Kay Group Holdings Pty Ltd & Ors v K & K Plastics Pty Ltd & Ors [2008] VSC 169

2 Each of the groups of parties has sought leave to appeal against the interim award. The vendor parties in proceeding No 5922 of 2008; the purchaser parties in proceeding No 5726 of 2008.

3 Having heard argument, I refused the leave sought by the purchaser parties. Counsel for those parties said that his clients did not require that I provide reasons for this, other than those given in the course of the hearing. With respect to the application for leave made by the vendor parties, I refused leave summarily with respect to all but three of the suggested questions of law arising out of the award. I reserved my decision upon the remaining three questions. I now give my decision upon those three questions and my reasons for decision on all of the questions raised by the vendor parties.

4 The vendor parties' application is for leave to appeal pursuant to s 38(4) of the Commercial Arbitration Act 1984. I am told that the parties also seek to impugn the award under s 42, but leave is not required for this and I am not concerned with these further claims. I am, of course, mindful of the statutory limitation in s 38(5) upon the power of the court to grant leave. It is for this reason that I have dealt summarily with most of the questions of law raised before me. While the tradition has been not to give reasons, I am aware that reasons are now required. Nevertheless, when leave is granted, these reasons must necessarily be brief lest they embarrass the judge hearing the appeal. In any event, given the terms of s 38(5)(b), lengthy reasons are not appropriate unless the facts and arguments are complicated.

5 The issues between the parties in this case were numerous and complicated: the defence and counterclaim of the purchaser parties alone runs to nearly 140 pages. The hearing occupied some 40 days. The arbitrator delivered three sets of reasons of which the principal reasons, as amended, occupied some 140 pages. These reasons themselves are complex and difficult and it is for this reason that I venture a little more detail than might otherwise be appropriate.

6 In his award, the arbitrator determined that the amount payable by the purchaser under the sale agreement was $3,040,751, subject to the counterclaims of the purchaser. In his reasons,[4] however, this amount is given as $3,040,541, but nothing turns on this apparent discrepancy.

7 The counterclaims of the purchaser, so far as are here relevant, alleged[5] that a number of pre-contractual representations were made by Mr B Koppel on behalf of the vendor. The arbitrator found that these representations were not made. By an amendment to their defence and counterclaim made very late in the arbitration, the purchaser parties added paragraph 50A containing the following allegations of additional representations made:

1. that the Business made a profit of $1.4 million for a number of years up to and including the financial year ending 30 June 2003 (with the exception of the financial year ending 30 June 2002);
2. ...

1. the trial balance and the adjusted EBIT calculations provided on 16 June 2004 and the accounts and the adjusted EBIT calculations provided on 5 October 2004 recorded the true financial position of the Business; and

1. the accounts and the EBIT calculations provided on 5 October 2004 showed that the average adjusted profit of the Business for the financial year ended 30 June 2003 and the year to 31 May 2004 was approximately $1.4 million.

These representations were relied upon as constituting misleading and deceptive conduct by the vendor.

8 In addition, the sale agreements contain a number of warranties given by the vendor and its directors concerning the financial position of the business. These were, generally, as to the accuracy of the balance sheet and financial statements and as to the completeness of the vendor's disclosures as to financial matters.

9 The sale agreements were entered into on 24 November 2004 and negotiations had continued for some months prior to that date. Financial statements for the financial year 2004 were not prepared. The financial information provided to the purchaser were the financial statements for 2003 and certain subsequent monthly management accounts.

10 The arbitrator found that "the Balance Sheet [presumably that for 30 June 2003] did not present a true and fair view of the profit and loss and state of affairs of the business".[6] This conclusion, in the context in which it is found, appears to be based upon inaccuracies in stock figures. The finding of the arbitrator was that these figures were not accurate but he was unable to determine the true position.[7] He did, however, infer that the value of stock had been seriously understated for some time.[8]

11 The arbitrator also found a number of financial non-disclosures. These included the non-provision of 2004 financial statements and matters material to the management accounts for June to September 2004 regarding sales, stock and profit.[9] The information provided as to doubtful debts was insufficient[10] and the true position regarding an item described as the Edensour loan, was not disclosed.[11]

12 The arbitrator's findings about the representations as to a profit figure of $1.4 million require a little examination. The purchaser alleged that statements to this effect were made by Mr B Koppel to Mr Mochkin and by Andrew Goldberger to Mr Mochkin[12] and to Mr Tartaka. The arbitrator rejected the evidence of Mr Mochkin[13] and Mr Tartaka[14] as to this. In paragraph 50A(d) of the defence, however, it is said on behalf of the purchaser that a like representation was contained in the financial material provided by the vendor. The arbitrator accepted that this representation was proved and, further, insofar as the underlying accounting information was inaccurate, so too was this representation false.[15]

13 The arbitrator concluded that the vendor and its directors were in breach of the warranties and, further, that they engaged in misleading and deceptive conduct inasmuch as they made the representations alleged in paragraph 50A(c) and (d) of the defence.[16]

14 It is now possible to understand the suggested questions of law which, it is said, the arbitrator erroneously answered. Counsel for the vendor parties relied upon both limbs of s 38(5)(b) with respect to many of these matters. In the course of argument, however, it did not appear that the second limb had any application, except perhaps for Grounds 1 and 2. In the proposed notice of appeal these questions are expressed as grounds of appeal setting out suggested errors of law.

15 The first ground, which was fundamental to a number of the grounds which followed, was developed by counsel at some length. It is in the following terms:

1. The Arbitrator erred in law in holding that the provison of the trial balance and adjusted EBIT calculations provided on 16 June 2004 and the accounts and adjusted EBIT calculations provided on 5 October 2004 ("the Financial Records") by the first and second appellants to the respondents which did not contain any inaccurate information which was relevant and/or detrimental to the respondents was capable of constituting misleading and deceptive conduct or conduct which was likely to mislead or deceive, contrary to section 52 of the Trade Practices Act 1974 and section 9 of the Fair Trading Act 1999.

16 I refused leave to appeal on this ground because it presupposed a fact which was not accepted by the purchaser parties and which was not the subject of a finding by the arbitrator. This fact was that the provision of the trial balance and the adjusted EBIT calculations provided on 16 June 2004 and the accounts and adjusted EBIT calculations provided on 5 October 2004 ("the Financial Records") did not contain any inaccurate information which was relevant and/or detrimental to the purchaser.

17 I have already summarised the findings of the arbitrator. He found that the financial position shown in the Financial Records was not accurate. It was put to him on behalf of the vendor parties that, even so, this would not amount to misleading and deceptive conduct unless the effect of the representation as to profits or EBIT overstated the true position. The arbitrator rejected this proposition. He said that the fact that the financial accounts misstated the true position meant that they were misleading and deceptive.[17]

18 As a matter of ordinary language, I see no manifest error of law in this conclusion nor any error of law. Section 52 of the Trade Practices Act and its equivalent in the Fair Trading Act do not qualify the words, misleading and deceptive. I was referred to no authority to the contrary.

19 Ground 2 is, for present purposes, in similar terms. I rejected this submission as to error for the same reasons.

20 Grounds 3, 4 and 5 were concerned with the fact that the EBIT calculations in the Financial Records contained adjustments for notional entries. As I mentioned in the course of rejecting these grounds, there is no substance in them. The adjustments in question were made by the parties to provide a basis for predicting the EBIT which the purchaser might expect to receive in the commercial environment where it would conduct the business. The representation included these adjustments. I should record in this context that the arbitrator was known to the parties to be a very experienced commercial Queen's Counsel with formal commercial qualifications. Matters such as these are matters of fact which he was well able to deal with. No manifest error of law is here to be found.

21 Ground 6 appears to be predicated upon a misreading of paragraph 128 of the arbitrator's reasons. I rejected this ground. The fact is that the arbitrator did find that the representation alleged in paragraph 50A(d) of the defence was misleading[18] because it depended upon the inaccurate financial statements upon which the conclusion was based.

22 Grounds 7 and 8 concern reliance. I rejected these because, as formulated, they raised questions which were essentially questions of fact. The arbitrator found that the purchaser sought the warranties as to the financial matters and required that they be inserted in the sale agreements. This, in the circumstances, is a factor suggestive of reliance.[19] Contrary to the terms of the ground, it, is nowhere said by the arbitrator to be the only factor which led him to the conclusion that the purchaser relied upon the financial records. In this respect the inference of reliance was reasonably open to the arbitrator.[20] .

23 Ground 9 concerns causation. It is said that the arbitrator erred in law in holding that the vendor and Mr B Koppel were liable for damages where no such damages were shown to have been caused by the incorrect statements. The matter is a little complicated by reason of the fact that the questions of causation were raised with respect to both the breach of warranty claims and the misleading and deceptive conduct claims.

24 It was put that the arbitrator ought to have identified the respect or respects in which the Financial Records were inaccurate and then to have made a finding as to the loss caused by this inaccuracy or these inaccuracies. What the arbitrator appears to have done is to find that inaccuracies in the Financial Records existed and that the purchaser entered into the sale in reliance upon those records. The purchase was a disadvantageous one and the losses suffered were thereby caused indirectly by the inaccuracies. He then concluded that any loss suffered by the purchaser in making the purchase was recoverable. The suggestion put by counsel on behalf of the vendor parties was that, upon such an analysis, no causation could be shown, for the inaccuracies were not shown to be detrimental or relevant to the purchaser. The legal requirement that there be a causal nexus means that the purchaser should satisfy the arbitrator that the inaccuracies were a cause of the loss.

25 My initial impression was that such an error would not be an error of law, but I reserved my decision to look more closely at the arbitrator's reasons. It is a requirement of law that there be some causal nexus between the breach of warranty and the loss and also between the misleading and deceptive conduct and the loss.[21]

26 In the case of the misleading and deceptive conduct claims, the arbitrator acknowledged that this was so.[22] He then addressed the question whether this nexus was demonstrated where the inaccuracy understated the EBIT. He concluded that such a contention was for the vendor to prove. Since the position as to this was uncertain, the vendor did not discharge this onus.[23] This onus, it would seem, is the ultimate onus of proof. It may be that in shifting the onus in this way, the arbitrator had in mind the observations of Gaudron J in Henville v Walker,[24] but her Honour was there speaking of the evidentiary onus. He then concluded that "other than damages by way of reduction of purchase price" he was unable to say that damage was caused by the misleading conduct or what the quantum of this damage might be.[25] The cases to which I have referred, however, proceed on the basis that the misleading and deceptive conduct in question was shown to be one among a number of causes of the plaintiff's loss or that the loss was an indirect consequence of the conduct. [26] In any case there must be a nexus demonstrated by the plaintiff.[27] This matter might be seen as a reliance question, a point which is not now included in the proposed grounds of appeal. It may be that the better view is that a finding ought to have been made as to whether the purchaser relied upon the erroneous information contained in the financial information provided, that is the misleading and deceptive representation, rather than upon the financial information generally. Given that the nature of the error was not identified, it may be that the arbitrator ought to have concluded that the purchaser did not discharge the ultimate onus of establishing this fact. These are matters which warrant the attention of a judge on appeal.

27 I am satisfied that the reasons either do not identify the nexus in these cases or the arbitrator has overlooked this requirement. This would constitute appellable error and I will grant leave to appeal on ground 9.

28 Grounds 10 and 11 concern the arbitrator's approach to the quantum of the purchaser's loss. For the misleading and deceptive conduct claim, the arbitrator found that the proper measure was to be determined by reducing the purchase price.[28] He calculated the true value of the business to be $7,806,800[29] and that this should be substituted for the contractual price. Since payments made by or credits accruing to the purchaser totalled $7,065,783,[30] the amount awarded in favour of the vendor was $741,017.[31]

29 The reasoning behind this approach must be that, but for the misleading matters in the Financial Records, the purchaser would not have entered into the sale. The adjustment of the sale price, therefore, compensated it for entering into this disadvantageous transaction.

30 In the case of the breach of warranty claims, the arbitrator appears to have approached the question of quantum in a different way. He determined that the measure is the difference between the amount paid and the fair value of the business.[32] This measure then produced a loss of $2,327,524,[33] being the difference between the amount payable[34] under the contract, namely, $10,194,324 and the true value of $7,806,800.[35] Elsewhere the loss is calculated at $2,388,324,[36] but this may be due to an arithmetical error. In any event, neither figure found its way into the award. These matters, however, are tied up with the questions of causation raised in Ground 9 and I will grant leave to appeal in respect of these grounds as well.

31 Grounds 12 and 13 criticise the decision of the arbitrator to reject a submission that the purchaser's warranty claims were time-barred by reason of cl 12 of the sale agreement. This point was considered and rejected by the arbitrator[37] relying upon the decision of Sheppard J in Clark Equipment Australia v Covcat Pty Ltd.[38] I rejected these grounds because no manifest error or, indeed, any error in this regard has been demonstrated.

32 Grounds 14 and 15 are concerned with causation of loss due to the breaches of warranty. It was put that, since the inaccuracies in the Financial Records were not detrimental to or were irrelevant to the purchaser, they could not be said to have caused loss to it. Second, it was put that the arbitrator fell into error in concluding that the purchaser did in fact suffer loss as a consequence.

33 The submission of the vendor ignores the other breaches of warranty which the arbitrator found to exist.

34 Ground 14, as expressed, does not represent any conclusion of law by the arbitrator. He concluded as a fact that the purchaser entered into an unprofitable purchase by reason of the breaches and that it suffered loss in the sum representing the difference between the amount payable under the sale agreements and the fair value of the business.[39] This essentially factual finding was open on the evidence. Accordingly, I rejected Grounds 14 and 15.

35 Ground 16 was concerned with the treatment of accrued employee entitlements in the arbitrator's calculation of the true value of the business. The arbitrator in his original reasons deducted these entitlements which totalled $103,365. He was invited to reconsider this and he did so. In his further reasons dated 31 March 2008 he confirmed his earlier decision not to include the item. I rejected this ground on the basis that it did not raise a point of law. The question turned essentially upon the appropriate accounting treatment of the item, a question upon which the opinions of the experts differed. It is a question of fact and the conclusion of an experienced commercial arbitrator in these matters was open on the evidence.

36 Ground 17 concerned the arbitrator's orders as to costs. I rejected this ground too. It is clear from his separate reasons given on this question that the arbitrator was aware of the correct principles to be applied. His conclusion as a matter of discretion fell within these principles, and should not lightly be disturbed. I should add, that I rejected the complaints of the purchaser parties about the costs orders on the same basis.

37 I conclude, therefore, for the reasons set out above, that leave should be granted to appeal in respect of Grounds 9, 10 and 11 only and that, otherwise, the application for leave to appeal should be refused.

[1] The award is date 31 March 2008, but the evidence suggests that it was published later.

[2] Revised Reasons dated 31 March 2008, Further Reasons dated 31 March 2008 and Reasons upon costs dated 31 March 2008. The original reasons appear to have been published on 13 February 2008.

[19] See Gould v Vaggelas [1984] HCA 68; (1984) 157 CLR 215 at 238-9 per Wilson J.

[20] See Roads Corporation v Dacakis [1995] VicRp 70; [1995] 2 VR 508 at 520, per Batt J.

[21] See Wardley Australia Ltd v Western Australia [1992] HCA 55; (1992) 175 CLR 514 at 525.

[24] (2001) 200 CLR 459 at 482 [67] - [70.

[26] See Henville v Walker (2001) 200 CLR 459 at 469 [14], per Gleeson CJ.

[27] See Henville v Walker (2001) 200 CLR 459 at 492 [103], per McHugh J.

[30] Reasons para 254, as amended by the Further Reasons para 16.

[38] (1987) 71 ALR 367 at 371.