australian edition (2008) 1091 para [23.14].

[13] [1994] HCA 4; (1992) 179 CLR 332 at 359.

[14] Mason CJ, Dawson, Toohey and Gaudron JJ at 349.

[15] Chaplin v Hicks [1911] 2 KB 786; McRae v Commonwealth Disposals Commission [1951] HCA 79; (1951) 84 CLR 377 at pp411-412.

[16] [1946] HCA 54; (1946) 74 CLR 127 at 143.

[17] [1946] HCA 54; (1946) 74 CLR 127, 143.

[18] The Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; (1991) 174 CLR 64.