Reliance and causation
92It will be seen that the parties' statement of the real issues in dispute differentiates between reliance on the one hand and causation ("by") on the other. I am not sure that the distinction is appropriate.
93In this case, the plaintiffs claim to have suffered damages "by" the defendants' misleading or deceptive conduct. The conduct alleged is the making of representations that were incorrect, and thus misleading or deceptive, at the time they were made. The plaintiffs say that they relied on those representations in deciding to enter into the contract for the purchase of the defendants' business.
94On analysis, this is not a case where the value of the business was affected, positively or negatively, by the misleading or deceptive conduct alleged. Nor, on analysis, is it a case where the plaintiffs suffered damage (if they did) on the making of the contract, because at that very moment they agreed to pay more for the business than its true value.
95Instead, the plaintiffs' case is that, by reason of subsequent events unrelated to the misleading or deceptive conduct, and not said to have been foreseeable at the time the contract was made, the business became worth less than they had paid for it.
96In many cases, where the making of a contract (or the contract immediately upon its making) is inherently disadvantageous to one party, that party may be said to suffer loss immediately upon, and by reason of the making of, the contract. In those circumstances, if the making of the contract was induced by misleading or deceptive conduct, it may be correct to say that the loss flowing from the making of the inherently disadvantageous contract was loss caused "by" that misleading or deceptive conduct. In such a case, the question of causation may well be coextensive with the question of reliance.
97In this case, however, the question of causation can only be resolved by considerations of reliance if the exclusive test of causation, for the purposes of s 68 of the Fair Trading Act (NSW) 1987 (which is the source of the statutory prohibition on misleading or deceptive conduct on which the plaintiffs' pleaded case relied), is the "but for" test.
98Since it is by no means self-evident that the "but for" test is the sole test of causation in the statutory context with which I am concerned, and because that proposition was very much in contest, it is appropriate to deal with the questions of reliance and causation together. The question, ultimately, is not just whether Messrs O'Shea, Rufford and Salmon relied on such representations as are shown to have been made to them. It is whether they, or the corporate vehicle that they incorporated for the purposes of the transaction, suffered damage "by" the making of those representations, to the extent that they have been shown to be incorrect. I should record at this point that the defendants' submissions drew no distinction between that corporate vehicle and the individuals who, ultimately, stand behind it.
99In short, even finding that the making of the incorrect representations, as to compliance, was a substantial, or not insignificant, cause of the plaintiffs' decision to enter into the purchase contract it would not resolve the statutory test of causation in the plaintiffs' favour, unless it can be shown that they suffered loss by the making of that contract.
The relevant principles
100The starting point is, I think, that as Gleeson CJ said in Travel Compensation Fund v Tambree (2006) 224 CLR 627 at [30]:
... in deciding whether loss or damage is "by" misleading or deceptive conduct, and assessing the amount of the loss that is to be so characterised, it is in the purpose of the statute, as related to the circumstances of a particular case, that the answer to the question of causation is to be found.
101Thus, as Gummow and Hayne JJ said in the same case at [45], the answer to the question of causation differs according to the purpose for which the question is asked.
102The purpose of s 68 of the Fair Trading Act is to reinforce the statutory proscription, in s 42 of that Act, of misleading or deceptive conduct, and to ameliorate the consequences of such conduct. It does so by giving the victim of that conduct a statutory right to recover from the perpetrator its monetary consequences. It follows, on the one hand, that no narrow test of causation should be introduced; but that, on the other, too wide a test of causation may unnecessarily hinder commercial activity without in any way serving or promoting the statutory proscription.
103One of the curious features of the statutory test of causation in s 68 of the Fair Trading Act is that, as Gummow J observed in Elna Australia Pty Ltd v International Computers (Aust) Pty Ltd (No. 2) (1987) 16 FCR 410 at 419, it appears to telescope "what to the common law would be issues of causation, remoteness and measure of damages". That proposition, too, highlights the need to pay careful attention to the statutory purpose intended to be served by s 68 in determining, in any given case, the question of causation that it poses.
104In the present case, the misleading or deceptive conduct alleged is a positive misrepresentation, or incorrect representation: that all the defendants' metal playground products complied with the requirements of the standard. Consideration of the causal consequences of that conduct directs attention to what followed from it. Assume, as the plaintiffs say, that what followed from the conduct was the making of the contract to purchase the business. It is not said that the contract was made at an over-value at the time: that is to say, it is not said that, at the time the contract was made, the business was worth less than the plaintiffs paid for it. Nor is it said that what the plaintiffs argue to be the subsequent diminution in the value of the business was in any way caused or contributed to by the misleading or deceptive conduct complained of. That is, the plaintiffs do not say that the business was worth less than they agreed to pay because seven products did not comply with the standard.
105In those circumstances, it is difficult to see why the policy underlying s 42 of the Fair Trading Act, in aid of which s 68 (among other provisions) serves, requires that the defendants should be the guarantors of the plaintiffs' business success.
106In truth, I think, the plaintiff's focus on the "but for" test as the proper test of causation in the circumstances of this case is misplaced.
107In Henville v Walker (2001) 206 CLR 459, McHugh J said at [103] that conduct (whether it be act, omission, statement or suggestion):
... will not be regarded as causally connected with the detriment if it provides no more than the reason why the person acted to his or her detriment. If the defendant intended the person suffering a detriment to act in the general way that he or she did, the common law will invariably hold that a causal connection existed between the conduct and the detriment. But if the conduct merely provides the reason why the person acted, it will not be sufficient to establish a causal connection unless the purpose of the legal norm that the defendant has breached is to prevent persons suffering detriment in circumstances of the kind that occurred.
108In the present case, the plaintiffs do not suggest that the conduct complained of caused them to act to their detriment. They do not suggest that the business was worth less than they paid for it at the time they purchased it. They do not suggest that they suffered detriment when they entered into the contract for purchase. As I have pointed out, if they suffered detriment, it was because, by reason of subsequent events that had nothing to do with the misleading or deceptive conduct, the business deteriorated and, on the plaintiffs' case, is now worth nothing.
109On that analysis, the defendants' conduct may have provided a reason why the plaintiffs find themselves in the position of which they now complain. But it does not follow that the defendants' conduct caused that position, or that, induced by it, they acted to their detriment.
110Applied to the facts of the present case, the statutory purpose required that the defendants not misrepresent the extent of their products' compliance with the standard. Vindication of that statutory purpose would, at least prima facie, require that the defendants make good any loss that the plaintiffs have suffered because in fact some of those products did not comply with the standard.
111But in my view, vindication of the statutory purpose does not require the defendants to assume financial responsibility for all the economic consequences of the decision to purchase. Nor does it require that the plaintiffs should be relieved of what have proved to be the financially ruinous consequences of their purchase, by the happy accident that a cause of the decision to purchase was, taking into account the scale of the transaction, a trivial misrepresentation that is related to those disastrous financial consequences only (if at all) by chronology, or by a strict application of the "but for" test.
112I accept, of course, that the statutory test of causation accommodates multiple causation. In Henville itself, the plaintiff's decision to buy land for the purposes of development resulted from the feasibility study that he had prepared which showed that the development would be profitable. That feasibility study was flawed partly because the plaintiff underestimated the cost of the project, and partly because the defendant real estate agent had misrepresented the likely selling price of units in the development. That was a case where the misleading or deceptive conduct was a cause of the decision to enter into the transaction. It was also a case where the plaintiff suffered loss on entry into the transaction, because the development would inevitably show a loss; and the defendant's conduct was a cause of that loss. Conceptually, it was no different to a case where the misleading or deceptive conduct induces the plaintiff to enter into a contract to purchase an asset at more than its true value (compare Potts v Miller (1940) 64 CLR 282). But this is not such a case.
113I note that, in a case involving what was characterised as an express negative representation, Beazley JA (with whom Ipp and Tobias JJA agreed) said that in considering the statutory test of causation, "what has to be done is to ascertain what would have occurred for the respondent not to have engaged in conduct which was misleading". See Abigroup Contractors Pty Ltd v Sydney Catchment Authority (No.3) (2006) 67 NSW LR 341 at [59].
114What her Honour said may not be directly applicable to the facts of this case, because this is a case of an express positive misrepresentation. Nonetheless, her Honour's observation demonstrates the importance of identifying the consequences of the conduct. In my respectful view, what her Honour said is to be understood as providing an illustration of how, on the particular facts of that case, the process of analysis should be undertaken. I mention this because the decision played some part in submissions of counsel in the present case.
115To rephrase the matter: accepting, for the moment, the plaintiffs' case on reliance, they did not agree to accept, or to accept at their peril, the risk of non-compliance. They did agree to accept the risk of adverse financial outcomes unrelated to compliance. In the present case, the loss for which the plaintiffs claim damages under s 68 is the result only of an adverse financial outcome unrelated to compliance. The plaintiffs have never suggested that they lost a single sale, or the custom of any business, because some of their products did not comply with the standard.
116The plaintiffs had all the information that they sought in relation to the business, its finances and prospects. They had the opportunity to conduct all the investigations they wanted into those matters. They availed themselves of that opportunity. Their projections as to the future (generally, and of the business in particular) proved to be wrong, for reasons to which I will turn. They did not prove to be wrong, nor were they falsified, because of the defendants' misrepresentations as to compliance.
Reliance
117As I have said, the individuals ultimately standing behind HM&O, and thus behind TAP 2, are Messrs O'Shea, Rufford and Salmon. Such express evidence as there was devoted to the topic of reliance was given by Messrs Rufford and Salmon. For reasons that are unexplained, Mr O'Shea did not give evidence.
118Mr Loewenstein submitted that, in addition, the Court could infer reliance from the facts that:
(1)the representations were of their nature material to the decision to buy the business;
(2)they were made with the intention of inducing the plaintiffs to buy that business; and
(3)the plaintiffs did in fact buy that business.
See Gould v Vaggelas (1984) 157 CLR 215.
119It was of course HM&O, and not Messrs O'Shea, Rufford and Salmon individually, that purchased the business. HM&O had not been incorporated at the time the representations were made. Nonetheless, debate proceeded on the basis that "any representations made to a person associated with a company, relating to the business intended to be purchased by the company, also constituted a representation to the company, at least in the absence of a statement to the company correcting the position" (see written closing submissions for the defendants at [50]). The qualification to that proposition can be ignored. There was no "statement to the company correcting the position".
Mr O'Shea
120The question of reliance requires consideration of the states of mind of the three individuals standing behind HM&O. The plaintiffs' case thus faces the immediate problems that one of those individuals - Mr O'Shea - did not give evidence. There was no reason offered as to his absence from the witness box. The defendants submitted that a "Jones v Dunkel" inference should be drawn, from the failure to call him (Jones v Dunkel (1959) 101 CLR 298; for a more recent exposition of the relevant principles, see Kuhl v Zurich Financial Services Australia Ltd (2011) 243 CLR 361).
121Mr O'Shea cannot be disregarded, or treated as irrelevant. It was Mr Salmon's evidence that Mr O'Shea and Ms Zilla O'Shea (whose relationship to Mr O'Shea is not explained) "decided to provide the bulk of the funding to purchase the business" (affidavit sworn 23 July 2010, para
47). It appears that Mr O'Shea or entities associated with him paid the deposit of $480,000.00 (same affidavit, para 51) and that entities associated with each of the individuals each contributed $1,566,666.67 towards the balance of purchase money (same affidavit, para 58).
122On any view, Mr O'Shea was a substantial investor, contributing more than $2,000,000.00 to the venture.
123From Mr Salmon's affidavit evidence, it appears that Mr O'Shea:
(1)wanted advice from his accountant and lawyer before deciding to enter into the transaction;
(2)attended the premises of TAP 1 during the week started 8 January 2007, when Mr Rufford undertook his due diligence investigation of the financial side of the business with the assistance of an independent account; and
(3)was given a copy of the Blitz brochure and shown around the business; it does not appear that he ever read it or paid any attention to what the brochure said.
124Mr Rufford said that he, Mr O'Shea and Mr Salmon had some discussions about the business (without giving details of those discussions) and that he and Mr Salmon met Mr O'Shea's accountant to discuss aspects of the proposed investment (again without giving details).
125There is no evidence that Mr O'Shea was told about the standard, or its importance, or that representations had been made as to compliance with the standard.
126The three venturers met on 12 January 2007. On that date, they decided to proceed with the purchase. There is in evidence a minute of that meeting. Omitting formal parts, the minutes record:
Meeting was called to Discuss DD process at Teach & Play (TAP).
Glenn Rufford indicated there was no issue regarding numbers being checked. Only real concern would be loss of customers.
It was decided to register HM&O with ASIC and proceed with business purchase.
127On the evidence, I am not prepared to find that Mr O'Shea ever had his attention drawn to, or otherwise paid any attention to, the question of compliance. I am not prepared to draw the inference that the question of compliance was of any significance to him. The only inference available from the evidence is that Mr O'Shea was interested solely in the business side. That is why he wanted advice from his accountant, and that is why he wanted a due diligence investigation to be undertaken of the performance of the business.
128Taking into account both the limited nature of the evidence as to Mr O'Shea's involvement and concerns, and the unexplained failure to call him, I conclude that his evidence on the question of reliance would not have assisted the plaintiffs.
Mr Rufford
129Mr Rufford said that the question of compliance was "a pre-requisite" to his interest in the defendants' business (affidavit sworn 23 July 2010, para 30). He said that he was not interested in buying a business which supplied non-compliant products, and that he would not have been interested in buying the business had he been aware that it was manufacturing non-compliant products (same paragraph).
130Mr Rufford sought to explain away the failure to undertake any due diligence investigation on the question of compliance as follows (same affidavit, para 44):
44.I did not have experience or expertise in manufacturing the products produced by the Business. Given the representations both oral and in writing that the equipment complied with or exceeded the safety requirements of the Australian Standard for playground equipment, it did not occur to me that I needed to have it confirmed. I did not test the playground equipment manufactured by the business for conformance with the Australian Standard and did not retain anyone with the requisite expertise to do so.
131That is a remarkable explanation. Mr Rufford had undoubted qualifications to investigate the financial side of the business. But nonetheless, he (together with Mr Salmon) retained an independent accountant to assist in that process. He had available to him the expertise and services of Mr Crellin who, as I have said, was apparently regarded as sufficiently qualified to express opinions on, among other things, the question of compliance. Mr Crellin was not asked to undertake any due diligence investigation into the question of compliance.
132I do not accept that Mr Rufford was prepaid, without question and without investigation, to act on representations as to one matter which was said to have been fundamental to his decision to purchase; whilst at the same time undertaking, with the benefit of external assistance, detailed investigations into another fundamental aspect. That inconsistency reflects adversely on Mr Rufford's evidence, both generally and, specifically, in relation to reliance.
133Further, Mr Rufford's position on reliance was undermined in the course of cross-examination. Mr Rufford was questioned (as was Mr Salmon) as to what his position would have been had he been told, before HM&O entered into the purchase contract, that about 31 items did not comply with the standard and that it might have cost up to $50,000.00 to change the production process so as to ensure that those items did comply. His answer suggested less than complete certainty (T292.6 -.20):
Q.Can I ask you, Mr Rufford, if you just assume for the moment that in one way or another you became aware before exchange of contracts for the purchase of the business that around thirtyone out of a hundred metal playground equipment items manufactured by the business did not comply with the Australian standard. I just want you to assume that somehow you became aware of that. I want you to assume you were told or investigated and found it would cost in the order of 30, 40 or $50,000 to change jigs and matters of that sort, to make those thirtyone items comply. I just want you to assume that you were told that before you bought the business. If you had those two pieces of information, you would still have bought this business for the same purchase price, wouldn't you?
A. If I had the information that it did not comply, no, I would not have bought the business. If subsequent conversations could have identified the cost, assume it was 30, 40, 50 or a million dollars, I don't know, then that would have been the discussion we would have had to have had, but we did not.
134To my mind, the clear inference from this answer is that if (what were then thought to be) the relevant disclosures were made, the question would have been one to be discussed, in the light of the estimated cost of rectification. Although Mr Rufford did not indicate who would be the parties to that discussion, it is clear that at least Mr O'Shea and Mr Salmon - the other venturers - would have been involved.
135I should make it clear that the question focused on 31 products, because that was then the plaintiffs' case on actual non-compliance. The compliance costs put to Mr Rufford come from the evidence that the defendants were proposing to lead (and in due course did lead). Their evidence now is that, for the seven non-compliant products, the cost of work necessary to make the products compliant would have been about $3,000.00 in 2007, and about $7,000.00 in 2008.
136Mr Rufford was unable to say, even on the question put to him, that nonetheless his decision would have been not to proceed. Had a question been put incorporating what may now be assumed to be the true state of affairs, it is unlikely that his hesitation would have been any less pronounced.
137The next question and answer to my mind confirm this reading of Mr Rufford's attitude. He was asked whether he would have decided to proceed with the purchase had there been no representations at all as to compliance, and was unable to answer (T292.22-.28):
Q.I just want you to assume a different situation. Just assume for the moment that nobody had told you, orally or in writing, that all the business's metal playground equipment products complied with the standard. I want you to you assume that none of that was said to you and that you did not see it in any document before exchange, you still would bought this business, wouldn't you?
A. No. I can't answer that.
138The context in which these aspects of Mr Rufford's evidence (and the evidence of Mr Salmon, to which I will turn in a moment) must be assessed includes:
(1)the earnings before interest and tax (EBIT) of the business, for the six months to 31 December 2006, had been, in round figures, $800,000;
(2)the plaintiffs were proposing to undertake due diligence to assure themselves that this recorded EBIT had in fact been achieved; and
(3)the plaintiffs were seriously contemplating the purchase of that business for the sum of $4.8 million; and
(4)the business (including both Ingram Products and TAP 1) sold about a thousand products in total; even if the metal playground equipment were the core and most profitable part of that business, there were only about 100 such products, of which (on the now known state of affairs) only 7 were non-compliant.
139To my mind, it defies belief to say that people who were seriously contemplating the purchase of such a business, for $4.8 million, would have baulked had they been told that they might have to spend $3,000.00 on making some seven products compliant: particularly, where the process of making those products compliant, and of testing their compliance, was anything but complex.
Mr O'Shea
140As to Mr O'Shea's position, I repeat that there is no way of knowing what his attitude would have been to the hypothetical disclosure, just as there is no way of knowing his attitude towards the importance of compliance (assuming it to have been drawn to his attention): because he has not given evidence.
Mr Salmon
141Mr Salmon's affidavit evidence was to the effect that the question of compliance was of primary concern to him, and that (for his part) he would not have proceeded but for the representations as to compliance. It was, he said, a moral issue involving the safety of children (see for example paras 23 and 24 of his affidavit sworn 23 July 2010).
142Mr Salmon was questioned in the manner referred to at [133] in relation to Mr Rufford. However, unlike Mr Rufford, Mr Salmon did not depart from his story. He referred to the possibility of children harming themselves, and to the possibility of litigation arising out of "the equipment that is existing out in the field already". As to this latter point, he acknowledged that his company might have no legal liability for products manufactured and sold by the defendants, but said (in arrogant and self-serving terms) that it was a moral obligation rather than a legal one (T92.32-93.28):
Q.If you just accept from me that if you take $100,000 per year gross, divided 52 weeks and 40hour weeks, it comes roundabout $50. I want you to assume that is an accurate calculation. Can I ask you a different question. I want you to assume that the reasonable costs of having a boiler maker change thirty odd jigs to make products compliant, together with the reasonable costs of testing a hundred odd metal playground equipment items, and the reasonable costs of deciding on changes, amending cutting lists, et cetera, all comes to roundabout $30,000 or $40,000; I just want you to assume that?
A. Why am I assuming that?
Q. For the purpose of my next few questions. If you had become aware prior to exchange or prior to completion that there were thirty odd noncompliant metal playground equipment products, the thirty about which this case is concerned, and assume for the moment that you had been told the reasonable costs of testing those changing jigs et cetera to result in compliant products, was in the order of $30,000 or $40,000, you would have bought this business?
A. Absolutely not. A business that is producing noncompliant equipment, going out to children's day care centres, where children can harm themselves, absolutely not.
Q. Assume for the purpose of my question that if you had been told it would cost $30,000 or $40,000 to make these thirty noncompliant items compliant, and that if you took over the business it would take you two to three weeks to turn these thirty noncompliant products into compliant products, you would have bought this business, correct?
A. Absolutely not. You are forgetting the equipment that is existing out in the field already that we have inherited with this purchase.
Q. Well, that was made by a business owned by two individuals, Mr and Mrs Ingram, correct?
A. Yes.
Q. When you bought the business, you incorporated a company, Teach & Play Pty Ltd?
A. Yes.
Q. So that if anybody sued you in relation to products made by the Ingrams, if they tried to sue you, your simple defence would be that Teach & Play Pty Ltd did not make that equipment, correct?
A. You have been hanging around the courts too long. This is not a legal issue, this is a moral obligation to the children out in the day care centre to ensure their safety. There is no way in the world we would have purchased this business if we had known that they were manufacturing equipment that was noncompliant, and that we would be potentially be exposed and potentially have to rectify. There is an obligation here, it goes beyond the legalities. There is a moral obligation to ensure the health and wellbeing of these children. That is what the Australian Standard is all about.
143The last answer set out is notable for two reasons. One is the contemptuous dismissal of counsel as someone who has "been hanging around the courts too long". The other is the assumption of the high moral ground, based on the "moral obligation to ensure the health and wellbeing of these children".
144Mr Salmon was tested on both aspects of that answer. His first response, in relation to "the legalities", was the tried and true response of evasion (T93.30-.36):
Q.Let's just deal with the legalities first. If you had been sued for injury caused by products manufactured by the Ingrams, your simple defence would have been, in your own mind, Teach & Play Pty Ltd did not make that equipment, correct?
A. In what context are you setting this question up? The foreknowledge that we had that the equipment was possibly noncompliant? I don't understand the context of that question.
145He was then asked about the "moral obligation". He conceded, reluctantly and after further evasion, that TAP 2 (which actually conducted the business after the purchase) had sold non-compliant equipment, and in any event had undertaken no program of notification of potential danger, or of recall of non-compliant equipment (T93.38-96.18; I will not set out that passage of evidence).
146Counsel then returned to the topic of Mr Salmon's reaction to the hypothetical disclosure of the extent of non-compliance and cost of repair, and it was put to him that his evidence of concern was untrue. He denied that. However, his true concern then became apparent: it was the viability of the business (T96.20-.45):
Q.You see, earlier when I put to you that you would have bought this business if you knew of the noncompliance and you knew $30,000 or $40,000 would remedy about two or three weeks work?
A. That is what you say.
Q. And your answer was a very emphatic, no, because of your high concern with the safety aspects with children, remember that?
A. Yes, that is one aspect of it. Yes.
Q. And you see
A. In isolation.
Q. You see, that answer, that is, you would not have bought it against the assumptions that I asked you to make because of that concern to safety is untrue, isn't it?
A. No.
Q. Because if you had one iota of concern for the safety of children, when you found out about the noncompliance, if you had any concern, you would have made sure that every school playground or child care centre that received noncompliant products was absolutely aware that in the worst of circumstances, for example, a child using one of the products manufactured by you might die, correct?
A. No, that is not right. I have already indicated that we let our major customers know who supplied the bulk of that market place, and marrying that up to keep the business viable, we did as much as we possibly could do.
147Mr Salmon said, further, that in respect of sales either through wholesalers or direct, TAP 2 undertook no communication with users of the products to advise them of the risk of harm of non-compliance (T97.24-.28). Presumably, that too reflected his concern "to keep the business viable".
148To my mind, Mr Salmon's reluctantly extracted admission of preference for business viability over the risk of harm to children undermines this aspect of his evidence in a very significant way; and, of course, reflects adversely on his credibility at large.
Analysis and conclusion on the question of reliance
149The stark facts are these:
(1)the defendants made representations to Messrs Rufford and Salmon as to compliance with the standard;
(2)Messrs O'Shea, Rufford and Salmon received information on the financial performance of the business;
(3)Messrs Rufford and Salmon asserted that the question of compliance was critical;
(4)clearly, having regard to the purchase price being sought (and ultimately paid), the question of financial performance was also critical;
(5)Messrs O'Shea, Rufford and Salmon undertook, or caused to be undertaken, a detailed due diligence investigation of the financial performance and business affairs of; the defendants' business;
(6)Messrs Rufford and Salmon did not, on the evidence, discuss the question of compliance with Mr O'Shea;
(6)Messrs Rufford and Salmon did not cause any investigation whatsoever on the supposedly crucial question of compliance;
(7)Messrs Rufford and Salmon had the means of investigation available: Mr Crellin, who is associated with them in York;
(8)there is no evidence to suggest that Mr Crellin was, in late 2006 or early 2007, incapable of doing what he did (or purported to do) somewhat later: namely, test the products for compliance with the standard; and
(9)nor is there any evidence that Messrs Rufford and Salmon asked for an opportunity to undertake compliance testing.
150I accept that the question of compliance was regarded by Messrs Rufford and Salmon as being not only relevant but important. It was important if only because, in their minds, the ability to offer compliant products was a significant marketing opportunity which would enable them to promote the business if the purchase proceeded. So much is apparent from:
(1)an investment proposal prepared by one or other or both of Messrs Rufford and Salmon, seeking funding for the purchase; and
(2)an analysis prepared for consideration at a board meeting at HM&O in February 2007.
151It does not follow, from the fact that compliance was important, that the transaction would not have proceeded if the correct situation, as to non-compliance and cost of making compliant, had been disclosed. The question is not one to be answered by absolute analysis or the statement of some black and white proposition. It is in my view clear that what was important to Messrs Rufford and Salmon was the relationship between compliance and business performance.
Reliance and causation
152I can accept that if there had been disclosed wholesale non-compliance, and uncertainty as to the extent to which compliance could be achieved (or the cost at which it could be achieved), that might have deterred Messrs Rufford and Salmon from proceeding any further. But if what had been disclosed was limited non-compliance, combined with quick, cheap and easy rectification, the position would be different.
153I do not accept Mr Salmon's evidence that he would not have proceeded if the true extent of non-compliance, and likely cost of rectification, had been disclosed. A fortiori, I am not prepared to infer that his answer would have been the same had the real position, as to the number of non-compliant items and likely cost of rectification, been disclosed.
154I conclude from Mr Rufford's evidence that he would have wished to consider the matter. As I have said, the important thing for him was the impact of any non-compliance on the performance and profitability of the business. Given the limited nature of the non-compliance and the low cost of rectification, it must have been apparent that there would be no impact: particularly having regard to the analysis at [168] to [172] below.
155I accept that Mr Rufford may have wished for some further assurance, perhaps by way of a compliance audit. Had that been done, it would no doubt have turned up the position that has been established through the adoption of the referee's report, and the position established by the defendants' evidence as to cost.
156Since Mr O'Shea has not troubled to tell the court of his reasoning process, or reaction to the disclosure of the true situation, I am not prepared to draw any inference that he would not have proceeded if the true position had been disclosed. That extends to the Gould v Vaggelas inference on which Mr Loewenstein relied.
157In my view, putting the limited non-compliance, and likely cost of rectification, into context (of the transaction as a whole), and accepting as I do that the question of compliance was important, the evidence does not support a conclusion that, had the correct situation been disclosed, the transaction would not have proceeded.
158On the contrary, I conclude, bearing in mind the concerns of Messrs Rufford and Salmon and the nature of the investigations that they undertook, it is likely that, if the real position had been disclosed and if they had satisfied themselves that the question of non-compliance could be rectified at minimal cost, the disclosure would not have provided any impediment to the transaction.
159I do not accept the evidence of Messrs Rufford and Salmon that is contrary to the conclusions that I have set out. I infer, on the contrary, that their reaction to disclosure of the true situation would have been to proceed one assured of compliance (as to which, see at [168] to [172] below).
Reliance and causation: some counter-factual situations
160In the course or argument, there was discussion of what would have to have occurred for the defendants not to have engaged in conduct that was misleading or deceptive. That discussion was sparked by what Beazley JA had said in Abigroup at [59] (see at [113] above). Although her Honour was speaking in the context of a case involving (as the Court of Appeal characterised it) an express negative representation, and on the face of things this is a case involving an express positive representation, it seems to me that her Honour's method of analysis can be applied to the present case.
161One way in which the defendants could not have engaged in misleading or deceptive conduct was by saying nothing whatsoever about the subject of compliance. However, that seems to me to be a theoretical and quite implausible hypothesis. The reality of this case is that the defendants had made it a highly significant feature of the business of TAP 1 that its products complied with the standard. That was represented repeatedly in the Blitz brochure and in numerous other documents produced by the defendants; and it was of course referred to more than once in the business profile. It is difficult to imagine how, in the real world, it would have been possible for the plaintiffs to buy the business without becoming aware of the question of compliance.
162Thus, I think, this scenario can be discarded.
163Mr Loewenstein submitted that, if the defendants were not to have engaged in conduct that was misleading or deceptive, it would have been necessary for them to represent, in substance, that although they believed that most of TAP 1's products complied with the standard, some unknown number did not; and that it would be expensive and time-consuming to test for compliance.
164Mr Curtin SC (who appeared with Ms English of counsel for the defendants) submitted that it would have been sufficient for the defendants to represent that all but seven of TAP 1's products complied with the standard; that it would cost no more than $600.00 to reconfigure TAP 1's jigs and processes to ensure that those seven products would in the future comply; and that in any event, all 100 products could be tested, for compliance, at a cost of about $3,800.00.
165I have no doubt that if the defendants had made a representation to the effect of that advance by Mr Curtin, the plaintiffs would have proceeded. They were looking to pay some $4.8 million for the defendants' business. That was the asking price that the defendants wanted. The defendants had assessed that figure by taking EBIT for the six months to 31 December 2007, doubling that (to represent 12 months' EBIT) and applying a multiple of 3.
166The plaintiffs carried out their own assessment of the business, with the assistance of an independent accountant, Mr Bell. Their method of assessment was somewhat different. The plaintiffs put to one side the earnings for the six months to 31 December 2007, no doubt because they were substantially higher than earnings for prior six month periods. Further, the plaintiffs calculated what appeared to be an EBIT figure that was adjusted to allow for the possibility of losing major customers to the extent of 40% of sales. By that means, the plaintiffs derived what appears to be an adjusted or normalised EBIT of $540,000.00. Nonetheless, they were prepared to pay the price that was asked.
167Accepting as I do that the question of compliance was of importance to the plaintiffs, it does not follow that they would not have proceeded if there had been flagged a problem with compliance. In my view, what would have been determinative is the extent of the problem, the cost of investigation and the cost of rectification (if rectification were needed).
168The evidence of the defendants' expert, Mr Dodd, is that he could have checked each of the 100 products for compliance with the standard, and given a yes-no answer, in one day's work at a cost (excluding GST) of $3,800.00. That evidence was unchallenged; Mr Dodd was not cross-examined. I accept that estimate.
169Further, Mr Dodd said, if it were assumed that such testing had disclosed (as is now known to be the case) that some seven products did not comply, rectification of the jigs and cutting lists could have been carried out, using a boilermaker for the former task, at a cost of about $545.00 (again excluding GST). Again, I accept that evidence.
170It is likely, I think, that if the plaintiffs had been told that there was a problem with compliance, they would have insisted that Mr Ingram investigate and rectify it. Although I have the impression that Mr Ingram is a man who does not believe in spending a dollar if the same result can be achieved by spending fifty cents, I think he would have accepted this. He and his wife wanted to sell the business. On their assessment, it was worth $4.8 million. Undoubtedly, the plaintiffs were interested in buying it; and there was at least one other interested purchaser. The business profile gave what seem to be compelling reasons why Mr and Mrs Ingram wanted to sell the business, and I have no reason to think that those reasons were anything other than genuine.
171In the scheme of things, vendors who wanted to sell an asset worth almost $5 million are unlikely to baulk at spending less than $4,000.00 to test a fundamental selling point; and are unlikely to baulk at spending a further amount of less than $600 to rectify the problems that, by hypothesis, would have been discovered from that testing.
172Thus, whether the representation should have been made in the form for which Mr Loewenstein contended or in the form for which Mr Curtin contended, the result in my view would have been the same. Investigations would have been carried out quickly and relatively cheaply, and rectification work would have been effected equally quickly and far more cheaply. The defendants would have been in a position to sell, and the plaintiffs able to consider buying, a business in respect of which all relevant products had been checked and found to be compliant with the standard.
173It was also open to the plaintiffs to obtain certification of compliance if they wished. Mr Dodd said that he could have certified each individual product for compliance, at an additional cost of $350.00 per product. That (unlike the question of investigation and rectification) was not pursued in cross-examination, or to any great extent in submissions, and I do not propose to make findings as to whether, had a representation been made in either of the forms contended for by counsel, matters would have gone beyond the stage of testing and rectification to include certification. However, in circumstances where Mr Rufford could not say that he would not have proceeded had he been told that there was extra cost of the order of $30,000.00 to $50,000.00 involved to make the products compliant, and where an expenditure in that range would have assured the plaintiffs of compliance certified by an independent expert, it might be thought that even expenditure of this order might not have amounted to an insuperable obstacle to contract and settlement.
Conclusions on reliance and causation
174In my view, the question of compliance was of importance to the plaintiffs, in considering and making their decision to purchase. Thus, in my view, the representations that undoubtedly were made were an effective cause of the decision to purchase.
175I do not accept the evidence of Messrs Rufford and Salmon that they would not have proceeded if the "true" position as to compliance (or non-compliance) had been put to them.
176Further, in my view, if there had been a qualified representation as to compliance (i.e., a representation which indicated either that some or an identified number of products did not comply), then bearing in mind the relevant factors to which I have referred, including the magnitude of the transaction and the relatively trivial cost of testing, the transaction would have proceeded in any event.
177To the extent that it is relevant to consider the counterfactual situation - of what would have to have occurred for the defendants not to have engaged in misleading or deceptive conduct - I conclude that, in light of all known relevant facts, the transaction would have proceeded in any event.