Kallin Pty Ltd v ACN 107 851 847 Pty Ltd

Judgment

1. The first defendant company (Good Booze) owned a liquor store in a shopping centre at Rhodes which traded under the name Shorty's Liquor Rhodes (Shorty's).
2. The second defendant Mr David Short (Short) was, together with members of the Short family, a shareholder in Good Booze. The Short family has interests in pubs and clubs including in the management of a chain of pubs known as the Keystone pubs.
3. From 2008, Short also operated a wholesale liquor business from premises in Ultimo called Shorty's Liquor CBD (Shorty's CBD) which supplied, amongst others, pubs which the Shorts managed.
4. Shorty's moved premises within the Rhodes shopping centre in mid-2009.
5. By all accounts there were some ructions within the Short family that led to a decision that Shorty's was to be sold.
6. The plaintiff company is associated with Mr Steven Chambers (Chambers). It and other companies associated with Chambers operate a chain of retail liquor stores under the name Chambers Cellars. In 2010 they had about thirty stores.
7. Good Booze retained a business agent, Mr Peter Manenti (Manenti) of Manenti Quinlan & Associates, to assist it in selling the business. Manenti circulated an advertisement which included the asking price of $980,000, weekly takings, gross profit, weekly expenses and net profit figures.
8. Manenti sent a copy of the advertisement to Chambers. Chambers says he called Manenti and told him that he was not interested in purchasing the business because he had heard from industry people that the sales figures included wholesale sales. His explanation for having said this was that he had heard from liquor suppliers that Shorty's sales figures included sales to other licensed premises, including some of the other outlets run by the Short family.
9. After 26 October 2010, Short met with Chambers. Short told him that Manenti had valued the business at $980,000, but that they would accept $800,000. Chambers asked for monthly sales figures for the previous four months. Chambers told him that he was not interested in figures for the period before Shorty's moved premises.
10. From October 2010, Short had negotiations with Coles Supermarkets Australia Pty Ltd (Coles), a supermarket chain which also operates retail liquor outlets.
11. On 3 November 2010, Short met with Chambers. Chambers told him that they were not interested in the business at the price being asked by Short.
12. Chambers says that a conversation to the following effect took place: Chambers: David, we have looked at the figures and especially with the high rent and outgoings we are not interested at that price. Short: It is a shame because with your group you would be able to run it well. This suits your group more than anyone else's. Chambers: The rumour around the industry is that your sales figures are inflated and that those figures include sales to your own pubs and hotel outlets and wholesale sales to other retailers. Short: No, that is rubbish, I have my own warehouse and I don't need to do that. Chambers: What about the champagnes? You seem to be selling a lot, when they don't sell out west. Short: There are some big companies out around Rhodes, and they spend big on champagne. You will get those sales. . Short: What would you buy it for? Chambers: No more than $600,000.
13. Short's version of this conversation was as follows: Chambers: Does Shorty's Liquor supply the Keystone bars? I heard through the industry suppliers that Shorty's Liquor supplies the Keystone bars. Short: No. Shorty's CBD supplies the Keystone bars. Shorty's Rhodes isn't set up to supply the bars. It's too far from the city, it doesn't have direct access to a loading dock and there actually isn't any storage area at Rhodes. Chambers: I also see you've got $260,000 in stock. That isn't the level I would buy, I'd like you to run that down to a maximum of $170,000. Short: Okay. We have 20 of our own brands. They have been really successful. Would you be interested in purchasing them? Chambers: No, I am not interested in your own brands I have my own. I don't want any of them. Short: What is your relationship with your suppliers? Chambers: We have great relationships with suppliers because we facilitate wine purchasing agreement for the Keystone bars. Short: Who do you deal with at Moet Hennessy and Pernod Ricard? Chambers: I deal with David Krenich, the State Sales Manager, and the state sales manager at Pernod Ricard. Short: How much will you pay for the store? Chambers: No more than $600,000.
14. Chambers says that he made the low offer of $600,000 in order to get rid of the deal. His in-house accountant was very much against purchasing because of the rumours about wholesale sales. The accountant was also against it because the rent was high.
15. On 16 December 2010, Coles made a written offer to buy Shorty's for $600,000. Short called Manenti who told him to take the offer. One of Short's family members suggested he offer the business to Chambers for $640,000. He called Chambers. Short says he told Chambers that Coles had made an offer and that Chambers could buy for $640,000.
16. Chambers then called Manenti who, according to both Chambers and Manenti, confirmed that Coles had offered to buy. Chambers was not cross-examined on this aspect and Manenti was not cross-examined at all.
17. Either way, Chambers was told that Coles had offered to buy the business. Chambers asked for updated sales figures. Short said the figures were a bit down because of trouble within the family and that they had not been marketing it properly, but suggested that Chambers would do better.
18. In his affidavit evidence, Chambers said that he decided to purchase Shorty's for around $640,000. It was an opportunity to expand the number of stores under the Chambers Cellar banner and to have a store in that area.
19. He says that he relied upon the figures contained in the financial statements given to him and that Short had assured him that the sales figures did not include wholesale sales.
20. He says that he calculated that he could break even on takings of $35,000 per week and could improve the trading performance and profitability of the store, because of his group's superior purchasing power, and get it past $50,000 per week based on what the store had been shown to be taking.
21. On 23 December 2010, Good Booze and the defendant entered into a written agreement for sale of business for a price of $640,000 plus stock.
22. Clause 12.2 of the sale agreement provides: 12.2 Records The Purchaser acknowledges having had full and sufficient opportunity of inspecting the books of the Vendor relating to the Business and of examining the Business for itself and no warranty as to the Business (other than those in this Agreement), or the takings or outgoings of the Business is given by the Vendor except that the entries in the books are true and correct. The Vendor is not responsible or liable for any representations, specifications and promises of any kind or description other than those expressly made in this Agreement.
23. Good Booze had a lease for its premises with Mirvac Retail Sub SPV Pty Ltd (Mirvac) for ten years commencing 15 April 2009 and terminating on 14 April 2019, with no provision for extension. As part of the sale transaction, the lease was transferred to the plaintiff with Mirvac's consent.
24. The plaintiff took possession of the business on 14 February 2011 and commenced trading immediately under the name Chambers Cellars. The transaction was completed on 22 February 2011. Settlement was delayed because of the Short family dispute.
25. Amongst other things, Chambers changed the lines of products for sale. Chambers Cellars has exclusive lines. Its catalogue for the period 19 January 2011 to 15 March 2011 included no less than seventeen lines stocked by it but not Shorty's.
26. Chambers says that in about March 2011 he was told that Shorty's had been transferring stock to other outlets. Short says that on or about that date Chambers called him and told him that the sales had been a lot lower than the figures he was given and asked about how much they were selling to corporate clients, to which he replied $2,000-3,000 per week.
27. Chambers says that about a year later (March 2012) Short called him to say that he had heard that Chambers had been saying around the industry that Short had lied to him. Chambers confirmed he had been saying this. Short threatened to sue for defamation. Chambers replied that he would be suing Short for what Short had done.
28. On 26 November 2014, the plaintiff's solicitors sent a letter of demand to Short. The letter asserted that Chambers had been 'profoundly and deliberately misled' with respect to the turnover of the business because the sales figures included not only retail sales but wholesale sales that the business had made to entities associated with Good Booze and its directors. The letter asserted that the true position became apparent when an employee at the store informed Chambers of this and when certain business records left on a computer were found. The letter asserted an entitlement to rescind the sale agreement, alternatively to damages for misleading or deceptive conduct. The letter proposed an agreement under which the sale would be rescinded, the purchase price refunded and Good Booze would compensate the plaintiff for trading losses sustained in the business from the time of completion. Short responded through his lawyers on 10 December 2014 by rejecting the assertions.
29. The 26 November 2014 letter did not itself purport to rescind the sale agreement.
30. On 2 February 2015, Chambers' solicitors wrote that they had been instructed to commence proceedings against Good Booze and Short.
31. It is not in issue that the sales figures provided to the plaintiff included sales to Shorty's CBD and that they were not at full margin.
32. For the financial year ended 30 June 2009, the business made total sales inclusive of GST of the order of $2.24 million of which $78,045 was sales to Shorty's CBD. For the year ended 30 June 2010, the sales figure is of the order of $2.15 million of which $160,978 was sales to Shorty's CBD. For the period 1 July 2010 to 14 February 2011, the sales figure is of the order of $1.19 million of which $28,575 was sales to Shorty's CBD.
33. Grossing up the sales to Shorty's CBD for the period 1 July 2010 to 14 February 2011 to the full year ended 30 June 2011 would add $16,970, bringing the annualised figure to $45,545. The profit that would have been earned on $16,970 worth of sales at Shorty's usual profit margin (24%) would be $4,072.
34. The impact on the net profit of the business as a whole by the exclusion of the wholesale sales is a maximum of $16,010 for the period 1 July 2009 to 30 June 2010, and for the period 1 July 2010 to 14 February 2010 it is $2,858.
35. Section 18(1) of Schedule 2 [1] to the Competition and Consumer Act 2010 (Cth) (the Act) provides: A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.
36. Section 236(1) provides: If: (a) a person (the claimant) suffers loss or damage because of the conduct of another person; and (b) the conduct contravened a provision of Chapter 2; the claimant may recover the amount of the loss or damage by action against that other person, or against any person involved in the contravention.
37. Section 243 provides relevantly that a court may make: (a) an order declaring the whole or any part of a contract made between the respondent and a person (the injured person) who suffered, or is likely to suffer, the loss or damage referred to in that section, or of a collateral arrangement relating to such a contract: (i) to be void; and (ii) if the court thinks fit - to have been void ab initio or void at all times on and after such date as is specified in the order (which may be a date that is before the date on which the order is made).
38. The plaintiff's primary case is that it was induced into entering into the sale agreement by the misleading or deceptive conduct of Good Booze and Short in providing it with misinformation as to the wholesale sales. The primary relief which it seeks is an order that the sale agreement be rescinded or set aside, with ancillary orders that it be re-transferred to Good Booze, that Good Booze repay the amounts received under the sale agreement and that the lease be reassigned to Good Booze.
39. Its secondary claim is for an award of damages under the Act (against Good Booze and Short personally alleging that he was involved in the contravention), which it says it suffered because of the misleading conduct, or for damages for breach of the warranty given in clause 12.2 of the sale agreement.
40. These proceedings were initiated by the plaintiff on 7 September 2015. They were originally set down to be heard on 27 November 2017. That hearing was vacated, amongst others, because of a flood in the court building. The case was heard on 6 and 7 February 2018.
41. The first question for determination is whether Short conveyed to Chambers in their conversation on 3 November 2010 that the sales figures did not include wholesales sales to other retailers.
42. Where a party seeks to rely upon spoken words as a foundation for a cause of action, including a cause of action based on a contract, the conversation must be proved to the reasonable satisfaction of the Court, which means that the Court must feel an actual persuasion of its occurrence or its existence. In the absence of some reliable contemporaneous record or other satisfactory corroboration, a party may face serious difficulties of proof. Such reasonable satisfaction is not a state of mind that is obtained or established independently of the nature and consequences of the fact or facts to be proved. The seriousness of an allegation made, inherent unlikelihood of an occurrence of a given description, or the gravity of the consequences flowing from a particular finding are considerations which must affect the answer to the question of whether the issue has been proved to the reasonable satisfaction of the Court. Reasonable satisfaction should not be produced by inexact proofs, indefinite testimony, or indirect inferences: see Briginshaw v Briginshaw (1938) 60 CLR 336 at 362; Helton v Allen (1940) 63 CLR 691 at 712; Rejfek v McElroy (1965) 112 CLR 517 at 521; Watson v Foxman (1995) 49 NSWLR 315 at 319.
43. The versions of Chambers and Short diverge as to the critical words said.
44. Chambers says he asked whether the sales figures included wholesale sales to other retailers. Short's version is that the question was as to supply to the Keystone bars. I interpolate that Short gave unchallenged evidence that Shorty's did not supply the Keystone bars.
45. I did not find Chambers an impressive witness. Indeed, as appears below, I do not accept his evidence on the question of reliance. Short was a more impressive witness. His evidence was that only Keystone pubs was referred to.
46. Short says that the Shorty's CBD sales were immaterial and were not uppermost in his mind. He readily accepted, however, taken as a statement with respect to wholesale sales generally, what he told Chambers was incorrect because Shorty's sales did include sales to Shorty's CBD.
47. I feel no actual persuasion that Chambers used the words 'wholesales sales to other retailers'. However, his question as to the Keystone pubs could be construed as one about sales to businesses connected to the Short family (as were the Keystone pubs). This is how Short says he understood it. I am prepared to accept that Chambers himself intended the question to cover such businesses and that he understood the answer accordingly. On this footing, Short's answer was inaccurate. Although he had no intention to deceive, Short gave Chambers information which was misleading or deceptive in contravention of the Act.
48. However, Short's conduct had no consequences for Chambers because I am satisfied that it played no causative role in Chambers' decision to buy. Far from being profoundly and deliberately misled, Chambers was not misled at all.
49. I do not believe Chambers when he says that in deciding to purchase he relied on Short's assurance that the sale figures did not include wholesale sales.
50. He placed no reliance on what Short said. He did not believe him. To the contrary, in deciding not to buy, Chambers followed his accountant, a person on whom he placed a lot of importance and whom he trusted, who was against the purchase because he believed the industry that there were wholesale sales included in Shorty's figures.
51. Chambers' evidence included the following: His Honour: Earlier when Ms Horvath was asking you some questions you referred to your accountant, who I take it is a person who you placed a lot of importance and trust in? Chambers: Yes. His Honour: What you said was the accountant persuaded you not to proceed because he told you that he, in effect, believed the industry that there were these wholesale sales to other retailers and that's why you shouldn't go ahead. Chambers: Yes. His Honour: I can take it from that, can I not, that if Mr Short told you that it didn't include wholesale sales to other retailers you didn't believe him? Chambers: Well, I just don't know but then he gave me his word that that is false. His Honour: But you didn't believe that because you didn't proceed because the accountant told you not to accept it, so quite plainly you didn't believe what Mr Short told you. Chambers: In some way, yeah.
52. Chambers had put in an unrealistic offer of $600,000, with the intention of bringing the dealings with Short to an end, so was his lack of desire to buy.
53. He was then given the opportunity to buy at not much more, in the knowledge that Coles had made an offer. This was a chance for a bargain which he was not going to let pass. He gave evidence that Coles' willingness to buy made him believe that the sales were true. I disbelieve him. He had no knowledge of what information Coles had been given or how Coles had determined its offer price. The factors which drove his conduct were the opportunity to get the business instead of Coles and the opportunity to expand the number of Chambers Cellars stores by acquiring a business in that area. I reject his suggestion that he placed any reliance on the alleged assurance earlier given by Short on the footing that as a consequence of Coles' offer he came to believe what Short said. Chambers' evidence is given years after the event in hindsight and it does not sit comfortably with his objective behaviour at the time.
54. The impact of the Shorty's CBD sales on the profit of the business, particularly in the critical period from 1 July 2010 to 14 February 2011, was inconsequential. In my view, knowledge of these sales would have made no difference to Chambers in his decision to buy: see Sidhu v Van Dyke (2014) 251 CLR 505 at [93].
55. The plaintiff's primary claim fails, as does its claim for damages under the Act. Its claims against Short for being knowingly involved in the contravention also fail.
56. Had the plaintiff established any reliance on the conduct complained of, I would decline in any event to make an order rescinding or setting aside the sale. It is too late and the landscape has changed.
57. The plaintiff has had possession of, and has run, the business for seven years. It has had the benefit of the lease which has not long to go. It has known about its alleged complaint since 2011. It threatened to sue in 2012 but delayed doing so until 2015. It has operated the business according to its own lights and under its own trade name. It has changed the business. It has sold its own lines and discontinued lines which Shorty's sold. Justice would not be served by ordering rescission: see Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (No 1) (1988) 39 FCR 546 at 562-564.
58. The plaintiff has not established that it suffered any loss by reason of the conduct complained of. It has not sought to establish that the business was worth any less than what it paid for it. It has provided no rational basis upon which any damages can otherwise be assessed. It chose to run the business and keep on running it: see Anema E Core Pty Ltd v Aromas Pty Ltd [1999] FCA 904 at [36]; Netaf Pty Ltd v Bikane Pty Ltd (1990) 26 FCR 305 at 309; Starborne Holdings Pty Ltd v Radferry Pty Ltd (1998) ATPR 41-634 at 40,996.
59. The plaintiff's claim for breach of warranty is unsustainable. In its second further Commercial List Statement [2] it articulated this claim as follows: Breach of contract … Good Booze has breached the Warranty in that the entries in the books of the Business provided to Kallin (being the Financial Statements) were not true and correct. Particulars The Financial Statements include sales by the Business to Shorty's Liquor CBD and Porters Bexley in circumstances where David Short and Good Booze had represented to Kallin that all sales in the Financial Statements were retail sales.
60. During submissions it abandoned (as it had to) the inclusion in the particulars of a representation that all sales were retail sales.
61. It has established no breach of the warranty, nor has it established that it suffered any relevant loss. The plaintiff accepted that the books and records were true and correct. They recorded all sales.
62. It sought to argue in final submissions that the books were not correct because they purported to be the records of an exclusively retail business. This suggestion does not accord with its pleadings and I would reject it anyway. The warranty is as to the correctness of entries in the books. The books are correct. It is not a warranty as to the profitability of any transaction.
63. During the hearing, I invited the plaintiff to produce a document which set out the quantification of its damages. No such document was produced, no doubt because it could not be.
64. As I understood it, the plaintiff's final position was that its damages were $4,072, being the profit it says it would have earned had it made retail sales for the remainder of the 2011 financial year at the rate at which Shorty's had made wholesale sales to Shorty's CBD. There is no basis to find that the plaintiff would have made any such sales or that it would have made any level of profit on them. Again, it ran the business as it saw fit. The effect on the profit of the business of disregarding the Shorty's CBD sales is de minimis.
65. The proceedings are dismissed.
66. I provisionally order that the plaintiff is to pay the costs of Good Booze and Short. This order will solidify after seven days unless my Associate is notified in writing by any party that some other order is sought and the grounds therefor, in which event, arrangements can be made for the matter to be relisted.